South Africa and the United Kingdom
concluded a convention for the avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income and capital gains, which was
gazetted in Government Gazette 24335 of 31 January 2003. That agreement was subsequently amended by
Government Notice 52 in Government Gazette 34971 on 2 February 2012 with effect
from 13 October 2011.
The amendments to the treaty concluded by
South Africa and the United Kingdom dealt with, inter alia, the exchange of
information regulated by article 25 and article 25A dealing with assistance in
the collection of taxes.
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SARS and UK revenue can assist in targeting
tax debtors in each
other's countries
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Article 25A of the treaty provides that the
South African Revenue Service (‘SARS’) and Her Majesty’s Revenue and Customs (‘HMRC’)
shall assist each other in the collection of taxes.
Article 25A refers to any amount owed in
respect of taxes of every kind and description imposed on behalf of South
Africa and the United Kingdom or of their political subdivisions or local
authorities, so long as the taxation in question is not contrary to the tax
treaty or any other instrument to which the two countries are parties, as well
as interest, administrative penalties and the cost of collection or conversancy
related to such tax.
The treaty provides that, where a tax debt
is enforceable under the laws of South Africa, and is owed by a person who
cannot under the laws of South Africa prevent its collection, that tax debt
shall, at the request of the Commissioner: South African Revenue Service be
accepted for purposes of collection by the competent authority of the United
Kingdom. Article 25A(3) provides that
the tax debt shall be collected by the United Kingdom in accordance with the
provisions of its laws applicable to the enforcement and collection of its own
taxes, as if that debt were an amount due to the United Kingdom. The treaty also requires South Africa to
assist the United Kingdom in collecting tax debts due by United Kingdom taxpayers
from assets they may have in South Africa.
Before the insertion of article 25A into
the tax treaty, SARS was unable to assist HMRC in the collection of taxes due
to it from assets of United Kingdom taxpayers located in South Africa and, similarly, HMRC was unable to assist
SARS in recovering taxes due to SARS from assets located in the United Kingdom
belonging to South African taxpayers.
The question that did arise at the time that the article was inserted into
the treaty, was whether the assistance in the collection of taxes could apply
to taxes which arose prior to the insertion of the article into the tax treaty.
This question was considered in the United
Kingdom’s Court of Appeal in the case of Ben
Nevis (Holdings) Ltd and Anor v Commissioner for HM Revenue and Customs
[2013] EWCA Civ 578. Ben Nevis is a
company incorporated in the British Virgin Islands, which was owned and
controlled by a Mr David King and/or his trustees. The judgment indicates that Ben Nevis is
liable to the Commissioner: SARS for taxes from the 1998 to the 2000 years of
assessment amounting to approximately R2,6 billion following the final
determination of a tax appeal in October 2010.
Subsequently, judgment was taken against Ben Nevis in proceedings in the
courts in South Africa.
SARS took the view that, when Mr King
became aware that SARS was investigating Ben Nevis’ tax affairs, he transferred
Ben Nevis’ assets to another company incorporated in British Virgin Islands,
and that, as a result thereof, funds of approximately £7,8 million had
been credited to a bank account in London in the name of Metlika Trading
Limited.
As a result of the protocol amending the tax treaty between South Africa and the United Kingdom taking effect on 13 October 2011, which now, for the first time, allowed for mutual assistance in the collection of taxes, a request was made by SARS to HMRC that it assist SARS in the collection of the tax debt due.
As a result of the protocol amending the tax treaty between South Africa and the United Kingdom taking effect on 13 October 2011, which now, for the first time, allowed for mutual assistance in the collection of taxes, a request was made by SARS to HMRC that it assist SARS in the collection of the tax debt due.
The High Court in the United Kingdom had
previously dismissed Ben Nevis’ application to set aside the order granting
judgment against Ben Nevis in respect of the tax due to SARS.
Historically, the courts in the United
Kingdom have declined the request to entertain claims for the enforcement of
revenue or other public laws of a foreign state. This flows from the well-established
principle that the courts of one country will not enforce the revenue laws of
another country. However, this principle
has been watered down as a result of international agreements concluded by
various governments, and, particularly, the Joint Convention on Mutual Administrative
Assistance in Tax Matters, which include a provision for assistance in the
recovery of taxes.
Originally, as pointed out above, the tax
treaty concluded by South Africa and the United Kingdom did not contain any
provision for mutual assistance in the collection of taxes. Article 25A was inserted by virtue of the
protocol conclude by the two governments, with effect from 13th
October 2011.
Ben Nevis sought to argue that article 25A
of the tax treaty could not apply as a
result of the fact that the tax debts were due in respect of years of
assessment commencing prior to the coming into force of the 2002 convention
concluded by South Africa and the United Kingdom. Thus, Ben Nevis sought to argue that the
effect of article 25A and article 27 of the 2002 convention limited the scope
of article 25A to tax debts on or after 1 January 2003. The tax owed by Ben Nevis related to the 1998
to 2000 assessments, that is, prior to the 2002 convention and most certainly
prior to the date on which article 25A was inserted into the tax treaty
concluded between South Africa and the United Kingdom.
Lord Justice Lloyd Jones reviewed various
cases dealing with the interpretation of international agreements and also the
relevant articles of the Vienna Convention on Treaties and considered the
retrospective effect of article 25A.
The Court also referred to a memorandum of
understanding that was agreed to by South Africa and the United Kingdom and
criticised the fact such memorandum could only be obtained by taxpayers by
making a Freedom of Information Act request.
The Court, therefore, expressed the view that it is in the interest of
fairness to taxpayers that memoranda of understanding agreed by contracting
states should be readily available to the public.
The Court reached the conclusion that the
application of article 25A to a request for assistance in the enforcement of
tax debts arising before the protocol came into effect did not amount to
retrospective application, nor was it unfair that the protocol should apply to
such pre-existing tax liabilities. The
Court also considered the effect of the Finance Act of 2006, and whether that Act
permitted HMRC to conclude an agreement with another country such that mutual
assistance in the collection of tax debt should apply retrospectively.
At the end of the day, the Court decided
that the presumption against retrospective effect did not apply to Ben Nevis,
because the application of article 25A in respect of taxes arising before 19
July 2006, that is, the date on which the relevant provisions of the Finance
Act took effect, or 1 January 2003, did not involve any objectionable
retrospective effect. The Court
accordingly decided that article 25A could be utilised by HMRC in assisting
SARS in recovering tax liabilities which arose prior to the insertion of
article 25A into the tax treaty concluded by South Africa and the United
Kingdom.
It is interesting to note that the tax
treaty concluded by South Africa and Australia contains a similar provision
dealing with the assistance in the collection of taxes at article 25A which
appeared in Government Gazette 31721 of 23 December 2008. The press has reported that Mr Tannenbaum,
the alleged mastermind of a Ponzi scheme, is indebted to SARS in the amount of
R747,990,921.00. Mr Tannenbaum would
appear to currently reside in Australia, and, when reference is made to the
decision in the Ben Nevis case, it is more than likely that SARS will seek assistance
from the Australian Tax Office to recover the taxes due as a result of the
alleged Ponzi by relying on article 25A of the treaty concluded by South Africa
and Australia.
Thus, governments will assist each other in recovering taxes due by taxpayers of other countries from assets that those taxpayers may have in the other country.
■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, July 2013.
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