Monday 9 November 2015

Lodging a Complaint against the South African Revenue Service

The Tax Administration Act No. 28 of 2011 (“TAA”) which took effect on 1 October 2012 created the Office of the Tax Ombud to deal with complaints against the South African Revenue Service (“SARS”) empowering that office to deal with complaints made by a taxpayer regarding a service matter or procedural or administrative matter arising from the application of the provisions of a tax Act by SARS.

Before a taxpayer can lodge a complaint with the Office of the Tax Ombud, it is important that they have exhausted the internal complaints resolution mechanisms within SARS, unless there are compelling circumstances to do so. The TAA prescribes what constitutes compelling circumstances and those are not dealt with further in this article.

During September 2015 SARS refined the process a taxpayer must follow when lodging a complaint regarding the manner in which they have been dealt with by SARS. According to the SARS website  a complaint is a grievance or some other type of dissatisfaction experienced by a taxpayer, trader or representative relating to a process, including queries, returns or any other service request or a service experience that is not adequately resolved.

The SARS guidelines dealing with complaints makes it clear that SARS’ processes should be fully exhausted to resolve a taxpayer’s query before a formal complaint is lodged. Where the taxpayer remains dissatisfied with the service after their normal interaction with SARS, they are entitled to complain against SARS. It must be noted that where a taxpayer disagrees with an assessment or any decision taken by SARS, it is necessary to follow the formal dispute resolution process and to lodge an objection against the assessment raised. The complaints process cannot deal with the merits or otherwise of an assessment issued by SARS.

Where a taxpayer is dissatisfied with SARS’ service or processes, it is necessary to have a case number first, particularly where a taxpayer wishes to complain about missing documentation, quality or speed of service or unresolved issues.
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Taxpayers are required to submit a complaint via e-filing which means that the complaint will be tracked electronically or alternatively by calling the SARS Complaints Management Office (“CMO”) on 0860121216. In order to complain via e-filing, the taxpayer must be a registered e-filer to complete and submit the complaint form. Previously taxpayers were unable to lodge complaints electronically which meant that complaints were not capable of comprehensive tracking and follow up.

Where a taxpayer is unable to file a complaint via e-filing, they may seek assistance from a SARS agent to complete the complaints form on their behalf when contacting the CMO. When lodging a complaint, a taxpayer is required to indicate the nature of the complaint and to categorise the complaint into one of the specified categories. According to the SARS website, the categories of complaints and examples relating thereto are as set out below:
            “No.        Category                                               Example
                1              Legal/Policy                                          For example, debit cards not accepted for payments.

                2              Employee behaviour/Competence For example, agent X was rude, or agent did not know how to assist
                3              Channel experience/environment/  For example, contact centre is very slow to answer, or there is no
                                technical issues                                   parking at branch X.
                4              Quality and speed of service            For example, incorrect resolution of request, or it took 6 months to
                                                                                                process my banking detail change.
                5              Unresolved service/operational       For example, turn-around-time exceeded and my return has not yet
                                matter                                                    been processed.
                6              Missing or lost documentation          For example, I have submitted my return, but SARS cannot find it.”
Where a taxpayer wishes to lodge a complaint relating to the quality and speed of service, or an unresolved service operational matter or missing or lost documentation, the taxpayer must submit a case number first. Thus, the taxpayer’s complaint will only be accepted if there is already a case logged on SARS’ systems and the case number is inserted on the complaints form.
SARS has indicated that once a taxpayer has complained, they will receive either a text message or email notification at various stages of the process confirming that the complaint has been received. It is intended that the resolution date will be a maximum date of 21 days after the complaint has been logged with SARS. Where the taxpayer remains dissatisfied with the outcome utilising the SARS internal complaints process, the taxpayer may lodge a formal complaint with the Office of the Tax Ombud.
SARS published a document entitled “Guide to the Complaints Functionality on E-filing” setting out how taxpayers and tax practitioners can lodge complaints via e-filing in respect of the taxpayer’s own affairs or in respect of the affairs of taxpayers managed by a tax practitioner.
Where the taxpayer remains dissatisfied after having followed the internal complaints process at SARS, they are entitled to file a complaint with the Office of the Tax Ombud, which office will determine whether the complaint falls within the mandate of that office and advise the taxpayer accordingly. The Tax Ombud intends to finalise complaints made by taxpayers within 15 business days of receipt of the taxpayer’s complaint. Where the Tax Ombud anticipates that the complaint will not be resolved within the specified time period, the Office will advise the taxpayer thereof.
The Tax Ombud recently tabled its annual report for 2014/2015 in Parliament as required under the TAA. That report indicates that during the twelve months under review, 1277 complaints were received from taxpayers, of which 861 were rejected on the basis that the complaints fell outside of the ambit of the Tax Ombud’s mandate or that the taxpayer had failed to exhaust SARS’ internal complaints process. Of the 409 complaints accepted by the Tax Ombud, 75% were resolved in favour of the taxpayer.
The Tax Ombud’s report identifies the most important categories of complaints lodged by taxpayers against SARS and these related to problems relating to the following areas:
·                Withdrawal of assessments by SARS
·                Delays in refunds
·                Changes in banking details of taxpayers
·                Identity theft
·                Turn-around time on objections and appeals
·                Outcomes of objections/appeals not implemented by SARS
·                Debt procedures not adhered to by SARS
·                Undue delay in issuing of tax clearance certificates
It must be remembered that the Office of the Tax Ombud cannot compel SARS to adhere to the finding made by the Ombud’s office but where SARS chooses not to adhere to the recommendations made by the Tax Ombud, that will be reported to Parliament. Thus, SARS must have  very sound reasons not to accept the recommendations made by the Tax Ombud, particularly when reference is made to the provisions of the Constitution.
In conclusion, where taxpayers are aggrieved with the manner in which they have been dealt with by SARS officials or SARS has failed to resolve the taxpayer’s complaint properly, they are entitled to take that up with the Office of the Tax Ombud and based on experience in practice, the Office of the Tax Ombud is having the desired effect in resolving complaints made by taxpayers against SARS. Taxpayers are therefore urged to lodge complaints with the Office of the Tax Ombud once they have failed to resolve the matter utilising SARS’ internal complaints processes.
Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, November 2015. 

Monday 12 October 2015

Preservation Order and the South African/Australian Double Taxation Agreement

On 20 August 2015 the Supreme Court of Appeal delivered its judgment in the case of M Krok & Jucool Enterprises Inc. v The Commissioner for the South African Revenue Services which related to an appeal from the Gauteng Division of the High Court regarding the correctness of the confirmation of a preservation order granted by Fabricius J in the context of the South African and Australian Double Taxation Agreement (“DTA”).

The DTA was concluded by the two countries on 1 July 1999 and subsequently altered by way of a Protocol signed on 31 March 2008 which catered for the states to assist each other in the collection of taxes. During January 2012 and February 2013, the Australian Tax Office (“ATO”) requested the assistance of the Commissioner: South African Revenue Service to assist it in the collection of taxes allegedly due by Mr M Krok to the Australian Commissioner of Taxation in the sum of Australian $25 361 875.79 plus interest for the period 30 June 2004 to 30 June 2009. The ATO therefore required SARS’ assistance in the conservancy of Mr Krok’s assets located in South Africa pending the collection of the tax debt and a formal request was made accompanied by the certificate required under section 185 of the Tax Administration Act, No. 28 of 2011 (“TAA”).

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Mr Krok emigrated to Australia from South Africa during April 2002 and prior to his emigration a trust of which he was a beneficiary vested the capital assets of that trust in Mr Krok. Thus, Mr Krok held the assets received from the trust in addition to his personal assets.

The distribution was made by the South African trust in order to reduce capital gains tax in the future and also to allow for the remittance of income under the exchange control regulations. Pursuant to Mr Krok’s emigration from South Africa, he contended that he ceded all South African income and assets to a foreign company, Polperro, held by a foundation located in Lichtenstein. Subsequently during December 2008 Mr Krok emigrated from Australia to the United Kingdom. Mr Krok contended that as part of his emigration planning to United Kingdom, Polperro was liquidated and the assets owned by him were transferred to Jucool Enterprises Inc., a company incorporated in the British Virgin Islands and held by a Jersey Trust.

During 2009 the ATO conducted an audit of Mr Krok’s tax affairs covering the period February 2003 to February 2010.

As a result of the ATO’s investigation into Mr Krok’s affairs, the ATO concluded that Mr Krok had failed to declare income derived by him for Australian tax purposes in respect of assets held by him in South Africa while an Australian resident. The various transactions whereby assets were transferred from Mr Krok to the foreign companies were never disclosed to SARS or the ATO. 

The ATO reached the conclusion that Mr Krok retained legal and beneficial interest in the assets and that the alleged assignment of his rights and interest of the capital and income of the assets to the foreign company violated South African exchange control regulations and was a sham. Consequently, the ATO adjusted Mr Krok’s tax returns and issued notices of assessment reflecting tax and penalties. The objections lodged by Mr Krok to those assessments were disallowed by the ATO.

As a result of the ATO’s request for assistance under the DTA, SARS launched an application for a preservation order under section 163 of the TAA. Mr Krok contended that the tax claimed by the ATO fell outside of the scope of the DTA on the basis that the Protocol came into effect on 12 November 2008 and therefore should only apply in respect of income or profits and gains of any year of income beginning after 1 July 2009.

Jucool contended that it had legal title to the assets and that the assets were therefore not owned by Mr Krok. Thus, Mr Krok’s primary argument was that the DTA did not apply on the basis that the tax in issue did not arise on or after 1 July 2009. The court considered the Vienna Convention on the Law of Treaties of 1969 and reached the conclusion that the Protocol concluded by South Africa and Australia applied to all tax debts, whether they arose before or after the date on which the Protocol was agreed to.

The court referred to the fact that the arguments raised by Mr Krok were dismissed in the case of Ben Nevis (Holdings) Ltd and Metlika Trading Ltd v Commissioners for HM Revenue and Customs. That case considered the provisions of the tax treaty between South Africa and the United Kingdom regarding an appeal in which similar issues to those raised in the Krok case were considered in the context of a similar article to a 2002 DTA between those two countries as amended by a 2010 Protocol. 

In the Metlika case the taxpayer argued that the 2010 Protocol precluded mutual assistance in the collection of tax debts which arose before 1 January 2003. The United Kingdom court disagreed with Metlika and accordingly allowed the United Kingdom Revenue to assist SARS in the collection of amounts allegedly due to it. The Supreme Court of Appeal therefore held that there was no merit in the taxpayer’s point on retrospectivity and that the provision of Article 25A allowing for reciprocal assistance in the collection of tax applied regardless as to when the income tax debt arose.

Furthermore, the court rejected Jucool’s contention that it was the beneficial owner of the assets in question and not Mr Krok.

Thus, the Supreme Court of Appeal confirmed the decision of the High Court authorising SARS to assist the ATO in recovering the tax allegedly due by Mr Krok to the ATO, despite the fact that the tax arose prior to the date on which the Protocol took effect.

Taxpayers therefore need to be aware that where they incur a tax debt in one country, that country may seek assistance in the recovery of those amounts from the assets held by a taxpayer in another country with which a DTA has been concluded.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, October 2015. 

Monday 28 September 2015

International Fiscal Association 69th Annual Congress 2015

 I was privileged to be invited to be the South African Branch Reporter and also a panelist for "Subject 2: The Practical Protection of Taxpayers' Rights" at the International Fiscal Association's 69th Annual Congress in Basel 2015

IFA BASEL2015 Registration Hall at the Exhibition Centre in the Messeplatz
 One of the many "goody bags" from various sponsors of the conference:
   Arriving at the opening function and chatting to Professor Jennifer Roeleveld
 of IFA-SouthAfrica,  hosts of the IFA Annual Congress in 2022.
and member of the Permanent Scientific Committee of the IFA 
and Prof Johann Hattingh of University of Cape Town at Ms Möller research board.  
Both IFA-South Africa and Prof Johann Hattingh snapped photos as I was presenting
 on the panel for Subject 2: The Practical Protection of Taxpayers' Rights
Prof Jennifer Roeleveld chairs IFA Basel seminar on Taxpayers' Rights & International Exchange of Information. 
Prof Craig West as secretary.  Photo courtesy of Prof Johann Hattingh
   The Gala Dinner had a variety of talented performance artists to entertain us
 The IFA flag being handed from Switzerland (Congress Host 2015)
 to Madrid (Congress Host 2016)
   After the congress was over, my wife and I stayed in 
the remote mountain village of Pianazzola, Italy
  then onto Milan for an orchestral concert at Teatro de alla Scala 
and a visit to Castello Sforza
Homeward bound! Waiting in Zurich Airport for flight LX288 to Johannesburg, 
the last flight of the day to depart from Zurich.

Saturday 19 September 2015

New Release: "a stranger in a strange land" by Judy Croome

I've been asked when my wife's next book will be available. 
It's now available in both print and eBook. 
Click here for a review of the book by Vine Leaves Literary Journal(UK)
and click here for a review by Readers' Favorites (USA)

The links to purchase it are below the book details.

Aztar Press is proud to announce the release of
"a stranger in a strange land" Judy Croome's latest volume of poetry.

Purchase in South Africa from Loot or directly from Aztar Press.
Purchase internationally from Amazon, Barnes and Noble, Kobo and others.

Monday 14 September 2015

Tax Treatment of Awards Received from Foreign Trusts by South African Beneficiaries

Where a South African tax resident beneficiary receives an award from a foreign trust, it is important that they ascertain the nature of the distribution received from that trust, so that they may correctly disclose the nature of the amount received from the trust for tax purposes in South Africa.

The tax payable by the beneficiary on an award received from a foreign trust will depend upon the precise nature of the distribution received from the foreign trust.

It must be remembered that under section 102 of the Tax Administration Act, No. 28 of 2011 (“TAA”) the taxpayer must discharge the onus of proof as to whether an amount is exempt from tax or is taxable. 

Thus, where a taxpayer is unable to determine the underlying nature of the amount received from a foreign trust, SARS would be fully entitled to regard that amount as normal income fully liable to tax in South Africa.

It would be far preferable if the foreign trustees assisted the South African beneficiary by advising them as to the nature of the amounts comprising the distribution made to the beneficiary so that the tax exposure relating to that distribution can be properly managed.

Where the beneficiary receives a return of trust capital, that clearly will not be taxable on the basis that it is a return of capital which falls outside of the rules taxing capital gains in South Africa imposed under the Eighth Schedule to the Income Tax Act, No. 58 of 1962, as amended (“the Act”).

Where, however, a foreign trust disposes of assets and realises capital gains thereon and subsequently makes an award to a South African beneficiary, the beneficiary will then receive a capital gain and depending on the circumstances that may or may not be taxable in South Africa.
Image purchased from © Keating
Paragraph 80(3) of the Eighth Schedule to the Act deals with the position where a resident acquires a vested right to any amount representing the capital of any foreign trust and that capital arose from a capital gain of that trust or any amount which would have constituted a capital gain of that trust if that trust had been tax resident and determined in any previous year of assessment during which the resident beneficiary had a contingent right to that capital and that capital gain was not subject to tax under the provisions of the Act. 

In such circumstances the amount received must be taken into account for purposes of calculating the aggregate capital gain or aggregate capital loss of the resident beneficiary in that year of assessment.

Thus, where a foreign trust disposes of assets and realises a capital gain thereon in say the 2014 tax year and subsequently awards that gain to the resident beneficiary in the 2015 tax year, that gain will then be taxable as a capital gain in South Africa. 

However, where the trust disposes of assets and realises a capital gain and distributes that to a resident beneficiary in the same year of assessment, it is apparent that the capital gain will not be taxable in the hands of the resident beneficiary. 

This interpretation is supported by the comments made in the Davis Tax Committee’s Interim Report on Estate Duty, where at page 45 the following is stated:

“However, unlike paragraph 80(3) this provision suffers from deficiency, in that it refers to a capital gain and not to an amount that would have constituted a capital gain had the non-resident trust been a resident. It can thus only apply to the limited range of assets referred to in paragraph 2(1)(b). Consequently, SARS is powerless to subject most gains of a non-resident trust to CGT in the hands of resident beneficiaries when such gains are distributed in the same year of assessment in which they arise.”

Thus, where a foreign trust realises a capital gain, it is in the interests of the South African resident beneficiary that that capital gain is distributed in the same tax year, thereby ensuring that the amount escapes tax in the hands of the beneficiary based on current statutory provisions.

Where, the foreign trust derives income in the form of interest, dividends etc. it is important to know what part of the distribution relates to the different categories of income. 

This flows from the provisions of section 25B(2A) of the Act which regulates the tax consequences flowing from distributions received by a resident beneficiary from a foreign trust. 

In principle, where the foreign trust derives income and awards that to a resident beneficiary in the same tax year or in a subsequent tax year, the resident beneficiary will need to ascertain the composition of the distribution received so that they can analyse the award into its constituent parts. 

Where, for example, the foreign trust receives interest income that will retain its nature and will be taxed as interest in the hands of the beneficiary in South Africa upon receipt, regardless of the fact when that was received, unless it was derived prior to 2001 being the year in which South Africa moved to the worldwide basis of taxation. 

Insofar as dividends are concerned, where the foreign trust derives dividends and awards that to a beneficiary the income tax payable thereon will generally not exceed 15% based on the provisions of section 10B of the Act. It would be necessary to consider the particular facts and circumstances of the trust in question.

Where a South African resident beneficiary receives a distribution from a foreign trust and they are unable to identify the constituent parts of that distribution, the full amount would be treated as taxable by SARS.

Those persons who applied for amnesty under the 2003 amnesty legislation were required to accept that the assets owned by the foreign trust were regarded as theirs for income tax and capital gains tax purposes and as and when income is derived by the foreign trust, that will be taxed in the hands of the amnesty applicant.

The Davis Tax Committee has recommended that in future all distributions of foreign trusts be taxed as normal income. This proposal is justified by the Committee on the basis of seeking to discourage the creation of offshore trusts because of the deferral of the tax that a beneficiary obtains through the use of an offshore trust. 

However, this proposal does not take account of the fact that many persons applied for amnesty and are paying tax on income generated by foreign trusts as and when derived and should those trusts make distributions, it would be inequitable if those distributions are taxed again as a  result of the proposal contained in the Davis Tax Committee Report. This would constitute double taxation which cannot be justified and it is hoped that this proposal to summarily regard all amounts received from foreign trusts as income will not be accepted.

In conclusion therefore it is contended that trustees of foreign trusts should assist South African tax resident beneficiaries of those trusts by recording the distributions made to the resident beneficiary and the precise nature thereof so that the beneficiary can correctly disclose those amounts for tax purposes.

A further point to consider is that where distributions are received from a foreign trust, that should be disclosed to the exchange control authorities through the normal banking channels, particularly where the distribution is received in South Africa. 

Should the beneficiary wish to retain the distribution offshore, they should seek permission from their authorised dealer to do so for exchange control purposes.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, September 2015. 

Tuesday 11 August 2015

New South Africa and Mauritius Double Taxation Agreement

National Treasury published a media release on 17 June 2015 advising that a new Double Taxation Agreement (“DTA”) entered into force on 28 May 2015 between South Africa and Mauritius. The new tax treaty replaces the 1996 South Africa / Mauritius tax treaty.

National Treasury indicated that the primary reason for renegotiating the old tax treaty was to curtail abuse of the old treaty that existed between South Africa and Mauritius. 

The new treaty contains a revised test for establishing where a person, other than an individual, is resident and also deals with the question of withholding taxes on interest and royalties, as well as the liability of companies which are regarded as property rich. Each of these aspects will be dealt with below.

The new tax treaty has complied with all requirements under the Constitution of the Republic of South Africa and was gazetted on 17 June 2015 such that the new tax treaty took effect on 28 May 2015.

At the same time that the National Treasury published its media release, a Memorandum of Understanding concluded between the Mauritius Revenue Authority (“MRA”) and the South African Revenue Service (“SARS”) regarding the application of Article 4(3) which deals with the question of residence of persons other than individuals was published. 

This document should assist taxpayers in understanding what criteria will be relied on in establishing where, for example, a company is to be regarded as resident under the provisions of the tax treaty, that is either in Mauritius or South Africa.

The memorandum of understanding should assist taxpayers
in interpreting the provisions of the new Double Tax Agreement
between South Africa and Mauritius
It is questioned how many other Memoranda of Understanding SARS has concluded with other revenue authorities, particularly in light of the case of Ben Nevis Holdings Ltd & Another v Commissioner for HM Revenue & Customs [2013] EWCA CIV 578, where the court indicated that Memoranda of Understanding concluded by contracting states may have an important bearing on the position of taxpayers and that it is in the interest of fairness to taxpayers that such Memoranda of Understanding should be readily available to the public. 

Thus, the release of the Memorandum of Understanding concluded by SARS and its Mauritian counterpart must be welcomed, as it should assist taxpayers in interpreting the provisions of the tax treaty.

Article 4 of the treaty deals with the meaning of the term “resident” for the purposes of the tax treaty which provides that a resident of a contracting state means any person who under the laws of that state is liable to tax therein by reason of that person’s domicile, residence, place of management or any other criterion of a similar nature. Article 4(3) provides that in the case of persons other than an individual which is resident in both South Africa and Mauritius, the competent authorities of the contracting states shall decide where such person is resident. 

In the Memorandum of Understanding concluded by SARS and the MRA the authorities reached an understanding in relation to the factors to be taken into account when attempting to settle the question of dual residence in the case of persons other than individuals.

A person other than an individual will be deemed to be a resident for the purposes of the tax treaty taking account of its place of effective management, the place in which it is incorporated or otherwise constituted and any other relevant factors. 

The competent authorities of South Africa and Mauritius have indicated in the Memorandum of Understanding that the following factors will be considered in determining where a company is resident for purposes of the tax treaty:

·         where the meetings of the person’s board of directors or equivalent body are usually held;
·         where the Chief Executive Officer and other senior executives usually carry on their activities;
·         where the senior day to day management of the person is carried on;
·         where the person’s headquarters are located;
·         which country’s laws govern the legal status of the person;
·         where its accounting records are kept;
·         any other factors listed in paragraph 24.1 of the 2014 OECD Commentary (Article 4, paragraph 3), as may be amended by the OECD/BEPS Action 6 final report; and
·         any such other factors that may be identified and agreed upon by the Competent Authorities in determining the residency of the person.

Those companies which have been incorporated in South Africa and are wholly owned by South African companies need to ensure therefore that their primary activities are indeed conducted in Mauritius and not South Africa, thereby ensuring that the benefits available under the tax treaty will be available to such companies in Mauritius. 

Where a company has been incorporated in Mauritius but for all practical purposes is controlled in South Africa, such company will be regarded as resident in South Africa for purposes of the treaty. 

Thus, South African groups with companies in Mauritius should evaluate the manner in which the Mauritian company’s affairs are conducted so as to ensure that they cannot be said to be tax resident in South Africa under the provisions of the treaty concluded with Mauritius.

The old tax treaty provided for a zero withholding tax rate on interest and royalties on the basis that such amounts were only taxable in the state where the taxpayer receiving the interest or royalties resided.

The new tax treaty provides for a 10% withholding tax in the source country paying the interest. Furthermore, the new treaty allows for a 5% rate of withholding tax on royalties paid in the source country.

This means therefore that interest or royalties paid by a South African entity to a Mauritius person will be liable to a maximum withholding of either 10% or 5% as the case may be.

Under the old treaty, Mauritian companies were used to hold shares in South African companies  which owned fixed property located in South Africa. Where the shares in the Mauritian company were disposed of, South Africa could not, under the old treaty, subject that disposal to capital gains tax as is the case with other countries.

Thus, the new treaty now provides that a contracting state may tax capital gains realised on the disposal of shares deriving more than 50% of their value directly or indirectly from immovable property situated in that contracting state. 

Thus, with effect from taxable years commencing on or after 1 January 2016, any Mauritian company disposing of shares in a company owning fixed property in South Africa will attract capital gains tax in South Africa.

The new tax treaty also contains a new provision at Article 26 which allows for SARS to assist the MRA in recovering taxes due to MRA and in turn allows for SARS to seek assistance from MRA in collecting taxes due to SARS. An ever increasing number of tax treaties are catering for reciprocal assistance in the collection of taxes.

When reference is made to Article 28, which deals with the date on which the treaty enters into force, it would appear that the new tax treaty will generally apply with effect from 1 January 2016 in respect of taxes withheld at source relating to amounts paid or credited after 1 January 2016. Insofar as other taxes are concerned, the new treaty applies in respect of taxable years commencing on or after 1 January 2016.

Those South African groups that have operations in Mauritius need to review their affairs to ensure that they adhere to the Memorandum of Understanding concluded by SARS and MRA which will be utilised in determining where a company is resident for purposes of the tax treaty.

Dr Beric Croome is a Tax Executive Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, August 2015.  

Monday 13 July 2015

Constitutional Court decides that Exit Levy Paid by Mr Mark Shuttleworth is Lawful

The Constitutional Court handed down judgment on 18 June 2015 in the case of the South African Reserve Bank and Minister of Finance v Mark Shuttleworth regarding the nature of the exit levy paid by Mr Shuttleworth to export capital from South Africa. That court also dealt with the broad discretionary powers conferred on the Minister of Finance to regulate the exchange control system of the country.

During 2001 Mr Shuttleworth emigrated to the Isle of Man on the basis that he wished to free up his funds for investment outside of South Africa. At that stage the Exchange Control Regulations did not permit Mr Shuttleworth to transfer his assets from South Africa. He applied to the South African Reserve Bank (“the SARB”) to transfer an amount of approximately R2.5 billion out of South Africa and the SARB agreed thereto on the basis that he was required to pay a so-called exit charge of 10% of that amount. 

Mr Shuttleworth accordingly paid the exit levy of approximately R250 million and was later advised that the exit charge was a tax and had been imposed in a manner not permitted by the Constitution. Before the matter reached the Constitutional Court, the dispute was dealt with by the North Gauteng High Court and subsequently the Supreme Court of Appeal. 

The High Court held that the exit charge was lawfully imposed and also decided that a few exchange control legislative provisions were unconstitutional. Subsequently, the Supreme Court of Appeal held that the levy paid constituted a tax and was therefore unlawful and should be refunded.

As a result of the fact that both parties to the case were dissatisfied with the decision of the Supreme Court of Appeal, the case was heard by the Constitutional Court, which delivered its judgment on the matter on 18 June 2015.

After the first democratic election in South Africa in 1994, the process of relaxing of the exchange control rules started. During 2003 the Minister of Finance reached the conclusion that the economy had become more resilient and decided that it was appropriate to commence with the relaxation of exchange controls previously in force. 

The Minister confirmed that holders of blocked assets would be required to apply to the Exchange Control Department of the SARB to remit such funds and that approval would be subject to an exiting schedule and that an exit charge of 10% of the amount to be remitted would be payable. The Constitutional Court reached the conclusion that the decision to impose the 10% exit charge on persons wishing to export more than R750,000 was a decision made by the Minister and not the SARB.

The court stated that the Minister of Finance exercised the power to impose the levy in terms of regulation 10(1)(c) of the Exchange Control Regulations and imposed two conditions on persons wishing to remove funds from South Africa, namely, that they pay a 10% exit charge on the capital exceeding R750,000 and that the capital exported be subject to an existing schedule. Moseneke DCJ reached the view that the SARB was only responsible for implementing the policy decision made by the Minister of Finance and that it had no discretion when giving effect to his decision. The Supreme Court of Appeal had held that the exit levy constituted a tax and in light of the fact that it had not been introduced by way of a Money Bill in accordance with section 77 of the Constitution the levy was unlawful.

The court made the point that the government is not entitled to levy a tax or appropriate public money without due process and the express consent of public representatives and proceeded to analyse the provisions of section 77 of the Constitution and particularly the meaning of “national taxes, levies, duties [and] surcharges”. The court made the point that the fact that a charge or levy may be referred to as a tax does not imply that it must be  introduced with compliance with the requirements of section 77 of the Constitution.

Moseneke DCJ reached the view that the exit charge was not aimed at raising revenue but that its purpose was to restrict the scale of capital exported from South Africa. Furthermore, the exit charge did not apply to the general population of the country but only to those persons who wish to externalise capital in excess of R750,000. The court recognised that the exit charge generated revenue of some R2.9 billion for the government but reached the view that the garnering of income by the Treasury was secondary to the primary purpose of regulating and discouraging the export of capital from South Africa.

Image purchased from ©
Ultimately the court therefore decided that the exit charge paid by Mr Shuttleworth was not one which fell within the constraints set out in the definition of a Money Bill in the Constitution. The court was also required to deal with the delegation of legislative power and whether plenary legislative powers had been assigned to the President. 

The court reached the conclusion that the President did not delegate legislative power but that the power he had was to regulate by way of imposing conditions for the export of capital. The court took account of the particular circumstances regarding the movements in foreign currency and the possibility of funds being moved from one location to another and the need for special regulation thereof. 

The court accepted that the nature of the power which the Currency and Exchanges Act, No. 9 of 1933, conferred on the President to make regulations relating to currency is unusually wide but that was justified taking account of the unusual circumstances of the subject matter. The court therefore held that the exit charge paid by Mr Shuttleworth did not constitute a tax and it had been lawfully imposed.

The court also had to deal with an application filed by Mr Shuttleworth seeking leave to cross-appeal the decision of the lower court refusing to impugn the constitutional validity of all or some of the provisions regulating exchange control in the country. 

The court decided that it was not in the interests of justice to grant Mr Shuttleworth leave to cross-appeal against the decision of the Supreme Court of Appeal on the broad constitutional attack against the exchange control regulations. 

Despite the court’s conclusion, Moseneke DCJ made the point that the specific provisions targeted by Mr Shuttleworth “are well and truly archaic and may very well be at odds with the tenets of our Constitution. The state parties are nudged to take appropriate steps to review the provisions in issue.”

Mr Shuttleworth also sought to impugn section 9(1) of the Currency and Exchanges Act and regulation 10(1)(c). The High Court had dismissed Mr Shuttleworth’s contention and Moseneke DCJ agreed with the view reached by that court that South Africa’s “exchange control system requires a flexible, speedy and expert approach to ensure that proper financial governance prevails”.

In the result the court held that regulation 10(1)(c) of the Exchange Control Regulations was valid. Thus, the Constitutional Court held that the exit levy paid by Mr Shuttleworth was lawfully imposed and this puts paid to the SARB having to make a refund to Mr Shuttleworth and indeed any other persons who paid the levy upon exporting capital from South Africa.

It is interesting to note that Froneman J did not agree with the conclusion reached by Moseneke DCJ and therefore handed down his own dissenting judgment. Froneman J reached the view that the exit charge raised revenue for the national government and reached the conclusion that it could therefore only be imposed by way of original legislation passed by Parliament. Froneman J therefore reached the conclusion that the imposition of the exit charge by announcement in Parliament was constitutionally invalid.

The decision of the Constitutional Court brings finality to the Shuttleworth saga which has been underway for a number of years and it is clear that the exit levy imposed on the export of capital was, in the view of the court, lawfully imposed. The Minister of Finance indicated in his 2015 Budget Speech that the SARB  is in the process of simplifying the Exchange Control Manual and plans to finalise that during 2015.  It is hoped that the SARB will take heed of the court’s views on the provisions contained in the Exchange Control Regulations and that those provisions will be reviewed to take account of the Constitution.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, July 2015.