In terms of chapter 5 of the Tax Administration Act No. 22 of 2011 (the “TAA”), the South African Revenue Service (“SARS”) is empowered to seek information from taxpayers to ensure that the returns that they have submitted to SARS are complete.
Originally, the TAA did not provide a means for SARS to compel taxpayers to supply information relating to foreign related entities. In practice, SARS would request information from taxpayers pertaining to overseas subsidiaries or on other occasions indicate that they wished to conduct an audit in the country in which the foreign subsidiary was located.
It is clear from a review of South African and international law that SARS’ powers do not extend beyond the borders of South Africa and that it would have been unlawful for SARS officials to arrive in a foreign country to conduct an audit on a company or entity located abroad. That is the reason why States conclude double taxation agreements to eliminate double taxation but also to allow for co-operation between States and to receive information from a taxpayer located in one jurisdiction for transmission to a revenue authority in another country.
Thus, SARS could only procure information from another country under either a bi-lateral tax treaty or in accordance with the Convention On Mutual Administrative Assistance In Tax Matters which allows for a revenue authority in one country to seek assistance from another revenue authority to audit and investigate the affairs of the taxpayer located in the other country.
Countries such as Canada and Australia have historically had provisions in their fiscal legislation allowing the revenue authority to request information from domestic taxpayers regarding entities related to the domestic taxpayer which are located abroad.
It was therefore no surprise that section 46 of the TAA was amended by way of section 42 of the Tax Administration Laws Amendment Act No. 23 of 2015 which now confers on SARS the power to call for information from a South African taxpayer in respect of a connected person located abroad.
Thus, section 46 (2) now provides that a senior SARS official may require relevant material from a taxpayer held or maintained by a connected person as defined in paragraph (d)(i) of the definition of connected person contained in section 1 of the Income Tax Act 58 of 1962, as amended in relation to the taxpayer where that person is located outside South Africa.
The definition of connected person is comprehensive and this article does not seek to analyse the scope of that definition but taxpayers must remember that the connected person definition particularly in relation to a company is very wide and clearly would apply where, for example, a South African company owns more than 50 % of the equity shares or voting rights in a company located abroad, or meets certain other requirements specified in paragraph (d)(i) of the definition of connected person.
Section 46 also regulates the time period within which information located abroad must be provided to SARS. Where the information is held by a connected person in relation to a South African taxpayer, the taxpayer must supply the information within 90 days from the dates of SARS’ request for the information and it is important that SARS when calling for the information relating to the connected person located abroad sets out the consequences should the taxpayer fail to provide the information requested.
It must be noted that the time period referred to is 90 days and not business days as defined in section 1 of the TAA and thus in determining the period available within which to respond taxpayers would need to take account of calendar days and not business days.
Where a taxpayer fails to provide the information requested by SARS in accordance with section 46 of the TAA it must be noted that the material in question may not be produced by the taxpayer in any subsequent proceedings with SARS unless a competent court directs otherwise on the basis of circumstances beyond the control of the taxpayer and any connected person referred to in paragraph (d)(i) of the definition of connected person as defined in the Income Tax Act in relation to the taxpayer.
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It is interesting to note that other countries have a similar provision that where a taxpayer declines to provide information relating to a foreign related entity that information cannot be used in subsequent proceedings against the revenue authority of that country.
Thus, Section 46 (9) of the TAA which provides that information may not be used by the taxpayer should they not make it available to SARS is not uncommon.
It is important to remember also that that where a taxpayer is assessed by SARS , the onus is on the taxpayer in accordance with section 102 of the TAA to prove that an amount, transaction, event or item is exempt or otherwise not taxable, or that an amount or item is deductible or maybe set off.
Thus, should a taxpayer not provide the information to SARS it may become very difficult for the taxpayer to discharge the burden of proof as prescribed in section 102 of the TAA.
In addition, the failure to provide information to SARS is specifically regarded as a criminal offence under section 234 of the TAA.
Thus, taxpayers should not lightly refuse or neglect to furnish information to SARS when called upon to do so, including information relating to a connected person located abroad.
In addition, the failure to provide information, particularly information held by a connected person abroad, could be construed as obstructive and result in an increase in the understatement penalty which SARS may seek to impose if SARS adjusts the taxable income of the taxpayer.
Thus, taxpayers who are requested to provide information held or kept by a connected person as envisaged in section 46 read together with the definition of connected person in section 1 of the Income Tax Act need to be aware of the consequences should they fail to provide the information to SARS timeously.
Dr Beric Croome is a Tax Executive at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, March 2016.