Tax Evaders Find it Difficult to Hide Across Borders

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.

SARS  and  UK  revenue   can assist in targeting 

tax debtors in each other's countries

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.

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 13^th 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.

Previously, tax treaties did not envisage countries assisting each other in the collection of tax debts, but this has changed, and the OECD’s Model Convention now contains such provisions. Furthermore, the Joint Convention on Mutual Administrative Assistance in Tax Matters includes a provision for the assistance in recovery of taxes.  

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. 

Inexorable Powers of the Tax Debt Collector

It is important that taxpayers who are indebted to the South African Revenue Services (SARS) engage with the Commissioner to resolve the manner in which the tax debts will be paid.  It must be remembered that the tax debt will not go away, and that the Commissioner has substantial powers in the Tax Administration Act to ensure that taxpayers settle tax debts due to it.

Where a taxpayer is required to file a tax return, that will be assessed by the Commissioner: South African Revenue Service, and an assessment will be issued reflecting the amount of tax payable by the taxpayer to SARS, or, alternatively, payable by the Commissioner to the taxpayer by way of a refund.  It is important that the taxpayer settles the tax reflected as payable on the assessment within the time period allowed on the assessment. 

Should the taxpayer fail to pay the tax within the time allowed, interest will be levied on the late payment of tax, and, furthermore, the Commissioner: SARS may initiate the various recovery procedures contained in the Tax Administration Act, No 28 of 2011, to ensure that the tax is indeed paid by the taxpayer.

Where the taxpayer fails to pay the tax when it is due, the Commissioner may apply for civil judgment for the recovery of the tax reflected as payable.  Previously, the so-called ‘judgment rules’ were contained in section 91 of the Income Tax Act, No 58 of 1962, and are now regulated by section 172 of the Tax Administration Act.  

Where a taxpayer fails to pay tax which is payable, the Commissioner may, after the giving the taxpayer at least 10 business days’ notice, file with the clerk or registrar of a competent court a statement setting out the amount of tax payable and certified by SARS as correct.  Previously, under section 91 of the Income Tax Act, the Commissioner was not obliged to issue a notice to the taxpayer indicating that SARS was about to take a judgment against the taxpayer.

SARS will get its due,
so it's best to pay up ahead
of any punitive measures

Note that the Commissioner is entitled to file a statement at court regardless of whether or not the amount of tax reflected as payable is subject to an objection or appeal, unless the obligation to pay the amount in dispute has been suspended under section 164 of the Tax Administration Act.

Therefore, should a taxpayer wish to dispute an assessment and lodge an objection thereto, they need to adhere to the rules regulating objections and appeals, and, at the same time, decide whether to pay the tax in dispute or to request the suspension of payment under section 164 of the Tax Administration Act.

It must be noted that the Commissioner: South African Revenue Service is not required to give the taxpayer prior notice of the intention to take a judgment against the taxpayer where the Commissioner is satisfied that giving such notice would prejudice the collection of the tax in question.

A difficulty arises in cases where the Commissioner has made an error on the assessment issued to the taxpayer and subsequently files a statement at court, which can have disastrous implications for the taxpayer’s credit standing.  

Furthermore, it does appear that there are occasions where the Commissioner takes a judgment without advising the taxpayer that it is intending to take judgment against the taxpayer.  

The difficulty that taxpayers have is that the information reflected on the e-Filing system regarding the amounts which may be payable by the taxpayer do not, for some reason, always correspond with what is reflected on SARS’ own internal system.  It is not unknown for taxpayers to have been in receipt of tax clearance certificates confirming that their tax affairs are in order and yet suddenly be advised by creditors or another party that judgment has been taken against them for the failure to pay taxes due to SARS. 

Where SARS fails to advise the taxpayer of the intention to take judgment, the taxpayer has no recourse against SARS, but would have to approach SARS with a view to having the judgment withdrawn, or, alternatively, approach the High Court for a rescission of the SARS judgment.

As pointed out above, should a taxpayer decide to lodge an objection against an assessment, a decision must be made whether to pay the tax in dispute or to submit a properly-motivated request to the Commissioner to postpone the payment of tax pending the outcome of the objection and appeal.  

Again, the difficulty that arises is that taxpayers may file an objection and a request for postponement of payment and not receive any communication from SARS for a substantial period of time.  The first time that they may become aware of a problem, is when SARS has either taken judgment against them or demands payment of tax within a very short period of time, despite the fact that SARS has failed to consider the taxpayer’s request for postponement of tax in accordance with section 164 of the Tax Administration Act.  

The taxpayer’s only recourse would be to launch proceedings in the High Court, or, once the Tax Ombud is appointed, to seek assistance from that office.

Where the taxpayer is unable to meet its tax obligations as a result of poor financial conditions, it is imperative to engage with the Commissioner to resolve the matter and consider seeking a deferral of payment in terms of section 167 of the Tax Administration Act.   

It does not appear that the Commissioner has published the Public Notice referred to in section 167(1)(a) of the Tax Administration Act, which sets out the criteria or risks that may be prescribed by the Commissioner in adjudicating whether an instalment payment agreement should be concluded with the taxpayer.  

Where, however, the taxpayer is facing financial difficulties, consideration should be given to applying for an instalment payment agreement on a properly motivated basis, and in compliance with the provisions of section 167 of the Tax Administration Act.  

Clearly, the Commissioner will not agree to an instalment payment arrangement for an indefinite period, but will typically agree to the payment of the outstanding tax in a number of instalments, and will review the arrangement regularly.

Previously, under section 99 of the Income Tax Act, the Commissioner could appoint any other party as the agent of the taxpayer and direct that any monies held by that person on behalf of the taxpayer be paid over to the Commissioner in settlement of the tax debts due by the taxpayer.  The rules regulating the so-called ‘appointment of agent’ are now contained in section 179 of the Tax Administration Act. 

That section requires a senior SARS official to issue a notice to any person who holds or owes or will hold or own any money, including a pension, salary, wage or other remuneration for or to the taxpayer, and require the person to pay those funds over to the Commissioner in satisfaction of the taxpayer’s tax debt.  The first time, generally, that a taxpayer becomes aware of such steps having been taken against it, are when payment instructions issued by the taxpayer to its bank cannot be followed because no funds are held in the taxpayer’s bank account as a result of SARS’ instructions. 

The Commissioner may also direct an employer to withhold from any salary payable to a member of its staff and to pay such money over to SARS in satisfaction of tax debts due by the employee.  SARS has published guidelines as to how employers are to deal with so-called ‘garnishee instructions’, and, also, to ensure that employees receive sufficient remuneration to pay the basic living expenses of themselves and their dependants. 

The Tax Administration Act also contains rules regulating the liability of financial management for tax debts due to the Commissioner.  

A person is personally liable for the payment of any tax debt due by the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt to SARS, where that person controls or is regularly involved in the management of the overall financial affairs of the taxpayer, and, where a senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer. 

The decision to rely on section 180 of the Tax Administration Act can, therefore, only be made by a senior SARS official.  Unfortunately, taxpayers at this stage are not aware as to which SARS officials have been designated as senior SARS officials under the Tax Administration Act.

Clearly, where a person is involved in the financial management of a taxpayer, and deliberately fails to pay SARS taxes due and diverts those funds for other purposes, and it can be shown that the person was negligent or acted fraudulently, they may be personally liable for the tax debts of the taxpayer.

In addition, section 181 of the Tax Administration Act prescribes the circumstances where shareholders may be liable for the tax debts of a company.  Previously, the Commissioner was only entitled to recover Value-Added Tax and PAYE from persons involved in the financial management of a taxpayer under specific provisions contained in the Value Added Tax Act and the Income Tax Act.  Section 181 of the Tax Administration Act now applies to any tax debt due by a company, and is thus wider than those rules that were contained in the administrative provisions of the various tax Acts which have been repealed with effect from 1 October 2012.

The liability of a shareholder for the tax debts of the company arises where a company is wound up other than as a result of an involuntary liquidation without having settled its tax debts due to SARS, including its liability as a responsible third party, withholding agent or representative taxpayer, employer or vendor.

Those persons, who are shareholders of the company within one year prior to the company being wound up, are jointly liable to pay the unpaid tax to the extent that they receive assets of the company in their capacity as shareholders within one year prior to its winding up, and the tax debt existed at the time of the receipt of the assets would have existed had the company complied with its obligations under a tax Act.  

It must be noted that the provisions contained in section 181 do not apply in respect of a listed company as defined in the Income Tax Act or in respect of a shareholder of such a listed company.

The Tax Administration Act contains other specific provisions empowering the Commissioner to ensure the collection of tax debts from taxpayers who do not settle the payment of their tax debts timeously.  In certain cases, the Commissioner may seek the assistance of a foreign revenue authority where South Africa has concluded a double-taxation agreement allowing for the reciprocal assistance in the collection of tax debts.

Dr Beric Croome is a Tax Executive at Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review(March 2013.) Free image from ClipArt. 

Last Resort for SARS to effect collection of dues

The Commissioner: South African Revenue Service recently indicated that it would utilise its powers contained in section 99 of the Income Tax Act 1962, to secure payment of penalty assessments issued by SARS to defaulting taxpayers for non- or late rendition of income tax returns.

A number of commentators have questioned whether SARS's power to appoint an agent is valid in light of the bill of rights contained in the Constitution of the Republic of South Africa, Act 1996, as amended.

It is important that taxpayers remember the process SARS must follow, prior to it initiating the collection of tax by relying on section 99 of the Income Tax Act. SARS must, firstly, issue an assessment to the taxpayer, reflecting an amount payable to SARS. This is in accordance with the Supreme Court of Appeal decision of Singh vs Commissioner: SARS.

The taxpayer would, typically, also receive a statement of account reflecting the amount payable to SARS and it would issue letters of demand or notices to the taxpayer requesting the taxpayer to pay the tax reflected as payable within a specified period. More often than not, SARS would also telephone the taxpayer to advise that the amount remains payable and that collection steps will be taken should the taxpayer not pay within a further period of time. SARS, therefore, only uses the power in section 99 of the act once the taxpayer has failed to engage with SARS to either dispute the assessment or to make arrangements to pay the tax reflected as payable.

Right: The Constitutional Court has upheld the 'pay now, argue later' principle.

Section 99 confers on the Commissioner the following power: "The Commissioner may, if he thinks necessary, declare any person to be the agent of any other person, and the person so declared an agent shall be the agent for the purposes of this act and may be required to make a payment of any tax, interest or penalty due from any monies, including pensions, salary, wages or other remuneration, which may be held by him or due by him to the person whose agent he has been declared to be."

It must be noted also that under the provisions of section 75(l)(j) a person who fails to comply with the provisions of section 99 of the act commits an offence and may be liable, on conviction, to a fine or to imprisonment for a period not exceeding 24 months.

It is accepted that the provisions of section 99 may appear draconian, but it must be pointed out that such provisions are not unique to SA. During 1996, the Commissioner approached the Constitutional Court for an opinion as to whether certain provisions of the fiscal statutes complied with the constitution. Unfortunately, the Constitutional Court decided not to adjudicate the various matters raised by SARS as it did not relate to an actual legal dispute, but was more in the nature of an opinion being sought from the Constitutional Court by SARS.

In the case of Hindry v Nedcor Bank Ltd and Another, Judge Wunsh had to determine whether section 99of the act was consistent with the Constitution. In Hindry, the taxpayer received a refund from the Commissioner in error. The Commissioner sought to reclaim the refund incorrectly authorised and eventually issued a notice to the taxpayer's bankers, appointing them as the taxpayer's agent under section 99 of the act, in order to recover the tax due by Hindry. Hindry applied for an interdict from the court preventing the bank from paying the Commissioner under the notice issued, pursuant to section 99, on the basis that the provisions were inconsistent with the Constitution.

Judge Wunsh decided that section 99 did not violate the constitution and. furthermore, that in none of the taxing statutes of other countries is the revenue authority required to give the taxpayer advance notice of an attachment, thereby enabling the taxpayer to make representations to avoid the effect of the agency appointment.

The judge pointed out that the garnishee procedure is recognised in other countries which constitute open and democratic societies.

Further, it must be pointed out that the Constitutional Court has upheld the "pay now, argue later" principle in Metcash Trading Ltd v Commissioner: SARS, which has the effect that SARS can insist on payment even though the taxpayer disputes an assessment issued by SARS.

The Value-Added Tax Act, 1991,contains a similar provision to section 99,at section 47. In Contact Support Services (Pty) Ltd and Others v Commissioner: SARS and Others, the taxpayer applied for the setting aside of the notices issues under section 47 of the VAT Act on the basis that the audi alteram partem principle had not been observed. The court refused to allow the challenge to the notices issued pursuant to section 47 of the VAT Act because the notices were not ultra vires the constitution.

However, in Mpande Foodliner CC v Commissioner: SARS and Others, the court set aside notices issued under section 47 on the basis that the denial of the audi principle before issuing the notices under section 47 of the VAT Act, infringed section 33 of the constitution. However, subsequently, in Smartphone SP (Pty) Ltd v ABSA Bank Ltd and Another the court referred approvingly to the comments made by Judge Brett in the Contract Support Services case. The court pointed out that in determining whether the taxpayer's right to administrative justice had been violated, it is necessary to take account of the circumstances of each case and it was unable to support the decision in Mpande.

Thus the courts have held that the issue of notices under section 99 of the Income Tax Act or section 47 of the VAT Act, do not unlawfully violate the taxpayer's right to administrative justice as envisaged in the Promotion of Administrative Justice Act of 2000.

More recently, in the Supreme Court of Appeal case of Shaikh v Standard Bank of SA Ltd and Another, the court was required to decide whether the payment of funds made by the bank to SARS was valid, despite the fact that the notice issued appointing the bank as the taxpayer’s agent, was deficient under the VAT Act. The court held that even though SARS may have referred to the incorrect statutory provision, it does not invalidate the administrative act where the decision is permitted under the provision in question.

Therefore based on a review of precedents in SA, it does not appear that section 99 violates the rights of taxpayers enshrined in the constitution. Clearly, where SARS has not issued an assessment to a taxpayer, or has otherwise abused its powers, the taxpayer would be entitled to approach a court for relief and should be entitled to recover damages from SARS.

However, where the taxpayer has ignored an assessment issued by SARS and subsequent notices of demand, SARS is fully entitled to rely on section 99 of the act to ensure the collection of tax due to it. It is important though, that section 99 of the act is used as a last resort by SARS, only after the taxpayer has failed to comply with their statutory obligations.


▪ Dr Beric Croome is a tax executive at ENS. This article first appeared in the August 2010 “Tax Bites” column of the Business Law & Tax Review in the Business Day.