Request by SARS for Information from South African Taxpayers Regarding Related Parties Abroad

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. 

Receiver Throws Information Net Wider

On 5^th April 2013, the Commissioner: South African Revenue Service issued Government Notice number 260, which appeared in Government Gazette number 36346 on 5^th April 2013, setting out returns of information which must be submitted by third parties in terms of section 26 of the Tax Administration Act, No 28 of 2011. 

It is appropriate to point out that, on 29^th February 2012, the Commissioner: South African Revenue Service published a Government Notice requiring reporting institutions to furnish bi-annual returns of investment and interest with effect from the 2013 year of assessment.  That government notice required certain financial institutions to supply extensive information to the Commissioner: SARS.  As a result of the Tax Administration Act taking effect, it was necessary for a new notice to be published specifying information to be supplied by various third parties to Commissioner: SARS.

Hackles may rise as this move could be seen as a violation of the taxpayer’s right to privacy

At the time that the Tax Administration Act was being finalised, it was indicated that the legislation was being enhanced to improve the gathering of information from third parties by the Commissioner: South African Revenue Service, so as to increase the levels of tax compliance in South Africa and to assist in the further pre-population of tax returns to be submitted by individuals.

The latest notice requires financial institutions to supply details of retirement annuity contributions paid by taxpayers and for medical aid schemes to supply details of contributions made by persons in respect of the medical scheme, as well as all expenses paid for a person by a medical scheme.  

These two particular requirements will assist SARS in pre-populating tax returns to be lodged by individuals.  In addition, financial institutions in receipt of premiums paid for income protection policies must disclose that to the Commissioner, which should assist taxpayers in satisfying the Commissioner: SARS as to the deductibility of premiums paid on income protection policies.

The notice issued on 5^th April 2013 requires the following persons to submit a return in the manner prescribed in the notice:

•          banks regulated by the registrar of banks in terms of the Banks Act or the Mutual Banks Act;
•          co-operative banks regulated by the Co-operative Banks Development Agency in terms of the Co-operatives Banks Act;
• 
  
•          the South African Post Bank Limited, regulated in terms of the South African Post Bank Limited Act;
•          financial institutions regulated by the executive officer, deputy executive officer or board, as defined in the Financial Services Board Act, whether in terms of that Act or any other act;
• 
  
•          companies listed on the JSE and connected persons in relation to the companies that issue bonds, debentures or similar financial instruments;
• 
  
•          state-owned companies, as defined in section 1 of the Companies Act that issue bonds, debentures or similar financial instruments;
• 
  
•          organs of state, as defined in section 239 of the Constitution of the Republic of South Africa that issue bonds, debentures or similar financial instruments;
• 
  
•          any person, including a co-operative, as defined in section 1 of the Income Tax Act, who purchases any livestock, produce, timber, ore, mineral or previous stones from a primary producer other than on a retail basis;
• 
  
•          any medical scheme registered under section 24 of the Medical Schemes Act;
• 
  
•          any person who, for their own account, carries on the business as an estate agent, as defined in the Estate Agency Affairs Act and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property; and
• 
  
•          any person who, for their own account, practices as an attorney, as defined in section 1 of the Attorneys Act, and who pays to or receives on behalf of a third party any amount in respect of any investment, interest or the rental of property.

The notice then describes the nature of the information to be provided by the categories of persons specified in the notice.  The Commissioner is seeking information regarding amounts paid or received in respect of or by way of any investment, rental of immovable property, interest or royalty, and transactions that are recorded in an account maintained for another person, that is, so-called transactional accounts like bank accounts.

Furthermore, those persons involved in the purchase and disposal of financial instruments for clients are required to disclose details of amounts paid in respect of the purchase and disposal of financial instruments.

Insurance companies are required to report the payment of amounts made upon the death of a person in terms of an insurance policy.

Monies paid in respect of the purchase, sale or shipment of livestock, timber, ore, mineral, precious stones or by way of a bonus, in the case of a co-operative, are required to be disclosed to the Commissioner by affected persons.

The affected third parties are required to submit the requisite IT3 form to the Commissioner, or, alternatively, a data file compiled in accordance with SARS’s business requirements specification for IT3 data submission.

The requirement to submit information to the Commissioner is onerous in that the returns specified in the notice containing all information required in respect of the period from 1 March to 31 August of each tax year must be submitted by 31 October and, in respect of the period from 1 March to the end of February, must be submitted by 31 May.  This increases the administrative burden on the affected persons, and will, no doubt, require amendments to computer systems to facilitate the transfer of data electronically to the Commissioner.

It is indicated that, where the third party return comprises twenty or less detailed records, the declaration portion of the return and detailed portion of the return must be submitted electronically using the SARS e-filing platform, or manually to the SARS office closest to the person’s place of business.

For those larger organisations, and where the third party return comprises twenty-one to fifty thousand detailed records, it is necessary to submit the declaration electronically using SARS’s e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ hypertext transfer protocol secure (https) bulk data file platform. 

In the event that the third party return comprises more than fifty thousand detailed records, the declaration portion of the return must be submitted electronically using SARS’ e-filing platform, and the detailed portion of the return must be submitted electronically, using SARS’ managed data transfer platform.

The Government Notice provides that alternative arrangements may be made by affected persons as to how the information should be transferred or made available to SARS.

The Government Notice was issued so as to enable SARS to enhance third party information received by it, to ensure enhanced compliance with the tax laws of South Africa, and, also, to facilitate a greater degree of pre-populating of tax returns issued by SARS for completion by individuals.

Some commentators may seek to argue that the provision of the information called for violates the taxpayer’s right to privacy, but it must be remembered that any right contained in the Constitution is capable of limitation under section 36 of the Constitution of the Republic of South Africa, No 108 of 1996, as amended.  

The request of the information set out in the notice may be construed as a violation of the right to privacy, but it is necessary for SARS to call for such information in order to comply with its obligations in administering the tax laws of South Africa, and, on this basis, the limitation of rights provision contained in section 36 of the Constitution would assist SARS should the information called for be challenged by taxpayers or affected persons.  

■ Dr Beric Croome is a tax executive at ENS.This article first appeared in Business Day, Business Law & Tax Review, June 2013. Free Image from FreeDigitalImages

Information Gathering To Ensure Law Compliance

CURRENTLY, the South African Revenue Service (SARS) has various weapons in its armoury to gather information from taxpayers to ensure compliance with the tax laws of SA. In terms of section 74A of the Income Tax Act,1962, the Commissioner may request that a taxpayer or any related person supplies  information, documents or things which SARS requires for the purpose of administrating the act.

In terms of section 74B, the Commissioner may, with reasonable prior notice, carry out an audit at the taxpayer’s premises to inspect or audit the records of the taxpayer. Under the provisions of section 74C, the Commissioner is empowered to conduct an inquiry into the affairs of a taxpayer. The media has recently focused on this form of gathering information after reports appeared that an inquiry was being conducted into the affairs of persons associated with Mr Julius Malema.

The Commissioner should only resort to an inquiry
under s74C, or a search-and-seizure warrant under s74D,
where the taxpayer has failed to supply information
requested in accordance with s74A or 74B

Furthermore, the Commissioner may search premises and seize documents in terms of section 74D, where a judge has issued a warrant authorising a SARS official to conduct such a search-and-seizure operation.

It is accepted that the Commissioner requires powers to gather information, but should only resort to an  inquiry under section 74C, or a search-and-seizure warrant under section 74D, where the taxpayer has failed to supply information requested in accordance with section 74A or 74B. 

Under section 74C, the Commissioner may authorise any person to conduct an inquiry for the purposes of the administration of the act. Once a decision has been made to conduct an inquiry, the Commissioner or a SARS officer must apply to a judge for an order appointing a presiding officer to preside over the inquiry to be held. If the  Commissioner lodges an application to a judge to appoint a presiding officer, that application is required to be supported by information supplied under oath, setting out the facts on which the application under section 74C is based.

In terms of section 74C(5), a judge may grant the order appointing a presiding officer only if he is satisfied that there are reasonable grounds to believe that there has been non-compliance by any person of their obligations under the provisions of the act or that an offence under the act has been committed by any person. The order requested may also be granted when the inquiry is likely to yield information, documents or things which may supply proof of noncompliance with the provisions of the act or the committing of any offence under the act.

It must be pointed out that, when the application is made to a judge to appoint a presiding officer to conduct an inquiry into the affairs of a taxpayer, that taxpayer is not before the court, similar to the position where the Commissioner seeks a search-and-seizure warrant under section 74D.

Any order granted by a judge under section 74C is required to name the presiding officer referred to and the non-compliance or offence to be inquired into, and, also, identify the person who is alleged to have failed to comply with the provisions of the act, and, also, to be reasonably specific as to the scope of the inquiry.

The court is required to appoint a presiding officer from persons appointed to the panel by the Minister of Finance in accordance with section 83A(4). 


The presiding officer during an inquiry, is, under section 74C(8), entitled to determine the manner in which the inquiry shall be conducted and is conferred the same powers to enforce the attendance of witnesses and to compel them to give evidence or produce information as are vested in the President of the Tax Court contemplated in section 83. It is also required that the proceedings of the inquiry and evidence presented should be recorded in the manner prescribed by the presiding officer.

Section 74C(9) requires that the persons who receive a written notice issued by the presiding officer must appear at the inquiry to be questioned under oath for the purposes of the inquiry contemplated in section 74C. Any notice issued by the presiding officer to a witness or taxpayer is required to state where the inquiry will be conducted as well as the reasons for the inquiry.

Any person appearing at an inquiry is entitled to be assisted by a legal representative when they appear before the presiding officer.

Any person appearing at an inquiry conducted under section 74C is subjected to the preservation of secrecy, as defined in section 4 which also seeks to respect the right of the taxpayer to privacy.

It must be noted that any evidence given under oath at an inquiry may be used by the Commissioner when issuing assessments to the taxpayer who is subject to an inquiry.

It is specifically provided in section 74C(17) that no person may refuse to answer any questions during an inquiry, on the grounds that it may incriminate that person. However, no incriminating evidence obtained will be admissible in any criminal proceedings against the person giving evidence, other than in proceedings where that person stands trial on a charge relating to administering or taking an oath, the giving of false evidence or making of a false statement in connection with such questions and answers.  


The fact that  taxpayer may be engaged in civil or criminal proceedings does not prevent an inquiry conducted under section 74C from proceeding.

The press has reported on the tax affairs of Mr Dave King, particularly with regards to his disputes with the Commissioner. It is clear from The Commissioner for the South African Revenue Service v D King and four others, Case No 4745/02 unreported case of the Transvaal Provincial Division that the Commissioner obtained information about King under section 74C of the act.

Subsequently, it was reported that the Commissioner had commenced an inquiry into the tax affairs of Mr Glen Aggliotti, and, more recently, it was widely reported that the Commissioner had instituted an inquiry into persons associated with Mr Malema.

It is clear that the provisions of section 74C of the act are wide, and are used by the Commissioner to obtain information with a view to establishing the income derived by a taxpayer so that assessments may be issued to them. Any person who is required to be present a section 74C inquiry is well-advised to seek legal advice regarding the notice received from the presiding officer, and to ensure that they are properly represented at the inquiry, thereby ensuring that their rights are protected.

It is contended that the Commissioner should only resort to section 74C where a taxpayer has failed to supply information required under either section 74A or 74B. Unfortunately, it does not appear that this is always the case, as the Commissioner will, in some cases, institute an inquiry under section 74C without having requested the relevant information under one of the less intrusive means of gathering information from a taxpayer.

  

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, June 2012. Free image from ClipArt