A New Chance to get on the Right Side of SARS

A VOLUNTARY disclosure programme for taxpayers has been introduced as a permanent feature of the fiscal laws of SA, but more limited in scope than the previous programme. This was done via the Tax Administration Act, No 28 of 2011, promulgated on July 4 2012 and which took effect on October 1, and which contains the relevant sections, 225 to 233.

The new disclosure programme presents an opportunity for taxpayers to regularise prior violations of the fiscal laws of the country, but, unfortunately, does not grant relief on interest that would otherwise have been payable on the late payment of the tax concerned. 

Furthermore, the relief does not extend to penalties which may be imposed in terms of a tax act for the late submission of a return or the late payment of tax.

The taxpayer would need to consider seeking relief from those penalties under the particular provisions of the respective statute whereby such penalties are levied.

During the period 1 November 2010 to 31 October 2011, taxpayers could apply for relief under the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, No 8 of 2010, and, at the same time, could regularise violations of the exchange control regulations by applying for relief from the Financial Surveillance Department of the South African Reserve Bank.

For a taxpayer to successfully apply for relief under the new voluntary disclosure programme, it is necessary that the taxpayer has committed a default. 

A default is defined in section 225 of the act as meaning the submission of inaccurate or incomplete information to SARS or the failure to submit information or the adoption of a tax position which resulted in the taxpayer not being assessed for the correct amount of tax, or the correct amount of tax not being paid by the taxpayer, or an incorrect refund being made by SARS. 

The voluntary disclosure programme contained in the act applies to all taxes administered by the Commissioner: SARS other than customs and excise.

A prerequisite for applying for relief under the act is that the taxpayer is not aware of a pending audit or investigation into their affairs, or an audit or investigation that has commenced but has not yet been concluded. 

The law allows for a senior SARS official to direct that a person may still apply for voluntary disclosure relief even though an audit may be underway, having regard to the circumstances and ambit of the audit or investigation and the default which the person wishes to seek relief for would not otherwise have been detected during the audit or investigation conducted by SARS, and that the application for relief is in the interest of good management of the tax system, and the best use of SARS ’s resources.

Section 227 of the act prescribes the requirements for the voluntary disclosure to be valid: 

• The act requires that the disclosure must be voluntary, and involve a default which the taxpayer has not previously disclosed. 

• The disclosure must be full and complete in all material respects, and must involve the potential imposition of an understatement penalty in respect of the default, and not result in a refund due by SARS. 

• Finally, the act requires that the disclosure must be made in the prescribed manner.

As was the case under the previous legislation, taxpayers may apply for a non-binding private opinion as to whether that person is eligible for relief under the voluntary disclosure programme.

Where the taxpayer applies for relief under the programme, SARS will not pursue criminal prosecution for any statutory offence under a tax act, pursuant to the default committed by the taxpayer, and grant the relief in respect of any understatement penalty referred to in section 223. 

Ordinarily, where a taxpayer approaches SARS outside of the programme, SARS may impose an understatement penalty ranging from 5% to 75% where the voluntary disclosure is made after notification of an audit or where the voluntary disclosure is made before an audit, SARS can levy an understatement penalty of 5% to 10%. 

By seeking voluntary disclosure programme relief, the taxpayer will be relieved from being liable to any understatement penalty, except in the cases where the taxpayer is grossly negligent or has intentionally evaded tax.

Furthermore, the act allows for 100% relief in respect of an administrative non-compliance penalty that was or may be imposed under chapter 15 of the act, or a penalty imposed under a tax act, excluding those penalties levied for the late submission of a return or the late payment of tax.

The voluntary disclosure programme available under the new act is not as attractive as that available under the previous legislation in that the taxpayer remains liable to interest which is payable on the late payment of the tax in question.

The approval of the voluntary disclosure application and the relief available under the act must be evidenced by a written agreement concluded between SARS and the qualifying person. 

Section 230 of the act requires that the agreement must be prepared in the prescribed format, and must contain details of the facts pertaining to the default on which the voluntary disclosure relief is based, as well as the amount payable by the taxpayer, and must contain details of arrangements and dates for payment and relevant undertakings

by the taxpayer and SARS.

SARS is entitled to withdraw the voluntary disclosure relief granted where it is established that the taxpayer failed to disclose a matter that was material for purposes of making a valid voluntary disclosure as envisaged in section 227 of the act. 

The consequences of withdrawal are significant, in that any amount paid in terms of the voluntary disclosure programme constitutes part-payment of any further tax in respect of the relevant default, and SARS may pursue criminal prosecution for statutory offences under a tax act or related common law offence.

Once the voluntary disclosure agreement has been concluded between SARS and the taxpayer, an assessment or determination must be made giving effect to the agreement. 

Clearly the assessment issued pursuant to the voluntary disclosure agreement is not subject to objection and appeal.

New disclosure programme again allows taxpayers to regularise any transgressions, 

but no relief is provided for interest owing

Under the previous programme, applicants could apply for relief for tax defaults from SARS and relief from the Financial Surveillance Department of the South African Reserve Bank for violations of exchange control regulations. 

In its Guide to the Tax Administration Act, SARS indicates that the voluntary disclosure  programme will not provide relief on interest payable to SARS, or exchange control, and that the programme contained in the act will only deal with tax matters. 

Thus, at this stage, it would appear that there are no  plans for a permanent exchange control voluntary disclosure programme.

Those persons who have contravened the exchange control regulations, and did not utilise the previous voluntary disclosure programme, would be required to approach their authorised dealer to assist them with an application to regularise their exchange control affairs. 

The levy payable in regularising breaches of the exchange control regulations could range from 20% to 40% of the amount of the contravention in question. 

The quantum of the levy finally payable to the South African Reserve Bank will, amongst other things, depend on whether the applicant chooses to retain the funds abroad or return the funds to SA.

■ Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law and Tax Review (November 2012) Free image from ClipArt

Taxman relents on investment allowance

DURING 1996, exchange control regulations were relaxed so that private individuals could invest certain sums of money abroad, subject to the requirement of obtaining a tax clearance certificate from the Commissioner: South African Revenue Service (SARS).

The amount which could be invested has been increased fairly regularly, and the so-called foreign investment allowance, whereby natural persons may invest offshore, is R4m per person per calendar year for taxpayers in good standing and over 18.

On June 28 this year, the financial surveillance department of the South African Reserve Bank (SARB) released Exchange Control Circular No. 8/2012, dealing with foreign investments which may be approved in respect of natural persons in excess of R4m.

The SARB has advised that private individuals wishing to invest more than R4m a year abroad must first approach the Commissioner for a tax clearance certificate in the prescribed format, which must then be submitted with their application to the financial surveillance department via their authorised dealer for consideration.

Natural persons wishing to diversify their investments by investing offshore
can now apply to invest amounts offshore without limit

Thus, those natural persons who wish to diversify their investments by investing offshore, are now entitled to apply for consent to invest amounts offshore without limit. It must be noted that the documentation released by SARB only refers to natural persons, and thus, it would appear that it is not possible for a South African trust to apply for permission to invest offshore.

At one stage, those persons who chose to emigrate from SA were allowed to remit certain amounts of capital from SA, and were required to pay a levy of 10% of the assets in excess of the specified threshold which they wished to export from SA. Under the new dispensation, SA residents can invest offshore without limit and without being required to pay any levy to the SARB.

It would appear that there is no limit for which an individual may apply to invest offshore, but that the SARB has a mandate to authorize transfers of up to R200m, and amounts in excess thereof will need to be approved by the National Treasury itself.

It must be remembered that those persons who utilise the dispensation to invest offshore may not utilise the funds transferred from South Africa to directly or indirectly acquire shares or other interests in a company located in the Common Monetary Area (CMA) or any other assets in the CMA. 

Furthermore, the funds transferred from SA may not be reintroduced from offshore as a loan to a resident in the CMA. If the funds are utilised in such a manner, that would be regarded as a so-called “loop”, which constitutes a violation of the exchange control regulations.

Residents who travel offshore may not use the unutilised portion of travel foreign allowances for foreign investment purposes. Such funds are required to be brought back to SA, and offered for sale to an authorized dealer in accordance with current regulations.

Thus, SA resident individuals may now invest unlimited amounts offshore, but are required to obtain a tax clearance certificate before applying for authorisation to remit the funds abroad. 

The applicant would need to apply for a tax clearance certificate at their local Receiver of Revenue, and, depending on the amount of the foreign investment, the application for the tax clearance certificate may be referred to the office of the Commissioner: SARS in Pretoria for approval. 

If the decision is made to utilize the dispensation to invest offshore, it is necessary to consider the nature of investment to be made abroad, as well as the tax consequences flowing therefrom.

Where the South African investor acquires income-producing assets abroad, it must be remembered that the income generated from those assets acquired under the foreign investment allowance remain taxable in SA, on the basis that SA now taxes its residents on a worldwide basis.

Thus, should the decision be made to acquire, for example, listed shares, the dividends received on those shares will, from April 1 2012, attract tax, but such tax will be restricted to the rate of 15%, in accordance with section 10B of the Income Tax Act.

As and when foreign shares are disposed of, the capital gains tax consequences relating thereto must not be overlooked, and the capital gain will attract tax in SA.

Furthermore, the assets acquired by the South African investor will form part of that person’s estate upon their death, and will be liable to estate duty.

Investors may wish to place the funds transferred from SA into an offshore structure, and it is important to take account of the fiscal consequences. South African residents who donate assets to, for example, a foreign trust, remain liable to donations tax at the rate of 20%. 

Thus, it is unattractive for a South African investor to utilise the foreign investment allowance and to donate those funds to a foreign trust.

Alternatively, where the South African resident advances the funds invested abroad to a foreign trust, a market-related interest must be charged on that loan, failing which the resident will be in violation of the transfer pricing rules contained in section 31, which has the effect of imputing interest received by the resident on the loan receivable from the foreign trust where a market related rate of interest is not charged.

If a decision is made to advance funds, for example, to a foreign trust, it is important that the trust is, in fact, managed from abroad, and that it cannot be said that the trust’s place of effective management is located in SA, which would result in the foreign trust becoming a South African taxpayer. 

The risk of a foreign trust becoming a tax resident of SA arises where the South African investor decides to become a trustee of the foreign trust, or exercises other powers which could result in the trust’s place of effective management being regarded as being located within SA. Caution therefore needs to be exercised when creating a foreign trust and the manner in which that trust is managed.

SA recently conducted a voluntary disclosure programme from 1 November 2010 31 to October 2011, whereby South African residents could regularise violations of the exchange control regulations with SARB and regularise defaults under the tax system with SARS. The Tax Administration Act contains a provision which, once that statute becomes operational, introduces a permanent voluntary disclosure programme, allowing for South African taxpayers to regularise their tax affairs where necessary.

Unfortunately, that legislation is not yet in place, and it remains to be seen when it will take effect. However, where South African residents have removed funds from SA in contravention of the exchange control regulations, and may have violated the tax laws of South Africa, they will, once the voluntary disclosure programme and the Tax Administration Act take effect, be entitled to approach the authorities to regularise their previous transgressions.

Those residents who chose to utilise the foreign investment allowance must remember that the income from the assets invested offshore remains fully taxable in SA, and must be properly disclosed for tax purposes in their tax return.

The fact that private individuals can now invest unlimited amounts offshore, means that exchange control has, for all practical purposes, largely been removed, insofar as natural persons resident in SA are concerned. It is unfortunate that South African trusts cannot currently also invest in assets located offshore.

■ Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law and Tax Review (October 2012) Free image from ClipArt

SARS can recover taxes from offshore assets

Taxpayers need to be aware that the South African Revenue Service (SARS) can recover South African taxes from assets located in another country where SA has concluded a double taxation agreement, which contains an article dealing with mutual assistance in the recovery of tax debts.

Similarly, SARS would be obliged to assist foreign revenue authorities in the collection of tax debts due to those countries where the double taxation agreement with the country concerned allows that.

Where the taxpayer does not have assets located within SA, the question arises as to how SARS may seek to recover South African tax out of assets owned by the taxpayer, but which are located in another country.

There is a principle of international law that the judicial authority of one country will not enforce the revenue laws of another country.  This rule has become known as “The Revenue Rule” and in COT v McFarland, 27 SATC 15, it was decided that the courts in South Africa will not enforce any claim by a foreign state for taxes due and payable in another country. 

The Revenue Rule is founded on the principle that the imposition of taxation constitutes the exercise of sovereignty by a state and the enforcement thereof in another state would constitute an infringement of the sovereignty rights of that state.  Thus, in the absence of a custom or convention agreeing to reciprocal assistance in the recovery of taxation, SARS cannot recover taxes due by a taxpayer from assets located in a foreign country. 

In terms of section 108 of the Act, parliament may enter into any agreement with the government of any other country, whereby arrangements are made with such government to prevent or mitigate the levying of taxes both in SA and the foreign state or to render reciprocal assistance in the administration of and the collection of taxes under the laws of SA or such other foreign country. 

Section 93 of the Act sets out the procedure that SARS must follow where a foreign government requires assistance from SARS to assist with the collection of taxes due to a foreign revenue authority in respect of assets located in South Africa. 

From a review of the double taxation agreements concluded by South Africa with foreign countries, it appears that African countries lead the way in concluding agreements containing provisions allowing for the assistance in the collection of taxes.

The double taxation agreements concluded with our neighbouring states, namely, Botswana, Namibia, Swaziland, Lesotho and Mozambique, all contain articles providing for assistance in the collection of taxes.  Similar provisions are found in the double taxation agreements concluded with Uganda, Tanzania, Ghana and Nigeria.

Agreements concluded with Australia, the Netherlands and more recently the UK allow for the reciprocal assistance in the collection of taxes.  Article 25A was inserted into the double taxation agreement concluded between SA and the UK by way of Government Notice 52 on 2 February 2012.  

Article 25A of the agreement concluded between SA and the UK requires that the two states assist each other in the collection of revenue claims, and that the competent authorities of the respective states will settle the manner in which the article will be applied.  In the case of SA, the competent authority is the SARS and in the UK it is Her Majesty’s Revenue and Customs (HMRC).  

The article provides that any revenue claim of the one state, which is enforceable in accordance with the laws of that country and is owed by a person who cannot, under the laws of that country, prevent its collection, that revenue claim shall, at the request of the competent authority of that country, be accepted for purposes of collection by the competent authority of the other state. 

It is furthermore provided that the revenue claim shall be collected by the other country in accordance with the provisions of its own laws applicable to the enforcement and collection of its own taxes as if the tax debt where a debt of that state. 

A double taxation agreement which contains an article
dealing with mutual assistance in the recovery of tax
debts must be concluded.

The agreement also provides that where a tax claim of one of the country’s in respect of which that country, under domestic law, may take measures of conservancy to ensure the collection of the tax in issue, that country shall on the request of the competent authority of that state, be accepted for purposes of taking measures of conservancy by the competent authority of the other country. 

In addition, the agreement provides that legal proceedings in respect of the existence, validity of the amount of the revenue claim of one country shall not be brought before the courts or administrative bodies of the other country.  Thus, a taxpayer who is indebted to SARS cannot challenge the validity thereof in the English Courts.

Paragraph 8 of Article 25A of the agreement provides that the provisions of the article cannot be construed as imposing on the United Kingdom, the obligation:

* to carry out administrative measures which conflict with the laws and administrative practice of the United Kingdom;

*to carry out measures which would be contrary to public policy;

*to provide assistance if South Africa has not pursued all reasonable measures of collection or conservancy available under its laws or administrative practice;

*to provide assistance in those cases where the administrative burden for the United Kingdom is disproportionate to the benefit to be derived by South Africa;

*to provide assistance if the United Kingdom considers that the taxes with respect of which the assistance is requested are imposed contrary to generally accepted taxation principles. 

Article 25A of the double taxation agreement concluded by South Africa and United Kingdom was considered by the High Court of Justice, Chancery Division in the United Kingdom in the case of Commissioners for Her Majesty’s Revenue and Customs and Another v  Ben Nevis (Holdings) Ltd and others, [2012] EWHC 1807 (Ch).

SARS requested assistance from HMRC to assist in collecting taxes due by Ben Nevis to SARS in the amount of R2.6 billion.  Ben Nevis is a company associated with Mr David King who has featured in the press over a number of years regarding taxes payable in SA.  Article 25A was inserted into the 2002 agreement concluded by SA and the UK which originally came into force on 17 December 2002.

Ben Nevis argued that the provisions of Article 25 A can only apply to South African taxes for tax years ending on or after 1 January 2003.  It was therefore argued by Ben Nevis that Article 25A could not by utilised by SARS in seeking to recover taxes from assets owned by it in the UK and thus the attempt to recover the taxes due by Ben Nevis to SARS violates the Revenue Rule.

Pelling J referred to Article 27 of the OECD Model Tax Convention on Income and Capital and the Commentary thereon which provides that:

“Nothing in the convention prevents the application of the provision to revenue claims that arise before the convention enters into force, as long as assistance with respect to these claims is provided after the treaty has entered into force and the provisions of the article have become effective.”

The court therefore reached the conclusion that, even though the agreement came into force on 17 December 2002, the provisions dealing with the assistance in the recovery of tax debts applied in respect of taxes which may have arisen prior to that date.  An important factor was that the mutual assistance was only provided after article 25A took effect.

Pelling J reached the conclusion that there was no objectionable retrospective element that arises regarding Article 25A and thus decided that HMRC was authorised to assist SARS in recovering taxes due to SARS in respect of assets owned by Ben Nevis in the United Kingdom. 

The fact that the UK double taxation agreement was only amended recently does not preclude the tax authorities from seeking assistance in respect of tax debts which may have arisen prior to the insertion of Article 25A into the agreement in question. 

·     Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs Inc. An abridged version of this article first appeared in Business Day's Business Law and Tax Review September2012. Free image from ClipArt

Sars Widens Tax Net To Catch Regular Offenders

ON APRIL 1 2012 the Minister of Finance issued a media statement setting out the preliminary outcome of revenue collected for the 2011/12 fiscal year. The 2012 February budget set the South African Revenue Service (SARS) a revenue target of R738,7bn. The Minister reported that SARS collected R742,7bn, which is R4bn more than the revised revenue estimate in the 2012 budget. 

Gordhan indicated that the levels of compliance with fiscal legislation had continued to improve and that SARS will enhance its efforts to create a climate that is conducive to full compliance by all taxpayers. He launched the SARS Compliance Programme, a high-level overview of SARS’ plans for the next five years to enhance the levels of compliance with tax and customs legislation. 

This is the first time that SARS has publicly released a document setting out areas that will attract attention over the next five years to ensure that those identified sectors of the economy are complying with their fiscal obligations. 

In the document released by the Minister it was pointed out that the individual tax register has increased from 1.7-million individuals in 1994 to 6-million in 2010. The number of individuals on the register is likely to increase further still as a result of the requirement that all persons in formal employment must register for tax purposes. Previously individuals earning less than R60 000 a year were not required to register and submit tax returns to SARS. 

The Quarterly Labour Force Survey for the third quarter of 2011 indicated that there were about 13 318 000 persons employed in SA. If it is assumed that persons in informal employment were not previously registered for tax purposes, consisting of about 6-million people, this would still mean that there are about 1 318 000 persons in employment, deriving income, who  are not registered for tax purposes.  

SARS, therefore, intends to enhance compliance by focusing on particular sectors of the economy to ensure that persons who are not registered for tax purposes are identified and become registered. 

SARS has indicated that it will focus on seven broad areas over the next five years. SARS has advised that it will concentrate on wealthy South Africans and their associated trusts. 

Wealthy individuals who are not registered
for tax purposes will be identified and targeted 

It has noted that some wealthy individuals are not registered for tax and it will use third-party data consisting of information sourced from financial institutions and credit bureaux, as well as details of residential and holiday homes, aircraft, vehicle and boat sales, to identify such individuals for registration. 

SARS will also seek to utilise the provisions of tax information exchange agreements that have recently come into force with a number of countries to identify foreign assets and income. 

Furthermore, SARS will concentrate on large business and transfer pricing, and intends to recruit more specialised staff to concentrate on the transfer pricing arena, which will also operate with other tax administrations. In addition, SARS will focus on international tax compliance and review income declared for the payment of provisional tax. 

SARS has identified that compliance within the construction sector is apparently low. As a result, SARS intends conducting extensive audits in that industry, with particular focus on persons awarded government tenders. SARS will concentrate on filing, declaration and payment behaviour for corporate income tax, value-added tax (VAT) and employees tax (PAYE). It has been specified by SARS that it will focus on contractors and various levels of subcontractors in paving, decorating, plumbing, heating and ventilation, and ceilings and floors. 

SARS is concerned about the trade in illicit cigarettes, which reduces tax collected on the sale of legitimate cigarettes.  SARS will undertake a larger number of audits to identify such illicit cigarette sellers.

In addition, SARS has identified the undervaluation of imports in the clothing and textile industry as an area of concern. SARS will seek to co-operate with other government agencies and industry stakeholders to enhance the levels of compliance in this industry with a view to increasing inspections on textiles and clothing imported into the country. 

In its Compliance Programme SARS has indicated that it will pursue the regulation of tax practitioners and trade intermediaries. It is SARS’ intention that all tax practitioners and trade intermediaries are persons of good standing, who themselves comply with the fiscal laws of the country and provide a high-quality service and advice to their clients. 

SARS has advised that it will develop a rigorous risk profiling system to identify high risk practitioners and trade intermediaries. Gorhan's statement pointed out that most tax practitioners are indeed compliant and play a positive role in enhancing compliance in SA. 

SARS has indicated that tax practitioners in South Africa have about 18 400 personal tax returns outstanding and are indebted to SARS to the order of R260m. 

It has therefore been proposed that SARS will release legislative proposals to regulate tax practitioners in 2013. It is appropriate to point out that on July 15 2008 the revised draft Regulation of Tax Practitioners Bill was released by SARS for comment. 

The Regulation of Tax Practitioners Bill was, therefore, under discussion, yet nothing has happened in this area for the past four years, although it would now appear to be a priority for SARS. SARS has also indicated that many tax practitioners do not belong to a professional body and this results in those practitioners not being bound by a code of professional conduct. 

It is intended that this should change. Currently, SARS may file a complaint with a tax practitioner’s professional body where that practitioner has not adhered to the provisions of the Income Tax Act, in accordance with section 105A thereof. It does not appear that SARS has utilised those provisions in taking action against defaulting tax practitioners. 

Finally, SARS has indicated it will concentrate on small business, as a result of the fact that registration in that sector is low. SARS is also concerned about small business abusing the VAT system, where businesses charge VAT to customers but fail to pay it over.  Where taxpayers have not complied with their obligations it is important that they approach SARS and regularise their affairs before SARS identifies such persons. SARS will usually deal with persons approaching it more leniently.  

A further concern is the manner in which the tax collected by SARS is used by the government. The Minister of Finance, in his media statement (referred to above), issued an assurance that every effort will be made by the government to monitor the use of tax contributions paid by taxpayers and to ensure that such funds are used wisely. Gordhan has undertaken to use every effort to fight corruption and the abuse of public funds. 

The question that arises is whether the tax collections required by the government would be as high as they are were corruption and abuse of public funds reduced.

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

South Africa Gives Personal Tax Details to Other States

The first agreement for the exchange of information relating to tax matters concluded by South Africa with San Marino took effect on 28 January 2012.

South Africa has concluded a large number of double taxation agreements with its trading partners that usually contain an article that authorises the exchange of information between South Africa and the treaty partner. 

Furthermore, exchange of information agreements are being negotiated between South Africa and Bahamas, Argentina, Barbados, British Virgin Island, Brunei Darussalam, Costa Rica, Dominica, Georgia, Gibraltar, Jamaica, Liberia, Lichtenstein, Monaco, Saint Kitts and Nevis, Samoa and the Turks and Caicos Islands.  The agreement with Bermuda, Cayman Islands, Guernsey and Jersey recently took effect.

In addition, on 3 November 2011, South Africa signed, but has not yet ratified, the Multilateral Convention on Mutual Administrative Assistance on Tax Matters as amended by the protocol, which facilitates the exchange of information between parties who have adopted the Convention. 

South Africa is a member of the Organisation for Economic Co-operation and Development (OECD)’s Global Forum on Transparency and Exchange of Information for Tax Purposes.  At the Global Forum’s meeting held in Mexico during 2009 it was decided to put a peer review mechanism in place for all members of the Global Forum, based on its standards of transparency and information exchange for tax purposes. 

The Global Forum established a Peer Review Group to create the methodology and detailed terms of reference for the peer review process and decided that there would be two phases of that process.  Phase 1 will examine the legal and regulatory framework in each jurisdiction and phase 2 will evaluate the implementation of the standards in practice.  According to the schedule of reviews published by the Global Forum, South Africa was due to have been reviewed during the second half of 2011. 

Under Phase 1 of the peer review process, the Global Forum was mandated to evaluate the legal framework in South Africa regarding the exchange of information for tax purposes, and phase 2 would have required the Global Forum to establish from the Commissioner: South African Revenue Service the extent to which South Africa has implemented the Global Forum’s standards in practice. 

South Africa has therefore undertaken an obligation to ensure that it complies with the standards prescribed by the Global Forum and is therefore required to conclude exchange of information agreements with various countries so that it complies with those standards.  It is for the above reason that the South African government has concluded an exchange of information agreement with San Marino. 

Double taxation agreements authorise exchange of
information between signatory countries.
The revenue authority of one country may enter the
other country to interview individuals & examine records.

The purpose of the agreement is described as being to promote international efforts in the fight against financial and other crimes, including the targeting of terrorist financing.  The scope of the agreement is described as providing assistance via the exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the contracting countries relating to the taxes covered by the agreement.

Article 2 of the agreement deals with the taxes covered by the agreement and in the case of South Africa relates to normal tax, secondary tax on companies, withholding tax and royalties, the tax on foreign entertainers and sports persons and value-added tax.  The agreement does not directly refer to the new dividends tax that will take effect from 1 April 2012. 

Article 4 of the agreement provides that where the information in possession of the respective authority of the country from which the information is requested is insufficient to enable it to comply with the request for information, that country shall use the information-gathering powers it considers relevant to provide the requesting country with the information requested.  The article provides that each country will ensure that it has the authority to obtain and provide, through the competent authority as defined and on request, information held by banks and similar financial institutions, information regarding legal and beneficial ownership of companies and similar businesses and, in the case of trusts, information on settlors, trustees and beneficiaries.

The agreement also envisages the conducting of tax examinations abroad whereby the revenue authority of one country may enter the other country to interview individuals and examine records with the prior consent of the individuals or other persons concerned. 

Article 5 also allows for the competent authority of the requesting party to permit representatives of the competent authority of the requesting party to attend a tax examination in the territory of the requested party.

It is possible that a request for information may be declined where the request does not comply with the agreement or where the requesting country has not exhausted all means available in its own country to obtain the information. The agreement recognises information subject to legal privilege and also seeks to protect trade, business, industrial, commercial or professional secrets or trade processes, and in such cases the request for information in this regard may be declined.  The fact that a taxpayer is disputing an amount of tax does not prevent the tax authority requesting information from the other country.

Article 7 of the agreement seeks to preserve the confidentiality of the information disclosed by one country to the other and it is provided that the information may be used only for purposes set out in the agreement. 

Article 8 of the agreement provides that generally, indirect costs incurred in providing assistance shall be borne by the country from which the information is requested and direct costs incurred in providing assistance shall be carried by the country requesting assistance.

The agreement concluded by South Africa and San Marino is based on the OECD’s model agreement for tax information exchange agreements.  Clearly, the conclusion of the exchange of information agreements for tax purposes increases the reach the Commissioner: South African Revenue Service to obtain information from abroad regarding taxpayers residing in South Africa.  It also imposes an obligation on South Africa to provide information to another country where the other contracting state requires information regarding its taxpayers who may have business dealings in South Africa.

It will be interesting to see the report published pursuant to the peer review conducted on South Africa and to see the extent to which South Africa has complied with the standards prescribed by Global Forum. 

Dr Beric Croome is a tax executive at Edward Nathan Sonnenberg Inc. This article first appeared in Business Day’s Business Law & Tax Review March 2012. Free image from ClipArt

No deduction when shares used to acquire goods

The Supreme Court of Appeal recently delivered judgment in the case of Commissioner for the South African Revenue Service v Labat Africa Limited.

The dispute between Labat Africa Limited (“Labat”) and the South African Revenue Service (SARS) was first heard by the Tax Court, where Labat’s appeal against the disallowance of expenditure incurred by it was decided in Labat’s favour. In that case, the taxpayer had concluded an agreement to acquire a business in terms of which it acquired a trade mark from the seller.

In accordance with the agreement concluded by the parties, the total purchase price was R120m and that portion of the purchase price attributable to the acquisition of the trade mark was R44 462 000. The taxpayer acquired the rights to the trade mark on June 1 1999 and on June 15 1999 had issued shares to the seller in compliance with its obligations to give consideration for the trade mark acquired. The taxpayer sought to claim an allowance, which was then available under section 11(gA) of the Income Tax Act, in respect of the expenditure incurred on the trade mark acquired by it in its 2000 year of assessment.

SARS disallowed the taxpayer’s deduction on the basis that the agreement whereby the trade mark was acquired, the taxpayer was obliged to issue shares to the seller and, therefore, did not expend any monies or assets and, as a result, no expenditure was incurred by the appellant in acquiring the trade mark from the seller as required by section 11(gA) of the act. SARS sought to rely on the judgment of Judge Goldblatt, in ITC 1783 [2004] 66 SATC 373, where it was decided that the taxpayer had not incurred any expenditure for the purposes of section 11(gA) on the basis that the consideration given by the taxpayer consisted of shares issued by the taxpayer.

In ITC 1801, Judge Jooste decided that the taxpayer had incurred an unconditional legal obligation to pay for the trade mark, even though it had been agreed by the parties that shares would be issued in settlement of the obligation in question. The court, therefore held that the taxpayer had incurred an unconditional legal obligation as required, and that that was not dependent upon the making of payment, as was decided in Edgars Stores Limited v CIR. Judge Jooste held that the taxpayer was entitled to the deduction claimed for the acquisition of the trade mark in terms of section 11(gA) of the act.

SARS was dissatisfied with the decision of the Tax Court and noted an appeal against the decision, which was heard by the North Gauteng High Court in 2009. In Commissioner for the South African Revenue Service v Labat Africa Limited, the full bench of the North Gauteng High Court ruled that the conclusion of the Tax Court was correct and that the issue of shares by the taxpayer for the acquisition of an asset constituted expenditure, as envisaged in section 11(gA) of the act. Judge Sapire disagreed with the decision of Judge Goldblatt in ITC 1783 and therefore dismissed SARS’s appeal against the decision of the court in ITC 1801. SARS was dissatisfied with the decision of the North Gauteng High Court and lodged an appeal, which was heard by the Supreme Court of Appeal in September.

Judge Harms pointed out that Labat acquired the business for a consideration of  R120m, which was to be discharged by the issue of shares and expressed the view that the agreement was not an agreement of sale in that a sale agreement requires payment in money and not consideration in kind.

As a result of the transaction, Labat had to increase its authorised share capital and various special resolutions were passed to give effect to the transaction. The appeal court identified that the sole issue between the parties was whether “any expenditure” had “actually” been “incurred” by Labat. Judge Harms expressed the view that the Tax Court did not deal properly with the meaning of the term “expenditure” but rather whether expenditure had been incurred. The court stated that there was no issue as to when the liability, payable to the purchaser, arose. The appeal court pointed out that the question that the Tax Court should have considered was whether the issuing of shares by a company constitutes “expenditure” and not whether the undertaking to issue shares amounts to an obligation, which it accepted that it did.

The issuing of shares does not constitute
expenditure and, therefore, no allowance is
available to the company. 

Judge Harms reached the conclusion that for Labat to succeed with the deduction claimed by it, it must be shown that the legal obligation must be discharged by means of “expenditure” and that timing is not the question to consider. The court analysed the term “expenditure” and expressed the view that the ordinary meaning of the term refers to the “action of spending funds, disbursement or consumption.”

The court stated that expenditure requires a reduction in the assets of the taxpayer or, at the very least, a movement of the assets of the person who expends an amount.

In ITC 1783, Judge Goldblatt indicated that an allotment or issuing of shares does not, in any way, reduce the assets of the company and it can, therefore, not qualify as “expenditure” for purposes of the act.

Having analysed the transaction concluded by Labat with the seller, the court concluded that issuing of shares did not constitute expenditure and, therefore, no allowance was available to the company under section 11(gA) of the act.

Thus, no deduction is available under section 11(A) of the act based on the unanimous decision of the Supreme Court of Appeal, where a taxpayer issues shares for goods or services acquired by it.

The legislature chose to intervene insofar as assets acquired in exchange for shares issued by inserting section 24B into the act. Therefore where a taxpayer acquires assets by way of the issue of shares, the taxpayer is deemed to have incurred expenditure for purposes of determining base cost and arriving at the capital gain, which may be liable to tax when the taxpayer disposes of those assets.

However, where a company issues shares to an employee for services rendered, under a share incentive scheme, no deduction is available based on the decision of the court in the Labat case. The act allows a deduction, in terms of section 11(lA) where shares are issued in respect of qualifying equity shares issued pursuant to a so-called “broad-based employee share plan,” as envisaged in section 8B of the act. Taxpayers will be unable to claim a deduction for goods and services acquired where shares are issued to settle the amount due, unless the transaction falls into one of the exceptions referred to above.

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review November 2011. Free Image from ClipArt

SARS loses battle over MTN audit fees claim

In Mobile Telephone Networks Holdings (Pty) Limited v the Commissioner for the South African Revenue Service, the South Gauteng High Court was required to determine whether the Commissioner was correct in disallowing MTN’s deduction of audit fees for the 2001 to 2004 years of assessment and the expenditure incurred by the company, in respect of professional fees charged for the training of staff on a new accounting package.

The company initially appealed the Commissioner’s finding to the Income Tax Court, ITC 1842 [2010] 72 SATC 118, and succeeded partially on the deductibility of audit fees by securing a deduction of 50% on the audit fees claimed for the 2001 to 2004 years of assessment.  The Tax Court agreed with the Commissioner that the costs incurred on the training of staff for the new accounting package, was not deductible for tax purposes.

SARS loses battle:
Case provides some clarity
on the deductibility of audit fees and
professional services rendered.

The South African Revenue Service (“SARS”) was dissatisfied with the Tax Court’s decision and cross-appealed in respect of the decision on the audit fees, and contended that the deduction of 50% of the audit fees was incorrect.  In deciding whether the audit fees, or the fees paid for professional services, were deductible, the Tax Court was required to consider the provisions of section 11(a) of the Income Tax Act, Act 58 of 1962, as amended (“the Act”), the so-called “general deduction formula”, and also to take account of sections 23(f) and (g), which preclude the deduction of expenses incurred in relation to amounts which do not constitute income, or which are not expended for the purposes of the taxpayer’s trade.

MTN is a wholly-owned subsidiary of the MTN Group Limited (“MTN Group”) and has five wholly-owned subsidiaries. MTN Group conducts business by providing mobile telecommunication networks and related services. Victor J, pointed out that it was agreed in a pre-trial meeting that MTN carries on a trade. SARS disallowed the audit fees, which were incurred for purposes of complying with the company’s statutory obligation to have its accounts audited, as well as for the purpose of trading. Professional fees relating to the second issue, which SARS disallowed in full, comprised services provided in order to train the company’s staff on a computer accounting system.

The judgment points out that it was common cause between the parties that the company traded during the tax years in dispute.  The audit required the input and consideration of an auditor regarding the dividends received by the company, and income in the form of interest. The court pointed out that the dividend income represented the largest portion of MTN’s income, ranging between 89% and 99%, during the tax years in dispute.

The Tax Court decided that the audit fees were incurred for a dual purpose and, thus, reached the conclusion that it was appropriate to apportion the expenditure and decided that 50% was deductible and the balance was not.

The High Court pointed out that the taxpayer contended that, on average, only 6% of the entries in its books of account related to dividends, which was not disputed by SARS, was an important factor. SARS contended that the audit fees did not advance the trade of the company and were not directly related to the production of its income and, thus, all audit fees claimed by the company, should be disallowed.

SARS argued that the audit fees were incurred by the company to comply with its statutory obligations, and relied on Australian tax authority where expenditure was disallowed for undertaking a statutory task, FCT v The Swan Brewery Co. Limited (1991) 22 ATR 295.

The court pointed out that it was common cause that the amount of work undertaken by the auditors extended beyond the verification of interest income and receipt of dividends, but that those additional tasks did not detract from the appellant’s contention that the audit fees related to its income-earning activities.

It would appear that only 6% of the audit time was spent on the dividend section of the audit. The court decided that the expenditure incurred by the company on the audit fees, was incurred to directly facilitate the carrying on of its trade, not only in a legally compliant manner, but also to generate income.

The court decided that the only fair basis on which the audit fees should be apportioned was that 94% of those costs should be allowed as a deduction for tax purposes. The court, thus, decided that it was appropriate to take account of the time spent on auditing the interest income, as opposed to the fact that a substantial part of the income derived by the company, comprised dividends.

When dealing with SARS’ cross-appeal, the court indicated that SARS sought to argue that the audit fees did not attach to the company’s operations and even where trading is conducted through the company, the taxpayer should accept that there are additional expenses for audit fees and the legal obligation relating thereto is unrelated to the earning of the taxpayer’s income.  The court pointed out that SARS approach would provide an enormous obstacle to the world of commerce and trade if the deduction of audit fees was to be denied on this basis.

In reaching its apportionment ratio, SARS took account of the values of income derived and did not take account of the amount of work involved in the audit process. The court rejected SARS method of apportionment as being factually and legally incorrect. The court held that the bulk of the audit fees related to the earning of interest and not dividends based on the time spent by the auditors on the different tasks required to complete their audit.

In addition, SARS disallowed the professional fees paid for services rendered regarding the implementation of the computerised accounting system. The court pointed out that the majority of transactions in MTN’s financial records related to the interest income derived and that the accounting system was not used in relation to the dividend income received by the company. The expenditure claimed by MTN related to its business only and was not used for the benefit of its subsidiary companies.  The court expressed the view that the professional fees were closely connected to the earning of the interest-income received by the company and that the professional fees were directly related to the company’s trading activities.

SARS argued that MTN had not provided sufficient information and decided that the company had not discharged the onus placed in relation to the accounting system. The court was critical of SARS and pointed out that SARS had failed to consider the relevant information, before disallowing the professional fees relating to the accounting system.

Thus, the unanimous decision of the court was that 94% of the audit fees were deductible and that the expenditure relating to the training on the accounting system must be allowed. SARS was, accordingly, ordered to pay the costs of the company’s appeal. The case, therefore, provides some clarity on the deductibility of audit fees and, indeed, professional services rendered regarding the implementation of an accounting system.

• Dr Beric Croome is a Tax Executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law and Tax Review, October 2011. Free Image from ClipArt