Warrantless searches and the new Tax Ombud

The Tax Administration Bill (TAB) was introduced in the National Assembly in June. The Standing Committee on Finance (SCoF) was formally briefed on the TAB in August and, subsequently, in September SARS, released its formal response document on the submissions received on the TAB.

The 70-page response document is comprehensive and it is appropriate to refer to certain of the amendments that will be made to the TAB prior to the legislation being finalised and enacted. Furthermore, it is appropriate to consider what provisions are lacking in the TAB to address taxpayers' concerns and, particularly, ameliorate frustrations that taxpayers experience in their dealings with SARS.

SARS received submissions from various professional bodies. The SCoF also received a submission from SARS' Constitutional Counsel, who sought to address concerns raised by commentators on the constitutional validity of certain provisions contained in the Bill, for example, the power of SARS to conduct a search and seizure operation without a warrant.

Under s74D of the Income Tax Act, Act (58 of 1962), as amended, SARS may only conduct a search and seizure operation once a warrant has been issued by the court. The TAB proposes that SARS may conduct search and seizure operations without a warrant in order to protect the imminent destruction of documents. SARS indicated in its response document that the requirements in the TAB for a warrantless search and seizure operation are, apparently, stricter than those contained in 17 other South African statutes.

Taxpayers enjoy a right to privacy under s14 of the Constitution, (Act 108 of 1996) and should not be subjected to searches or seizures that are not sanctioned by a court. On the other hand, SARS has the mandate to ensure that taxpayers comply with the statutes administered by SARS under the South African Revenue Service Act (94 of 1997).

Clause 63 of the TAB allows a senior SARS official to authorise a warrantless search and seizure to protect the imminent destruction of documents and SARS’ Constitutional Counsel expressed the opinion that the power contained in the bill is valid under the Constitution. It remains to be seen whether the power will be abused in any way, once it is enacted.

The Tax Ombud's Office,
created to assist taxpayers who experience difficulty with Revenue,
is usually situated inside a Revenue building.

A number of the submissions received by SARS raised concerns about the manner in which the Tax Ombud’s office will be created and funded. Some commentators expressed the opinion that the proposals introducing the Tax Ombud do not go far enough. SARS indicated that the model for the Tax Ombud contained in the TAB is based on international practice and seeks to provide a substantial remedy to taxpayers in administrative and procedural matters.

Submissions on the TAB expressed the view that a Tax Ombud cannot be regarded as truly independent in light of the fact that the costs of the Tax Ombud's Office must be paid out of the funds of SARS and that the staff are employed by SARS and seconded to the Thx Ombud. It was thus suggested in the submissions made that the Tax Ombud should be funded by National Treasury and that the staff should not be SARS officials. It was also recommended that the Taxr Ombud should be accountable to parliament.

It must be noted that the TAB requires that the Tax Ombud is appointed by and accountable to the Minister of Finance. The Bill proposes that the Tax Ombud is housed within SARS, but reports to the Minister.

A number of commentators have raised concerns that this undermines the independence of the Tax Ombud Office. This concern is understood, but from a practical point of view, if the Tax Ombud was located outside of SARS, it would give rise to practical difficulties, particularly relating to the protection of taxpayer confidentiality and related matters.

The Taxpayer Advocate, created to assist taxpayers in the USA in their dealings with the Internal Revenue Service (lRS), and similar bodies created in Canada and the United Kingdom, are located within the Revenue Service’s office to simplify administration and preserve secrecy insofar  as taxpayers’ affairs are concerned. It would appear the norm that the Tax Ombud is located within the Revenue Service, but that the Tax Ombud must account to the Minister, as opposed to the Commissioner.

SARS proposed that the Tax Ombud be empowered to request the secondment of staff from SARS to the Tax Ombud Office so that the secondment of staff is driven by the Tax Ombud, as opposed to the Commissioner.

In the earlier version of the TAB, the Tax Ombud was not required to submit his or her annual report to parliament. SARS has accepted that the Tax Ombud should table the annual report of the Tax Ombud Office in the National Assembly, thereby ensuring parliamentary oversight of that office.

The Bill does not envisage a situation where the Tax Ombud can compel SARS to act in a particular manner. It would appear that this is the position of the Tax Ombud, or equivalent body, in Canada and the United Kingdom. However, the Taxpayer Advocate in the USA can issue “taxpayer assistance orders," which requires the IRS to desist from proceeding to recover taxes from a taxpayer, until the Taxpayer Advocate has resolved the taxpayer's problem with the IRS. It is unfortunate that the Tax Ombud was not conferred a similar power whereby SARS could be instructed to refrain from acting against the taxpayer until the matter has been reviewed.

It is hoped that in the report submitted by the Tax Ombud to the Minister and parliament, reference will be made to those instances where SAR'S has not adhered to the recommendations made by the Tax Ombud on how taxpayers' complaints should be dealt with. The Tax Ombud, as proposed in the TAB, cannot direct a taxpayer be reimbursed by SARS for wasted costs or damages as a result of SARS' abuse of power, or inefficiency. In the United Kingdom, the Taxpayer Adjudicator may recommend the payment of direct costs and a token payment to taxpayers to compensate them for the distress caused as a result of HRMC's conduct. It is unfortunate that the Tax Ombud will not have similar powers here.

There is no doubt that some taxpayers currently experience frustration in their  dealings with SARS. It would appear that there are undue delays in the payment of VAT and income tax refunds due to taxpayers. It is unfortunate that the Bill does not confer on the Thx Ombud some power to assist taxpayers in these cases. It should not be necessary for taxpayers to issue letters of demand and, subsequently, summonses against SARS to ensure the repayment of monies lawfully due to them. SARS has significant weapons available in its armoury to ensure the timeous payment of tax due by taxpayers but, unfortunately, taxpayers do not have any rights under the Act to enforce the payment of a refund due to them.

Furthermore, instances of cases where SARS demands information previously submitted to it on numerous occasions are reported too often. This results in severe frustration for taxpayers and is also a waste of time and effort. In such cases, SARS should reimburse the taxpayer for the costs incurred where it has lost documents submitted and for which receipts are obtained.

Furthermore, there have been instances of taxpayers applying for tax clearance certificates and receiving those without any difficulties and then, on applying for a new tax clearance certificate, are suddenly advised that there are taxes allegedly owed from approximately 10 years ago, or that a PAYE reconciliation has not been submitted. It is unclear why these glitches occur but they cause frustration for taxpayers and can cost them business in that they may be precluded from applying for tenders from government or other businesses.

The decision to create a legal framework for the Office of Tax Ombud must be welcomed and it is hoped that that office will resolve complaints lodged by taxpayers in their dealings with SARS. It is imperative that the correct person, with sufficient stature and gravitas, is appointed to head up the Tax Ombud's Office. The TAB is a move in the right direction in that it pulls together all of the administrative provisions currently scattered around the various fiscal statutes in the country. The fact that SARS must provide feedback to taxpayers undergoing an audit and the distinction between a normal tax audit and a criminal investigation indicated must be supported.

No doubt once the TAB has been enacted, the provisions will be refined from time-to-time to enhance the legislation and to ameliorate deficiencies identified by taxpayers and the Tax Ombud in relation to systematic issues.

For the Office of Tax Ombud to achieve its mandate successfully, SARS officials and taxpayers must trust the office will function properly and fairly.

Croome is Tax Executive with Edward, Nathan and Sonnenbergs. This article first appeared in Without Prejudice, December 2011. The image (taken in  New York, United States, April 15 2010, Midtown Manhattan office of the Internal Revenue Service) was purchased from iStock and is for editorial use only.

The Few Who Support Everyone Else

The South African Institute of Race Relations (SAIRR) issued a press release on January 24 2011, pointing out that the number of registered individual taxpayers in South Africa grew from 3.4 million in 2002/03 to 5.9 million in 2009/10, an increase of 73%. The statistics relied on by SAIRR draws on the documentation released by National Treasury and the South African Revenue Service (SARS), Tax Statistics 2008 and Tax Statistics 2009. The increase represents a healthy improvement in the number of taxpayers in South Africa and goes some way to broadening the tax base.

According to Tax Statistics 2008, there were 814 894 companies on the register in 2002/03, a number that increased to1 878 856 in 2009/10. That is an increase of more than one million companies and close corporations on the tax register, which represents an increase 131 %.

Insofar as trusts are concerned, there were 254 593 trusts on the register in 2002/03 and that increased to 331 954 in 2009/10, an increase of 36%.

It is interesting to note, though, that the number of trusts on the register in 2008/09 was 392 260, and this reduced to 331 954 in 2009/10, a reduction of 15.37%, which would indicate that the number of trusts being created is reducing and, furthermore, that a number of trusts were terminated.

In 2002/03, the number of employers on register for Pay-As-You-Earn (PAYE) purposes was 252 589 and that had increased to 395 575 in 2009/10, an increase of 57%. The number of persons registered as vendors for value-added tax (VAT) purposes increased from 506 098 in 2002/03 to 685 523 in 2009/10, a 35% increase.

Left: How many people escape the tax net? The question that often arises in South Africa is how many people are currently registered, and how many taxpayers should, in fact, be registered for tax purposes?

More recently, SARS has reported on the number of persons registered for customs purposes and for 2OO8/0 9, 422 636 persons were registered. Importers comprised 228 350 of that total, and exporters 194 286. In 2009/10, the number of persons registered for customs purposes increased to 439 065, which represents an increase of 3.89%. lmporters increasing to 229 442 persons and exporters to 209 623.

It is extremely difficult to determine how many individuals should be registered taxpayers in South Africa and the shortfall between those persons who should be registered, and those that are on the register constitutes part of the tax gap. The tax gap also comprises tax not collected as a result of taxpayers failing to declare the correct amount of income tax. This constitutes criminal offence, which could give rise to a criminal prosecution as well as the imposition of additional tax and interest under the various fiscal statutes.

It would appear that in the 2009/10 financial year, approximately 14 million persons benefitted from social grants funded by registered taxpayers. The continued viability of social grants being paid to some 14 million people, which is funded by a small pool of taxpayers is a matter of considerable debate.

In attempting to establish how many persons should be registered for tax purposes in South Africa, it is appropriate to refer to the Quarterly Labour Force Survey, published by Statistics South Africa, for the third quarter of 2010, which was published on October 26 20I0.That survey indicates a population of between 50 and 64 years of age of some 32 072 000 people and that the labour force, that is, persons in employment, comprises some 17 371 000 persons. The Labour Force Survey reports that:

• 9 043 000 persons are employed in the formal sector, other than the agricultural sector
• 2 172 000 persons were employed in the informal sector, other than agriculture
• 640 000 persons were employed in the agricultural sector and
• 1 119 000 persons were employed by private households.

The survey reports that there were approximately 4 396 000 unemployed persons in the third quarter of last year and that there are 12 669 000 persons who are not economically active. In addition, there were 2 033 000 persons who are regarded as discouraged work seekers. The survey defines “discouraged work seekers” as “persons who were not employed during the period under review, wanted to work or was available to work but did not take active steps to find work during the last four weeks as a result of there being no jobs available in the area, unable to find work requiring their skills or lost hope of finding any kind of work.”

As a starting point, therefore, it would appear that there are approximately 17 371 000 persons in employment in South Africa, whereas 5 920 612 persons were on the register for income tax purposes. It must be noted that those persons who derive remuneration of less than R60 000 a year are not required to register for tax and are subject to Standard lncome Tax on Employees (SITE).

SARS has reported that there are approximately five million formal SITE workers who derive annual taxable income below R60 000 and are, therefore, not required to register and submit annual returns. Thus, the number of individuals paying tax, according to SARS, would amount to approximately 10 920 612 persons. Unfortunately, it is difficult to ascertain how many persons are earning below threshold and, therefore, are not liable to tax at all.

Using the figures in Labour Force Survey of persons employed as 17 371 000 and the total number of persons on register with SARS and paying SITE as 10 920 612, there is an unexplained shortfall of 6 450 388 persons. Part of the difference probably represents those persons who derive amounts below the tax threshold (that is, R57 000 for persons under 65 years of age or R88 258 for persons over the age of 65 years for 2010/2011) and are, therefore, not required to pay tax. However, it does appear that there are a significant number of economically active persons in the country who are not registered for tax purposes.

The Labour Force Survey seeks to identify those persons in some form of employment and would not, for example, include those who are retired and may derive income in the form of pensions, interest or other passive income. It is unclear how many retired persons there are in the country, but a fair number of those would also be registered as taxpayers, by virtue of the nature of the income received by them exceeding the tax threshold.

On May 14 2010, the Financial Mail published a report on community banking and reported statistics on the number of banked adults in South Africa. According to those statistics, it would appear that, in 2009, there were 19 609 384 banked adults in South Africa. It is accepted that even though persons may operate a bank account, they may not be required to register for tax purposes. However, it is an interesting statistic when reference is made to the number of taxpayers currently on the register.

SARS has undertaken various initiatives to encourage persons outside of the tax net to regularise their affairs. In 2003, taxpayers who had not complied with their obligations could regularise their affairs by utilising the 2003 foreign exchange and related tax amnesty. More recently, in 2006, SARS administered the Small Business Tax Amnesty in an attempt to encourage qualifying small businesses to regularise their affairs from a fiscal point of view. Commencing November 1 2010, the legislature introduced the Voluntary Disclosure Relief Programme (VDP), which will allow taxpayers to regularise violations of fiscal legislation and the Exchange Control Regulations. These rules also allow for those not previously in the tax net to regularise their affairs.

Clearly, in the case of companies and close corporations, it is easier to ensure that those entities are registered for tax purposes upon incorporation. Historically, companies and close corporations would automatically be registered for fiscal purposes as a result of information passed from the Companies and Intellectual Property Registration Office (CIPRO), to SARS to ensure registration of those entities for tax purposes. It is unfortunate that CIPRO is currently facing its own administrative difficulties, which may give rise to deficiencies in this regard.

Trusts are administered by the Master of the High Court which, unfortunately, does not operate a computerised system of trusts on register and it is, therefore, difficult to ascertain whether all trusts that have been registered with the Master are, in fact, registered for tax purposes as required.

When reference is made to the number of persons employed in South Africa and the number of banked adults, it is clear that there is a significant number who appear not be registered for tax purposes.

SARS previously conducted “walk-abouts” whereby SARS officials would visit various business centres to ensure that persons who were conducting business were registered for tax purposes. The Tax Administration Bill (TAB) released on October 29 2001, contains clause 40, which will confer on SARS the power to arrive at the premises and inspect the premises to determine the identity of the person occupying those premises and to establish whether that person is conducting a trade or an enterprise from those premises and, more importantly, whether the person occupying those premises is registered for tax purposes. The clause does not require SARS to make a prior arrangement with the occupier and confers on SARS officials the power to arrive, without prior notice, to ascertain whether the persons conducting business from those premises are, in fact, registered for tax purposes.

It is important that SARS, taking account of the statistics referred to, undertakes a programme of education to ensure that people become aware of their fiscal obligations. This programme of education should commence at schools. It is important that the tax base is broadened, thereby ensuring that the tax burden is spread among a far greater number of persons than is currently the case and thus allowing the state to meet its social objectives.

It is critical that the tax revenue which is collected is efficiently spent and that wastage is reduced to a minimum.

* Croome is a Tax Executive with Edward Nathan Sonnenbergs. This articles first appeared in the March 2011 edition of "Without Prejudice"

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Tax Ombudsman's office to be created

On Friday, 0ctober 29 2010 the Commissioner of the South African Revenue Service released the draft Tax Administration Bill (TAB) for a second round of public comment. The TAB has been approved by cabinet and it was originally envisaged that it would be introduced to parliament during November 2010. An important amendment contained in the latest draft of the TAB, is the intention to create a Tax 0mbud's 0ffice in South Africa. (See HERE)

The press release issued by SARS at the time the TAB was released, states:

"A new framework for a Tax Ombud's Office to provide simple remedies to taxpayers affected by failures by SARS to fully respect taxpayers’ rights. The framework draws on those of the Canadian Taxpayer Ombudsman and the UK Revenue Adjudicator. The creation of this office was foreshadowed when SARS introduced the new court rules and the SARS Service Monitoring Office in 2003, when the then Minister of Finance stated that— 'Once SARS's processes and procedures have improved sufficiently, the next important step that will be taken in emulating international standards will entail an important role for an Ombud."'

Thus, the most recent draft of the TAB now contains clauses 14 to 21, which create the legal framework to create a Tax Ombud’s Office in South Africa.

The decision to create a Tax Ombud in South Africa must be welcomed and answers a call for its establishment made over many years by the Commission of Inquiry into the Tax Structure of South Africa, professional bodies and tax practitioners.

Left: The long-awaited Tax Ombudsman's Office will be created to help taxpayers and SARS resolve disputes.

Clause 14 of the TAB confers on the Minister of Finance the power to appoint a Tax Ombud for a period of three years, which term may be renewed. The Minister has also been conferred the power to determine the conditions regarding remuneration and allowances to be paid to the Ombud. The TAB, similarly, enables the Minister to remove the Ombud for any reason considered good and sufficient.

The TAB empowers the Minister to designate a person working in the Office of Tax Ombud as Acting Tax Ombud while there is a vacancy, and that person can act for no longer than a period of 90 days at a time.

The draft legislation requires that the person appointed as Tax Ombud is accountable to the Minister and must have a good background in customer service, as well as tax law. In addition, the person may not, at any time, have been convicted of theft, fraud, forgery or any offence involving dishonesty in the preceding five years.

Thus, the Tax Ombud will report to the Minister and not to the Commissioner: SARS, which should create the desired degree of independence.

In accordance with clause 15 of the TAB, the staff at the Office of the Tax Ombud is required to be employed under the provisions of the SARS Act and will be seconded from SARS. The Tax Ombud’s Office will be funded out of the funds allocated to SARS.

The TAB provides that the Tax Ombud and the staff attached to that office are subject to confidentiality provisions which will be contained in Chapter 6 of the TAB, currently enshrined in s4 of the Income Tax Act, Act 58 of 1962, as amended (that is, the so-called “secrecy provisions”).

The TAB prescribes the mandate of the Tax Ombud and provides that the Tax Ombud is charged with reviewing and addressing complaints by the taxpayers regarding a service matter or procedural or administrative matter arising from the application of the provisions of a Tax Act administered by SARS.

The Tax Ombud, in discharging his or her mandate, is required to undertake the following:

• Review a complaint and, if necessary, resolve it through mediation or conciliation;

• Act independently in resolving a complaint;

• Follow informal, fair and cost effective procedures in resolving a complaint;

• Provide information to a taxpayer about the mandate of the Tax Ombud and the procedures to pursue a complaint;

• Facilitate access by taxpayers to complaint resolution mechanisms within SARS to address complaints; and

• Identify and review systemic and emerging issues related to service matters or the application of the provisions of the TAB that impact negatively on taxpayers.


Clause 17 of the TAB makes it clear that the Tax Ombud may not review legislation or tax policy, or SARS policy or practice generally prevailing, or deal with any matter subject to objection and appeal under a fiscal statute, or any decision which is before the Tax Court. In those overseas countries where Tax Ombud Offices have been created, the resolution of legal disputes falls outside of the jurisdiction of the Tax Ombud and, in this respect, South Africa is adhering to the international norm.

The TAB provides that, once the Tax Ombud receives an issue falling within the Ombud's mandate, the Ombud may determine how the review of the taxpayer's complaint is to be conducted, and whether a review should be terminated before completion of the matter.

Currently, where taxpayers encounter administrative difficulties with SARS, it is necessary to raise the matter first with the official dealing with the taxpayer's affairs and failing resolution at that level, to refer the matter to the branch manager of the Receiver of Revenue office in question.

Only once that procedure has failed to resolve the matter, may the matter be escalated to the SARS Service Monitoring Office. Clause 18 of the TAB requires the taxpayer to exhaust available complaints resolution mechanisms in SARS before resorting to the Tax Ombud, unless there are compelling circumstances not to do so and this follows international practice.

It is provided that the Tax Ombud may entertain a request for assistance without exhausting SARS internal complaints procedures where the matter raises systemic issues or exhausting the complaints resolution mechanism will cause undue hardship to the taxpayer, or exhausting the SARS procedures is unlikely to produce a result within a period of time which the Tax Ombud considers reasonable.

In terms of clause 19 of the TAB, the Tax Ombud must report directly to the Minister and must submit an annual report to the Minister within five months of the end of SARS's financial year. In addition, the Tax Ombud is required to submit a report to the Commissioner: SARS, quarterly, or other intervals as may be agreed.

The annual report to be submitted by the Tax Ombud must contain a summary of at least ten of the most serious issues encounters by taxpayers, including a description of the nature of the issues.

Furthermore, the report must contain an inventory of the issues described for which action has been taken and the result of such action, and action that remains to be completed in the period during which each of them has remained unresolved.

Where no action has been taken, it is necessary to indicate the reasons for inaction on the taxpayer's complaint. Furthermore, the Tax Ombud’s report must contain recommendations for administrative action as may be necessary to resolve problems encountered by taxpayers in dealing with SARS.

It is specifically required that the Tax Ombud must seek to resolve all issues within the Tax Ombud's mandate in an efficient and effective manner and communicate with any SARS officials that may be identified by SARS. It must be noted that the Tax Ombud's recommendations are not binding on taxpayers or SARS. This would appear to follow the international norm, but based on experience, it does appear that revenue authorities, generally, will follow the recommendations made by the Tax Ombud and it is hoped that this outcome will prevail in South Africa.

The confidentiality of information dealt with by the Tax Ombud is preserved at clause 21 of the TAB. However, information may be disclosed where the information disclosed does not directly or indirectly reveal the identity of the taxpayer to whom it relates. Where information is required by the TAB or any other Act of Parliament, it must be disclosed, but only for the purposes of such statutes.

It remains to be seen when the TAB will be introduced to parliament and will take effect. Clearly, the creation of the Tax Ombud should create an effective means whereby taxpayers can resolve administrative difficulties encountered in dealing with SARS, or where SARS has abused taxpayers' rights. It must be noted that the Tax Ombud has no jurisdiction to deal with objections and appeals and legal disputes, as is the case with Ombud's offices around the world.

It is unfortunate, though, that the Tax Ombud is not empowered to award costs or damages to taxpayers who have suffered financial loss as a result of the conduct of SARS and its officials.

 Dr Beric Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in the December 2010 issue of Without Prejudice

Voluntary Disclosure Relief

The South African Minister of Finance announced in the 2010 Budget that legislation would be introduced to encourage taxpayers to regularise prior transgressions of the tax statutes in South Africa and the Exchange Control Regulations. The 2010 Budget Review indicated that voluntary disclosure relief would encourage individuals, with unreported foreign bank accounts, to disclose fully those accounts to the South African Revenue Service. South Africa has concluded a large number of agreements for the avoidance of double taxation with various countries and those agreements allow for the exchange of information between SARS and foreign revenue authorities.

In addition, SARS is in the process of concluding various tax information exchange agreements with a number of other countries traditionally regarded as tax havens. The voluntary disclosure programme is, therefore, being introduced to encourage taxpayers to regularise prior violations of the various tax statutes.

Details of the voluntary disclosure relief were first contained in the Draft Taxation Laws Second Amendment Bill, released by National Treasury for public comment on May 10 2010. The final version of the legislation, now known as the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill (29 of 2010), (VDPTLSAB) was introduced in the National Assembly on Tuesday August 25. It must be pointed out that the voluntary disclosure relief does not constitute an amnesty in that any tax that should have been paid and was not paid over to SARS, will always remain payable.

Qualifying persons

The voluntary disclosure relief is available to any taxpayer liable to pay any tax to SARS. The VDPTLSAB defines "tax" as including any tax, duty, levy, penalty and additional tax imposed in terms of any legislation administered by the Commissioner. Therefore, any taxpayer, be it a natural person, company, trust or close corporation, or other taxpayer is entitled to apply for the relief so long as they comply with the requirements contained in the legislation.

In order to qualify for the relief, the taxpayer must be in default insofar as the tax affairs are concerned and this means that inaccurate or incomplete information must have been submitted to SARS, with the result that the assessment was not for the correct amount of tax due or, alternatively, that an incorrect tax refund was made by SARS to the taxpayer.

It must be noted that persons facing a tax audit or investigation do not, generally, qualify, for relief under the programme. SARS may, in certain circumstances, allow for a person who is under audit or investigation to apply for the relief. Under the legislation, the Commissioner is empowered to direct that a person, who is under audit or investigation, may apply for voluntary disclosure relief where the Commissioner is of the opinion that the default in respect of which the person wishes to apply for the relief, would not otherwise have been detected during the audit or investigation and, furthermore, that the application would be in the interest of good management of the tax system and the best use of the Commissioner's resources.

The VDPTLSAB indicates that a person is deemed to be aware of a pending tax audit or investigation or that the tax audit or investigation has commenced where a representative of the taxpayer, an officer or shareholder or member of the person, where that person is a company, a partner in partnership with that person, a trustee or beneficiary of the taxpayer, if the person is a trust, or a person acting for or on behalf of or as an agent or fiduciary of the taxpayer, has become aware of the pending audit or investigation, or that tax audit or investigation has commenced.

Requirements for a valid voluntary disclosure

For a taxpayer to qualify successfully for the relief available under the programme, it is necessary that the disclosure is voluntary and must involve a default of the taxpayer's obligations to SARS. It is essential that the taxpayer makes full and proper disclosure of the default and that the default involves the potential application of a penalty or additional tax. The taxpayer is required to apply for the relief in the prescribed form. At this stage, SARS has not yet released the documentation required and will probably do so only once the legislation has been enacted.

A taxpayer may not apply for the relief where the disclosure will result in a refund due by SARS.

The Memorandum on the objects of the VDPTLSAB indicates that the application for the relief must be submitted during the period November 1 2010 to October 31 2011.

It is important to note that, in terms of the VDPTLSAB, the default or violation of the taxing statutes must have occurred prior to February 17 2010.The cut-off date is intended to prevent taxpayers from committing violations on an ongoing basis and just prior to the period for the submission of applications commencing.

Advantages of applying for the relief

Where a taxpayer successfully applies for the relief, they are assured of no criminal prosecution for the violation of the taxing statutes of the country.

In addition, the taxpayer will receive 100% relief for penalties and additional tax, other than the administrative penalties leviable under s75B of the Income Tax Act, Act 58 of 1962, as amended.

Further, qualifying taxpayers will receive 100% relief in respect of interest that would otherwise have been payable to SARS. Where, however, the taxpayer is subject to an audit or investigation and it has been decided by SARS that the person may still apply for the relief only 50% of the interest, that would otherwise have been leviable, will be imposed.

In all cases, the underlying tax remains payable to SARS, regardless of the nature of the tax. It is for this reason that it cannot be said that the voluntary disclosure relief constitutes an amnesty.

Confirmation of eligibility

The legislation contains an innovative provision whereby the Commissioner is authorised to issue a non-binding private opinion as to whether a person qualifies for the relief, so long as the person provides sufficient information for SARS to reach a decision. This information need not include the identity of any party to the default. Thus, it would appear that tax practitioners may seek guidance from SARS as to whether a particular taxpayer qualifies for the relief or not.

Left: Taxpayers who chose to participate in Voluntary Disclosure Relief must disclose material facts and figures. SARS officials will then consider their proposal and an agreement will be concluded.

Agreement to be concluded by a taxpayer and SARS

The legislation requires that the Commissioner and the qualifying taxpayer must conclude an agreement regarding the voluntary disclosure. The agreement must disclose details of the material facts of the default on which the voluntary disclosure relief application is based. In addition, the agreement must reflect the amount payable by the taxpayer, which must separately reflect the tax and interest amount due by the taxpayer as well as the arrangement and dates of payment. The voluntary disclosure agreement is also required to deal with the treatment of the tax issue in future years or periods and must contain details of the undertakings by the parties to the agreement.

Withdrawal of relief

Where the taxpayer fails to disclose material information, the relief granted under the legislation may be withdrawn and any amount paid under the voluntary disclosure agreement, will be treated as part-payment in respect of any outstanding tax in respect of the relevant default. In addition, SARS may, in such cases, institute criminal proceedings against the taxpayer for any statutory offence under a taxing statute or related common law offence.

SARS to issue a tax assessment

The legislation requires that SARS must issue an assessment to the taxpayer reflecting the agreement concluded under the voluntary disclosure relief programme. Clearly, any such assessment issued is not subject to an objection or appeal in that the assessment will be based on disclosures made by the taxpayer to SARS under the voluntary disclosure programme.

Reporting of information

The Commissioner is required to submit certain information to the Auditor-General and to the Minister of Finance regarding all applications receiver for voluntary disclosure relief. It is important to note that such information must be disclosed in such a manner that the privacy of the taxpayer is assured and does not disclose the identity of any qualifying taxpayer. The Commissioner must disclose the number of voluntary disclosure agreements concluded by taxpayers and SARS, the amount of tax and interest assessed and the relief granted under the legislation.

Exchange control

The voluntary disclosure relief programme will not work unless defaulting taxpayers may also regularise their position with the Exchange Control Department of the South African Reserve Bank. As a result, SARB will allow for the regularisation of prior transgressions of the Exchange Control Regulations.

The draft guidelines published by the Reserve Bank indicate that persons applying for the voluntary disclosure relief will be required to pay a levy of 1O% on the value of unauthorised foreign assets held by them as at February 28 2010. The applicant will be required to introduce the levy from funds located abroad, or, where they choose to settle the levy due to SARB by utilising domestic funds or the foreign assets are illiquid, the levy will amount to 12%.

Thus, where a person holds foreign funds in contravention of the Exchange Control Regulations, they may regularise those funds with the Exchange Control Department by following the processes to be announced by the Reserve Bank and to pay the levies as indicated above. In addition, companies which have violated the exchange control regulations may regularise those violations under the voluntary disclosure programme and pay the levy set.

Conclusion

Those taxpayers who have failed to comply with the tax laws and/or Exchange Control Regulations should avail themselves of the voluntary disclosure relief to take effect on November 1 2010. It is clear that the relief is available to all taxpayers.

Thus, for example where a company has failed to comply with its employees' tax obligations or its VAT obligations, it is entitled to seek the relief under the provisions contained in the legislation. In addition, those taxpayers who have removed funds from South Africa in contravention of Exchange Control Regulations and did not apply for amnesty under the Exchange Control Amnesty and Amendment of Taxation Laws Act (12 of 20O3), may now seek the relief available under the provisions contained in the legislation. It must be noted that the relief will only be available in respect of applications lodged with the authorities from November 1 2010 to October 31 2011.

Taxpayers who qualify for relief will benefit under the programme in that no additional tax, penalties or interest will be imposed and, furthermore, SARS will not institute criminal prosecution.

Dr Beric Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in the September 2010 issue of the law magazine “Without Prejudice”

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