Last Resort for SARS to effect collection of dues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Tricky tax aspects of companies' World Cup gifts

It was indicated in the previous column that soccer jerseys, tickets and other soccer-related paraphernalia made available by an employer to an employee, for no consideration, would attract fringe benefits tax, according to the seventh schedule to the Income Tax Act, 1962.

However, on the day before the opening ceremony of the 2010 Soccer World Cup the South African Revenue Service (SARS) released a media statement advising that draft legislation would be introduced proposing a limited exemption in respect of World Cup clothing, other goods or match tickets supplied by an employer to its employees.

The government has decided that where employers make World Cup clothing, related goods or match tickets available to employees and the value does not exceed R750, no tax will arise.

It must be questioned why the amendment was only announced on June l0 although SA was awarded the hosting of the World Cup during 2004.

It must be noted that when the employer provides World Cup clothing and tickets to employees with a value in excess of R750, that excess will remain subject to fringe benefits tax and the employer is legally required to deduct and withhold employees tax (PAYE) therefrom according to the provisions of the fourth schedule to the act.

Failure to comply with the provisions of the fourth schedule can give rise to the employer facing a 10% late payment penalty, interest at the prescribed rate and, possibly additional tax of up to 200% of the PAYE that should have been paid to SARS.

It must be remembered that the provisions of the seventh schedule are aimed at subjecting amounts of remuneration paid by an employer to an employee for services rendered to tax. Paragraph l0 of the seventh schedule prescribes the manner in which the cash equivalent of the value of any taxable benefit derived from the rendering of a service by an employer to any employee, as contemplated in paragraph 2(e) of the seventh schedule to the act.

Paragraph 10 contains specific rules regarding the manner in which the cash equivalent should be determined when the employer is engaged in the travel industry and makes tickets available to an employee. When the employer procures or renders other services to an employee it is necessary to take account of the cost incurred by the employer in rendering those services or having those services rendered to the employee less any consideration paid by the employee in respect of those services.

Therefore, where, for example, the employer acquires match tickets, soccer jerseys and related items at a cost of R2 000 it would appear that the excess over the exempt amount of R750 will be subjected to employees' tax . Clearly, where the cost incurred by the employer in procuring match tickets and related items does not exceed R750 no employees’ tax will arise.

When a business decides to purchase World Cup tickets and invites clients or customers to join staff members at the soccer matches, no fringe benefits tax should arise. Further, the company or business incurring such expenditure should be entitled to claim the expense as a deduction for tax purposes under the provisions contained in section 11(a) on the basis that such expense is in the nature of marketing.

In the SARS Press release issued on June 10 relating to the proposed amendment it was indicated that the 2010 Soccer World Cup is an important event for SA and its people for nation-building, and seeks to relieve employers of the obligation to deduct PAYE on World Cup T-shirts and jerseys made available by employers to employees to wear, particularly on what has become known in SA as Football Friday. Employers encouraged employees to show their support for SA’s hosting of the World Cup by wearing T-shirts or soccer jerseys supporting the national team on Fridays.

It remains to be seen when the legislation will be enacted, as Parliament will only resume its proceedings after the World Cup Tournament is completed.

Businesses acquiring match tickets and related soccer paraphernalia also need to consider the value-added tax (VAT) consequences relating to the expenditure incurred.

Those businesses that are registered for VAT purposes are usually entitled to recover amounts of VAT incurred on the purchase of goods and services utilised in the carrying on of their business. The VAT Act, 1991, contains a number of exclusions to the general rule and, particularly, in relation to what constitutes entertainment. Section I of the VAT Act defines entertainment as "the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a vendor whether directly or indirectly to anyone in connection with an enterprise carried on by him".

Section 17(2) of the VAT Act prohibits a business from recovering any VAT incurred in respect of goods or services acquired that constitute entertainment as defined in the VAT Act.

Therefore, where an employer acquires match tickets or hosts a function for clients and staff to observe the soccer matches, the VAT incurred on beverages and food will not be recoverable under the VAT system. This is no different to VAT incurred on meals provided by an employer to its employees for no consideration.

Insofar as the purchase of soccer jerseys and T-shirts are concerned the employer will acquire those items in order to make those available to employees for no consideration. It is debatable whether the employer will be entitled to recover the VAT on the purchase of such items as they are not acquired in order to render taxable supplies directly, but rather to engender nation-building and encourage employees to give of their best at their workplace.

It is important that businesses review the manner in which they have treated the purchase of match tickets, T-shirts and soccer jerseys from both an income tax and VAT point of view to prevent nasty surprises arising in the future when SARS conducts income tax, employees' tax and VAT audits on their affairs.

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

Free image from Clipart

Take your ‘free’, taxed seats for the soccer

The opening match of the 2010 FIFA World Cup took place at Soccer City on Friday, and the final will take place, at the same stadium, on July 11.

It has been widely reported in the media that the city of Johannesburg and the Mangaung municipalities have splurged more than R8m on World Cup tickets for municipal officials. It was reported that Johannesburg had spent well over R1m on 6 500 World Cup tickets for council members, which appears to go against directives issued by the National Treasury to the various arms of the government, not to incur such expenditure.

My purpose is not to consider the lawfulness or otherwise of such expenditure, but rather to consider the income tax consequences arising where an employer, whether it is a municipality or private sector employer, acquires tickets for the World Cup and makes those tickets available to employees free of consideration. It has been reported that some employers have acquired T-shirts for employees’ use and it is important that employers are aware of the employees’ tax consequences arising out of such gestures.

Left: Enjoy the 2010 Soccer World Cup in South Africa, but beware the tax consequences of your free tickets and free vuvuzelas. (Photo of Bailey Cockerill and Darryl Michaux by Megan Viljoen, Ghana vs Uraguay)

Any employer paying remuneration to an employee is legally required to withhold and deduct Pay-As-You-Earn (PAYE) or employees ’ tax from the amount of remuneration paid by the employer to the employee. This is according to the provisions contained in the fourth schedule to the Income Tax Act.

However, it is not only the cash consideration paid by an employer to an employee that attracts employees’ tax, but also those benefits constituting “taxable benefits” as defined in the seventh schedule. Fringe benefits have been taxed in SA since 1984 in an attempt to ensure that an employee receiving a cash package only pays a similar amount in tax to an employee receiving a mixture of cash and fringe benefits.

Paragraph 2 of the seventh schedule defines what constitutes “taxable benefits”. Such benefits are required to be valued and which will result in the employer facing the obligation to withhold and deduct PAYE from such benefits made available to its employees.

Paragraph 10 of the seventh schedule provides that where an employer renders any service to the employee, the cost thereof, less the consideration paid by the employee therefore, shall be subjected to PAYE. Where an employer procures World Cup tickets and makes those available to employees for no consideration, that will constitute a taxable benefit as envisaged in paragraph 10(1)(b).

The employer is legally required to withhold PAYE from the cost of acquiring the tickets made available to employees. It must be remembered that the failure to withhold PAYE on benefits made available to employees constitutes an offence under the act. Further, the employer always remains liable to pay the tax that should otherwise have been deducted and, in addition thereto, a late payment penalty of 10% of the tax payable on the benefit made available to the employee and which was not subjected to tax, interest on the unpaid tax.

Furthermore, the South African Revenue Service (SARS) is empowered to levy additional tax of up to twice the PAYE that should have been levied on the fringe benefits made available to employees.

Therefore, where an employer fails to comply with their statutory obligations to subject remuneration or, indeed, any fringe benefits to PAYE as required, they stand exposed to substantial financial consequences, including prosecution.

It must be pointed out that where an employer acquires, for example, soccer jerseys or T-shirts and makes those available to employees for no consideration, the cost thereof will constitute a fully taxable fringe benefit, which is subject to PAYE. Once again, the failure to deduct PAYE in such circumstances, will result in the employer facing the above adverse consequences.

Where an employer incurs the cost of transporting employees to another city to attend a match, the costs relating thereto will constitute a taxable fringe benefit from which PAYE is required to be deducted.

Should the employer decide to absorb the tax liability on behalf of the employees, on the basis that it does not wish to put its employees in a disadvantageous position, the settlement of the tax obligation by the employer for its employees is, itself, a taxable fringe benefit.

In such cases, the employer would need to calculate the tax arising on the settlement of the tax obligation, which becomes a complex calculation because of the nature of the benefit arising and the various iterations that the employer will need to undertake to determine the correct amount of tax payable in such circumstances.

Certain companies have chosen to sponsor the World Cup event and, as a result of that sponsorship, become entitled to various tickets which may, in turn, be made available by the sponsor to its employees. In such a case, it would be necessary to ascertain the cost incurred by the employer to procure the tickets for the World Cup and that amount will fall to be taxed in the hands of the individual employees attending the soccer matches in the country.

Once the World Cup has run its course, SARS will, no doubt, undertake investigations into employers ’ affairs to ensure that tickets made available to staff and related items have been correctly taxed, as was the case with previous tournaments hosted in SA, such as the Rugby World Cup and the Cricket World Cup.

Where, however, a business purchases tickets for the World Cup for purposes of entertaining clients as part of its marketing strategy and allows certain designated employees to accompany company clients to a football match, no fringe benefit should arise. Traditionally, SA has not sought to subject to employees’ tax the personal enjoyment and benefit that may arise from attending a sporting event with a client as is the case with certain other countries.

Further, the cost of acquiring tickets should be deductible for tax purposes on the basis that it is incurred as part and parcel of the company’s marketing strategy, which would be deductible under section 11(a) of the act, that is, the general deduction formula.

It is important, therefore, that where employers have made the decision to facilitate employees’ participation in the historic World Cup event, that the tax consequences are properly dealt with. Failure to comply with the onerous provisions of the fourth schedule to the act exposes the employer to substantial financial penalties, as a result of the non-deduction of PAYE on the cost of tickets made available to employees for no consideration. In addition, employers could fact the risk of a criminal prosecution.


■ This article by Dr Beric Croome  first appeared in the column “Tax Bites” in the June 2010 edition of the Business Law Review of Business Day.

SOCIAL: Ke Nako!!! It's time for Soccer World Cup 2010!

I'm ready.  I have my makaraba (note the personalized "taxpayers' have rights" slogan around the green ZA!) and my vuvuzela (below left), which I'm still learning to blow. 

The "United We Stand" parade yesterday, held to show the country's support for our team Bafana Bafana, took place in front of the Edward Nathan Sonnenbergs offices in Sandton. We got right into the spirit,  doing the iDiski and waving our flags. 

Ayoba yo! We're ready for the greatest Soccer World Cup ever.

SOCIAL: Marketing with a Difference

During my recent trip to Cape Town I met the hard-working publishing team at Juta's. It was an interesting meeting with plenty of good ideas being bandied about. The one idea which I forgot to mention was my birthday cake, baked by my sister-in-law Iona Cockerill (see left).  I never thought I'd have to eat my words! 


I was also thrilled to be able to see both my books for sale on the shelves at Juta's main branch in Dreyer Street, Cape Town.

Right:  "Tax Administration" under the "Accounting & Tax" section (lying on its side, just under the word "& Tax" sign)

Left: "Taxpayers' Rights in South Africa" under the "Law" section (standing upright just under the "L" of Law).

Even being wet and cold from the torrential Cape rain couldn't dampen my spirits!

Double taxation rules leave no room for manoeuvre

South Africa has concluded a large number of double taxation agreements (DTAs) with its trading partners to regulate the manner in which income derived by non-residents who carry out activities in SA should be taxed in this country and vice versa.

The primary purpose of a DTA is to eliminate double taxation from arising, such that the same amount of income is not subjected to tax in two states without credit being given for the tax paid in the other state.

Furthermore, many DTAs regulate assistance that may be granted by one state to another to assist in the collection of taxes due to the other state. DTAs also seek to ensure that income derived in a foreign country is subjected to tax in at least one of the states party to a DTA and specifically provide that information may be exchanged from SA to another state, or vice versa.

The article regulating the exchange of information in DTAs, typically, provides that the competent authorities of the contracting states — the competent authority in SA is the Commissioner of the South African Revenue Service (SARS) — shall exchange such information that is foreseeably relevant for carrying out the provisions of the DTA, or to the administration or enforcement of the domestic law concerning taxes dealt with the DTA.

The Exchange of Information Article seeks to protect taxpayer information by ensuring that information disclosed by, for example, SA to a foreign state, shall be treated as secret in the foreign state and will only be disclosed to persons or authorities, including courts and administrative bodies, concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes dealt with. The article governing the exchange of information contained in the DTA cannot violate the secrecy provisions contained in SA's fiscal legislation. Furthermore, the article cannot be relied on to supply information that would disclose any trade, business, industrial, commercial or professional secret, trade process or information, the disclosure of which would be contrary to public policy.

When, for example, SA receives a request from a treaty partner under a DTA, SARS is entitled to use the information gathering provisions contained in the Income Tax Act of 1962, as amended, even though the information is not required by SARS for its own tax purposes. SA may not decline a request for information because the information requested is of no interest to SARS.

The Exchange of Information Article provides that SARS may not decline to supply information because the information is held by a bank or other financial institution, nominee or person acting in an agency or fiduciary capacity, or because it relates to ownership interests in a person. Therefore, based on the Exchange of Information Article, SA can request information from countries with which it has concluded a DTA and, similarly, SA would be obliged to cooperate with requests for information received from countries with which we have concluded DTAs, even though SARS may not have any interest in the information itself.

Historically, the only DTA concluded by SA with trading partners that did not contain an exchange of information provision was the agreement concluded with Switzerland. However, a more recent DTA was concluded by SA and Switzerland that was gazetted on March 6 2009 to take effect in respect of taxable years beginning on or after January 1 2010. That DTA now also contains an exchange of information provision, although the wording is slightly different to the articles found in other DTAs.

It would appear that SA is in the process of negotiating or finalising various tax information exchange agreements with a host of countries. The SARS website indicated that SA is in the process of negotiating or finalising such agreements with Argentina, Bahamas, Bermuda, British Virgin Island, Cayman Islands, Channel Island, Gibraltar, Guernsey, Isle of Man, Jersey, Liberia, Lichtenstein, Monaco, Netherlands Antilles and San Marino.

On March 18 the Organisation for Economic Cooperation and Development (OECD) announced that the international fight against cross border tax evasion has entered a new phase with the launch by countries participating in the global forum on transparency and exchange of information of a peer review process (Global Forum) covering a first group of 18 countries. It appears that the reviews are a first step in the three year process approved during February 2010 by the Global Forum for improved tax transparency and exchange of information. SA is not a member of the OECD but has observer status and it is interesting to note that the OECD has announced that SA will be subjected to phase one and phase two reviews during the second half of 2011.

During the latter part of 2011 the OECD will evaluate how SARS complies with its international obligations to ensure the transmission of information under DTAs and other similar agreements.

In documents recently released by the OECD it has been pointed out that the tax information must be available and that the tax authorities must have access to the information and that there must be a basis for the exchange of any information. The OECD says that if any of the aforementioned elements are missing the exchange of tax information will not be effective.

The OECD requires that countries participating in the exchange of tax information should be able to identify the owners of companies and any body corporates, as well as identifying partners in any partnerships, and also requires participating states to ensure that information is available to the respective revenue authorities that identifies the settlor, trustee and beneficiaries of trusts created under the laws of the participating state.

The OECD report to be produced pursuant to the phase one review will include a detailed description of the elements of SA's legal and administrative framework for transparency and exchange of information, and is required to deal with the availability of information, access to information and the exchanging of information. The report is required to identify and describe any shortcomings that may exist in SA and provide recommendations how those shortcomings may be addressed.

The second phase of the monitoring and peer review process will focus on whether the exchange of information is effective. Therefore, the OECD will evaluate whether SARS has sufficient resources to seek and exchange the required information, or procedural requirements that frustrate the effective exchange of the information. Phase two of the review process will also determine whether there are deficiencies in the quality of the requests made by other states and the requests for information submitted to SARS.

It is important that taxpayers realise that SARS may exchange information with its trading partners in accordance with the provisions of DTAs, and that SARS will, in turn, receive information from its trading partners under those agreements, which it will rely on in ensuring that taxpayers have complied with their tax obligations in SA.

■ This Tax Bites article first appeared in the Business Day (Business Law & Tax Review, Page 7, May, 10 , 2010)

NEWSFLASH: "Taxpayers' Rights in South Africa" published

The book based on my PhD thesis has been published. This is the culmination of an idea I first had in 1994 when reading the Constitution of the newly democratic South Africa. It's been a long road and I am pleased to finally see it in print.

About this Publication: "Taxpayers’ Rights in South Africa" is the only book available to deal with the interplay between South African constitutional and tax law. It evaluates how South African Revenue Services powers function in relation to taxpayers’ constitutional rights and thoroughly and systematically unpacks the rights to property, equality, privacy, access to information, just administrative action and access to courts. Based on personal experience and award-winning research, this work provides guidance on issues that perplex taxpayers, SARS officials and tax practitioners every day.

Contents:
Tables of Cases and Statutes
Introduction
Background
The right to property
The right to equality
The right to privacy
Procedural rights
Protection of taxpayers' rights in selected foreign countries
Conclusion: The future of taxpayers’ rights in South Africa
Index

Publication Reviews:  'This book is the first full-scale attempt to discuss the important topic of taxpayers’ rights in South Africa and will provide a worthy addition to our literature on South African tax law.' Judge I F Farlam – Retired Judge of Appeal of the Supreme Court of Appeal

'Croome’s book forms the basis of significant beneficial developments in the administration of South Africa’s tax laws. His recommendations are often controversial but will assist in informed decision making in an area that remains relatively unexplored in legal commentary.’ Prof. D Bentley – Curtin University of Technology, Perth, Australia

'This work is of great significance in the context of South Africa’s tax jurisprudence. It provides a thoughtful summation of the way forward in this important new dimension of tax law.' Prof. R C Williams – Univ. of KwaZulu-Natal.

You can buy this book from JUTA'S LAW PUBLISHERS.
(ISBN 9780702182020)