Double Taxation Agreements – the noose closes

Recently, the Western Cape High Court had to determine whether the South African Revenue Service would utilise the powers contained in s74A and s74B of the Income Tax Act, (58 of 1962), as amended, to obtain information from a person in South Africa to ensure compliance with the provisions contained in a double taxation agreement (DTA) concluded by South Africa and Australia enabling the exchange of information.

This was the issue to be decided in the case of Commissioner: SARS v Werner van Kets, case number 13446/2011, as yet unreported, where Davis, J, delivered judgment on 22 November 2011.

SARS received a letter from the Australian Tax Office (ATO) requesting information in terms of Article 25 of the double taxation treaty.  The ATO’s request related to an investigation into the income tax affairs of a Mr Saville, specifically regarding his possible off-shore wealth, and his involvement with a Malaysian entity, which transferred substantial amounts into Australia.  

The information provided to SARS by the ATO indicated that Mr van Kets resided in South Africa and was a director of the Malaysian entity in question. It would appear from the judgment van Kets was in possession of information, which the ATO requested from SARS and that van Kets refused to disclose it on the grounds that it was confidential and that he was not authorised to release it.

Davis, J, indicated that the issue to be determined by the court was whether the words “any taxpayer,” used in s74A and s74B of the Act, can be interpreted to include a person who is not a “taxpayer” as defined in section 1 of the Act, but who, in terms of a DTA, has been identified as someone who can provide the information pursuant to the request made by the ATO.

s74A empowers the Revenue to request a taxpayer, or any other person, to furnish information it may require for purposes of administration of the Act. s74B, in turn, authorises SARS to request the taxpayer, or any other person, with reasonable prior notice, to furnish, produce or make available, the information or documents, which it may need to inspect, audit or examine.

s1 of the Act defines a “taxpayer” as any person chargeable with any tax leviable under the Act and includes any person required by the Act to furnish a return. Van Kets contended that the definition of “taxpayer” only relates to persons who are liable for South African income tax, or other taxes levied in terms of the Act, or who are required to furnish any return to SARS.

SARS argued that s74A and s74B provide the means by which it exercises the power to obtain information called for by foreign tax authorities, pursuant to DTAs concluded by South Africa, which obliges this country to supply information. SARS contended that if the argument put forward by van Kets was correct, it would have no legal means whereby it could request the necessary information, within South Africa, to meet the request from a foreign tax authority, even though the information may be located in this country, despite the fact that it relates to foreign taxpayers. 

Thus, SARS argued, the information-gathering provisions can be invoked for purposes of the administration of the Act, and includes the power to obtain information for purposes of meeting South Africa’s obligations under the DTAs concluded by it.

s108 of the Act empowers the National Executive to conclude agreements with governments of other countries, with a view to the prevention, mitigation or discontinuance of the levying, under the laws of South Africa, and of any other country, of tax in respect of the same income, profits or gains, or to the rendering of reciprocal assistance in the administration of and collection of taxes under the laws of South Africa and any other country.  Once Parliament has approved a DTA as stipulated in s231 of the Constitution (Act 108 of 1996), as amended, the agreement must be published in the Government Gazette and must be treated as if enacted in the Act itself.

South Africa concluded a DTA with Australia, which came into force on December 21, 1999. The DTA concluded by South Africa with Australia contains Article 25, which deals with the exchange of information by the revenue authorities of the two states.  Thus, under the DTA, the ATO can call for assistance from SARS, by requesting that SARS obtains information located in South Africa for purposes of the administration of tax in Australia.  Similarly, SARS may request assistance from the ATO to provide information, located in Australia, regarding a South African taxpayer.

Article 25 of the DTA, concluded by South Africa with Australia, provides that:

“The competent authorities of the Contractual States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration and enforcement of the domestic law concerning taxes referred to in Article 2, insofar as the taxation thereunder is not contrary to the Agreement.”

In van Kets, the court had to determine whether the provisions of Article 25 can be enforced under the provisions of South African law.  SARS submitted that, without the provisions of s74A and s74B of the Act, there would be no legal basis whereby SARS would be entitled to procure the information, which is “foreseeably relevant” for the administration or enforcement of Australian domestic tax law.

Counsel for van Kets argued that s74A and s74B would only apply to a taxpayer who is subject to tax under the provisions of the Act.  It was argued that the information called for by the ATO from van Kets cannot be supplied, despite a request being made in terms of the DTA, as it does not comply with the provisions contained in those sections. The court, therefore, had to decide whether the scope of s74A and s74B should be extended by virtue of the provisions contained in the DTA and, particularly, the wording found in Article 25.

The court recognised that the provisions contained in a DTA, become part of South African domestic income tax laws. s231 of the Constitution has the effect that the provision of a DTA becomes law in South Africa once it has been Gazetted.  Davis, J, made the point that the provisions of a DTA and the Act should, where possible, be reconciled and read as one coherent whole.

The court pointed out that the purpose of the exchange of information clause contained in the DTA is to ensure that a resident of Australia does not escape Australian tax, which may be imposed in respect of income accruing to that resident from a source located in South Africa. If the DTA did not provide for an exchange of information, the ATO would be unable to obtain information about such income, and subject that to tax in Australia.

Davis, J, reached the conclusion that where the DTA is read, together with the provisions of the Act, it implies that the word “taxpayer” should include not only those persons who fall within the provisions of the Act, but also those dealt with in the DTA.

In the case at hand, SARS was requested by the ATO to provide information held by van Kets regarding an Australian resident, Saville. The court held that SARS is entitled to require another person, in this case, van Kets, to furnish any relevant information particular to Saville. 

The court decided that s74A and s74B may be relied on by SARS for purposes of obtaining information from van Kets regarding Saville, thereby enabling it to comply with its obligations under the DTA.  The court, therefore, sought to reconcile the provisions of the exchange of information article contained in the DTA concluded by South Africa with Australia, and the information-gathering provisions contained in s74A and s74B of the Act.

South Africa has, in terms of the various DTAs concluded by it, undertaken to comply with certain international obligations and, had the court found that SARS was precluded from seeking information from van Kets regarding Saville, on the basis that Saville is not a South African taxpayer, which would have undermined the provisions contained in the DTA.

During March 2010, the Organisation for Economic Co-Operation and Development (the OECD) announced that the international fight against cross-border tax evasion has entered into a new phase with the launch of a peer review process by a first group of 18 countries participating in the Global Forum on Transparency and Exchange of Information. 

It appears that the reviews are a first step in the three-year process approved during February 2010 by the Global Forum in response to the call by G20 Leaders for improved tax transparency and exchange of information.  South Africa is not currently a member of the OECD but has observer status.

It is interesting to note that the OECD had announced that South Africa would be subjected to Phase One and Phase Two reviews during the second half of 2011.  Phase One of the review process will entail the assessment of the legislative and regulatory framework, whilst Phase Two of the review involves an assessment of the effective implementation in practice of the exchange of information in accordance with international treaties.

In documents released by the OECD, it has been pointed out that the tax information must be available, 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 stated that if any of the aforementioned elements are missing, the exchange of tax information will not be effective.  If SARS was precluded from disclosing information to a foreign tax authority in accordance with the exchange of information article found in a DTA, read together with s74A and s74B of the Act, it would undermine South Africa’s participation in the Global Forum.

Based on the judgment of the court, SARS is legally authorised to disclose information to the ATO or, in fact, any other foreign revenue authority held by a South African resident, regarding a person who is tax resident in the other country in terms of the exchange of information article contained in the DTA.

# This article first appeared in Without Prejudice, March 2012. Image obtained from www.abc.net.au Please contact the blog owner for any copyright issues, and the image will be removed forthwith.

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

Not All Smooth Sailing for Tax Defaulters

The Voluntary Disclosure Programme (VDP), enacted by way of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, 2010, came to an end on 31 October 2011. 

It is unclear, at this stage, how many persons applied for relief in respect of tax defaults administered by the Commissioner:  South African Revenue Service and for exchange control relief from the Financial Surveillance Department of the South Africa Reserve Bank.

It is appropriate to refer to the process which applicants will face insofar as the fiscal aspects of the VDP are concerned.

Voluntary Disclosure Programme
hits bump in the road as yet
more paperwork required

Persons applying for relief under the VDP had to submit a VDP application form electronically to SARS via e-Filing with the appropriate supporting documents.  

The legislation stated that the Commissioner would evaluate the applications lodged and that a voluntary disclosure agreement would be prepared to give effect to the relief under the programme. Once the agreement has been concluded, SARS is compelled to issue assessments to the applicant, giving effect to the document.

However, it now appears that SARS requires taxpayers, who applied for relief under the VDP, to re-submit the tax returns previously submitted in respect of the 2005 to 2009 years of assessment. 

It does not appear that this process is contained in the legislation. However, taxpayers have received e-mails from the VDP Unit at SARS, containing blank copies of tax returns for 2005 to 2009, which are required to be re-submitted. 

Unfortunately, the returns forwarded by SARS to applicants are in .pdf format, which means that the only way in which the tax returns can be completed is manually and that it is not possible to submit amended returns via e-Filing. 

It is unfortunate that SARS did not advise taxpayers, at the time that the VDP commenced, that this would be a requirement or, in fact, require the returns to have been submitted at the same time that the VDP application was filed.

It must be remembered that the VDP only dealt with tax defaults, which occurred prior to 17 February 2010. Those taxpayers who applied for VDP relief and have not yet filed their 2011 income tax returns, will need to take account of income derived from off-shore or other income not previously disclosed to SARS when completing those returns. 

If the 2011 tax return has already been submitted and assessed, VDP applicants should approach SARS to amend those returns to take account of income which was not previously reflected in the tax return.

The formal VDP process came to an end on 31 October 2011 and it is, therefore, not possible to apply for relief under the provisions of the legislation. 

Those taxpayers who, for whatever reason, chose not to apply under the legislation which operated from 1 November 2010 to 31 October 2011 and now wish to regularise their tax affairs, are required to approach their local branch office of SARS.

It does not appear that SARS has a formal process in place at the local branch offices to deal with those taxpayers who wish to rectify prior defaults. It would be important, though, for those taxpayers to have identified the matters which require rectification, including the quantum.

Once the Tax Administration Bill, 2011 has been enacted, taxpayers will be in a position to apply for relief under a formalised VDP. 

The VDP contained in the Tax Administration Bill  is not as generous as that which ended on 31 October 2011, by virtue of the fact that the process will allow for the waiver of additional tax, but not interest which would otherwise have been levied on the late payment.

Where VDP applicants are involved with, say, so-called “loop structures” in violation of the Exchange Control Regulations, Reserve Bank requires that these be unwound.  

Applicants must remember that the unwinding of such structures will give rise to adverse consequences in South Africa in the form of, possibly, capital gains tax (CGT), secondary tax on companies (dividends tax after 1 April 2012) or securities transfer tax, depending on the nature of the asset to be transferred from the off-shore structure to the South African resident.

It is not possible, in this article, to evaluate the various structures which exist and comment in detail on the fiscal consequences which may arise from unwinding “loop structures.”

Those applicants who applied for VDP relief from the Reserve Bank will be required to pay the levy on the unauthorised foreign assets within the period allowed by the Reserve Bank .  Where the foreign assets are owned by a foreign trust, it will be necessary for the foreign trust to make an award of funds to the resident personally so that they can pay the levy due to  the Reserve Bank .  

It is not possible for the foreign trust to pay the levy directly to the Reserve Bank , with the result that the off-shore structure will need to make an award equivalent to the levy payable by the resident, to the resident so that they can pay the amount over.

The Taxation Laws Amendment Act, 2011, repeals Part XIII of the eighth schedule to the Income Tax Act, 1962.  That part of the act required taxpayers, in receipt of funds from off-shore, to calculate the capital gain or capital loss which arose on the conversion of amounts in foreign currency into South Africa Rand.  

Fortunately, the legislation has repealed that part of the act with effect from 1 March 2011 and in respect of years of assessment commencing on or after that date. Therefore, any foreign exchange gain or loss, which may arise as a result of the award by the foreign trust of funds to the resident to pay the levy due to the Reserve Bank, will no longer be liable to CGT as was previously the case.

Those persons who chose not to apply for relief under the formalised VDP process, and wish to regularise prior transgressions of the exchange control regulations, will be required to approach the investigations division of the Reserve Bank with a view to regularising their exchange control affairs. 

Where persons applied for relief under the VDP, a levy of 10% was required to be paid on the value of the foreign assets held as at 28 February 2010 in excess of the foreign investment allowance available to natural persons. 

Where persons seek to regularise their exchange control affairs outside of the VDP, the Reserve Bank will impose a levy of up to 25% of the value of the assets at the time that the person applies for regularisation of the unauthorised foreign assets.

Once the applicant has received relief under the VDP administered by the Reserve Bank, they may not utilise the foreign assets to acquire assets in South Africa, or to advance loans, directly or indirectly, to any other South African resident.

Furthermore, should either the Reserve Bank or SARS discover that the VDP applicant did not make full and proper disclosure of their affairs in the VDP application, the authorities are entitled to withdraw the approval granted under the VDP.

It would appear that it is going to take many months for both the Reserve Bank and SARS to process all of the VDP applications received.  Applicants for VDP have no choice but to wait for the authorities to contact them to advise as to the status of their applications.

Dr Beric Croome is a Tax Executive at EDWARD NATHAN SONNENBERGS INC. This article first appeared in the Business Day Business & Law Review February 2012.

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.

Another Review of "Taxpayers' Rights in South Africa"

Buy your copy HERE

The following book review of my book Taxpayers' Rights in South Africa  first  appeared in the ADVOCATE, December 2011 edition.  The review was written by Advocate Andy Bester of the Johannesburg Bar.

Dr Croome's work on taxpayers' rights is the first textbook to consider fiscal legislation critically in the light of the values entrenched in the Constitution 1996.

Given that fiscal legislation is the subject matter of this work, it is a surprisingly easy read. Dr Croome has succeeded in treating substantial taxation issues in a way that makes it digestible to even the non-specialist.

The work commences with a general background and thereafter deals with the three major rights entrenched in the Constitution affected by fiscal legislation: the right to property, the right to equality and the right to privacy. These topics are carefully considered at the hand of a series of questions dealing with pertinent aspects of the real or perceived clash between fiscal legislation and constitutionally entrenched rights.

The author then turns to procedural rights. Not only is a useful comparison made with several other jurisdictions, but administrative justice and access to the courts is dealt with in an extensive yet extremely practical manner.

The work is well rounded off with the final two chapters. A discussion of the protection of taxpayers' rights in selected foreign countries is followed by a discussion of the future of taxpayers' rights in South Africa. In this chapter a critical discussion of current taxpayers' remedies interspersed with suggestions and recommendations by the author, provides food for thought not only for practitioners, but also for those involved in the administration and enforcement of fiscal statutes.

With taxation, perhaps one of the last remaining areas where the impact of constitutional values have not been that extensively tested yet, this work is a timeous and valuable addition to the bookshelves of tax practitioners, tax officials and legal practitioners in general.

The other book by Dr Croome, Tax Administration, this time co-authored by Professor Lynette Olivier, seeks to guide tax practitioners and those dealing with the fiscal authorities through the maze that is the administration of taxation. They succeed admirably.

Buy your copy HERE

Much of the subject matter contained in the book has been covered in other publications. Yet, perhaps because of the structure in which the information is presented, this work contributes substantially to the accessibility and digestibility of this area of law.

The authors deftly guide the reader through such topics as the requirements to register and submit tax returns' assessments, requests for information, access to information, penalties, refunds and more.

The text also includes a chapter on taxpayers' remedies and several annexures which go beyond the usual mere reference to the relevant legislation. Thus for instance, the SARS Service Charter is included, as is the Terms and Conditions of the SARS e-filing website. All in all this text succeeds in guiding readers through what tends to be rather complicated processes.

This review was written by Advocate ANDY BESTER, JOHANNESBURG BAR and first appeared in the ADVOCATE, December 2011 edition. 

SARS supplementary declaration for companies and close corporations

The Commissioner: South African Revenue Service ("SARS") recently announced that companies and close corporations ("CCs") will, in certain cases, be required to complete and submit a supplementary declaration for companies and CCs, Form IT14SD.

The new form will require companies and CCs to reconcile financial information across various tax types and customs. The IT14SD will require taxpayers to submit reconciliation statements for employees’ tax ("PAYE"), income tax, value-added tax ("VAT") and customs.


Most companies and CCs which are not currently reconciling financial information for the various taxes should proceed to do so, so that they will be in a position to supply the information that will be required by SARS.


It will be important for taxpayers, who are required to submit the Form IT14SD, to reconcile the turnover reflected as per the Annual Financial Statements ("AFS"), to the turnover reflected on the VAT returns. SARS is also seeking a reconciliation of the input tax as per the VAT returns and the expenditure as reflected in the AFS.


SARS will require taxpayers to submit details of salaries as per the AFS and to reconcile that to the figures submitted via the PAYE process.


In addition, information will be required by importers and exporters regarding customs information submitted to SARS and information contained in the AFS.


SARS has indicated that where companies and CCs submit their returns electronically, and that taxpayers who are identified for verification, an initial verification letter will be displayed on the taxpayer’s e-Filing profile and e-Filing will automatically make the Form IT14SD available on the taxpayer’s profile. Those taxpayers who do not submit tax returns electronically, will receive an IT14SD via the mail and will be required to complete the form and submit it to SARS.


SARS has advised taxpayers that the new Form IT14SD can be submitted either through e-Filing, via SARS branches or by post.


It is important that taxpayers who are not currently reconciling the information regarding the various taxes to the information contained in the AFS undertake to do so, with a view to the requirement that such information must, in future, be submitted to SARS.

• beric croome - executive Edward Nathan Sonnenbergs. This article first appeared in taxENSight November 2011  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