Information Gathering To Ensure Law Compliance

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

  

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

Sars Widens Tax Net To Catch Regular Offenders

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SARS Doubles Up On Requirements From 2013

Section 69 of the Income Tax Act, 1962 (“the act”) imposes an obligation on certain persons, if required by the Commissioner for the South African Revenue Service, to furnish information or returns within the time period as prescribed by the Commissioner.

These should reflect, among other things, interest earned by taxpayers, rent received by taxpayers or other specific information set out in section 69(1) of the Act. 

On 29 February 2012, Government Notice No 173 appeared in Government Gazette No 35090, imposing an obligation on institutions to submit information to the Commissioner bi-annually with effect from the 2013 year of assessment in terms of Section 69.  Historically, the Commissioner required certain institutions to submit returns and information reflecting interest derived by taxpayers in respect of the tax year on an annual basis. 

The Commissioner has now decided that the information must be submitted bi-annually and that reporting institutions are required to submit returns of monies invested with, loaned to and deposited with those institutions and in respect of interest received by or accrued to or in favour of any person from the reporting institution or from any other business carried on by the reporting institution in South Africa for the period from 1 March 2012 to 28 February 2013.

The Government Notice defines reporting institutions as follows:

• Banks regulated by the Registrar of Banks;
•  Co-operative banks regulated by the Co-operative Banks Development Agency;
• The South African Post Bank Limited (Post Bank;)
• Financial institutions regulated by officials of the Financial Services Board;
• Companies listed on the JSE and connected persons in relation to the companies that issue bonds, debentures or similar financial instruments;
• State-owned companies that issue bonds, debentures or similar financial instruments; and
• Organs of state, as defined in Section 239 of the constitution, that issue bonds or similar financial instruments.

SARS's new reporting requirements are
onerous and institutions need to upgrade
their systems to meet them.

The reporting institutions are required to submit the returns to the Commissioner by 31 October 2012 in respect of interest derived for the period 1 March 2012 to 31 August 2012, or by 31 May 2013 in respect of the period 1 March 2012 to 28 February 2013.

Previously, reporting institutions were only required to submit returns covering the tax year, that is generally from 1 March 2012 to 28 February 2013.  

Affected institutions will need to upgrade their systems so that they can supply the information required bi-annually and comply with the provisions of Section 69 of the act and the government notice.  It must be noted that the Commissioner requires that the returns are filed electronically with SARS.

The government notice also prescribes the information to be disclosed in the returns submitted to SARS in respect of natural persons and persons other than natural persons. 

In the case of natural persons, the reporting institution is required to submit details of the person’s surname, address, identity number and tax reference number, as well as certain other particulars pertaining to the investment held by the person with the institution and the interest earned. 

Reporting institutions are also required to indicate the account verification status of the investment in terms of the Financial Intelligence Centre Act. The institution must also report the monthly totals of all credits and debits to the account as well as the closing balance of accounts at the end of the return period. 

In addition, SARS must be advised of the date on which the account was opened and the date on which it was closed.

Much of the information now required was not called for before and did not appear on IT3(b) certificates issued by banks to their clients.  The requirement to disclose the monthly totals of all credits and debits to the account will enable SARS to identify taxpayers who should be subject to a tax audit.

In the case of companies or other persons, the registration number or reference number issued by the regulatory authority concerned must be submitted together with the tax reference number as well as interest derived by the taxpayer, and other information pertaining to the movements on the accounts.

The other information which is required for natural persons must also be submitted for other persons. 

SARS and a reporting institution may agree to different periods and dates for the submission of returns for persons whose financial years do not end on the last day of February of each year.

The extent of the information required from reporting institutions is onerous and it is going to be important that institutions amend their systems so that they can comply with the reporting obligations now imposed in terms of section 69.

It remains to be seen if SARS will itself issue notices to taxpayers in respect of interest derived from the over-payment of tax, which used to be done historically, but does not appear to be the case currently. 

This does create difficulties for taxpayers, as it is often unclear as to the amount of interest received from SARS as a result of the overpayment of income tax or value-added tax, and, more importantly, the date on which that interest accrued in favour of the taxpayer. 

DR BERIC CROOME is a  Tax Executive at Edward Nathan Sonnenbergs Inc. This article first appeared in the Business Day “Business Law and Tax Review” supplement, April 2012. Free image from ClipArt

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.