Fair Treatment Required Over Tax Certificates

In Zikhulise Cleaning Maintenance & Transport CC v the Commissioner for the South African Revenue, the North Gauteng High Court was required to pronounce on the manner in which the Commissioner withdrew a tax clearance certificate issued to a taxpayer. This is the first case which deals with tax clearance certificates and it is appropriate to consider the various tax clearance certificates which may be obtained from the Commissioner, including the legal framework.

Surprisingly, the Income Tax Act, 1962, does not refer to the manner in which such certificates should be applied for; neither when they are required nor the manner in which the Commissioner is required to deal with the issue thereof.

Currently, taxpayers are required to obtain tax clearance certificates as evidence that they are a taxpayer in good standing, or, alternatively, when they wish to submit a tender to a state organ. Individuals are required to secure a tax clearance certificate in order to remit funds under the concession available by the Reserve Bank to invest funds abroad.

Where a resident taxpayer wishes to emigrate, they are required to apply for a certificate for the purposes of emigration, which will facilitate the transfer of assets held by the taxpayer in SA to the country to which they are immigrating.

It is unfortunate that, to now, the Income Tax Act did not contain any provisions regulating the manner in which tax clearance certificates should be issued or applied for. It would appear that certificates have become a mandatory requirement for those taxpayers wishing to conduct business with the state.

SARS
operates under the rules of administrative justice
 and is required to invite a taxpayer
to make representations before
a tax clearance certificate is withdrawn

When applying for a certificate for purposes of a tender, the taxpayer must supply their particulars, and all tax numbers for the various taxes for which they are registered. At the same time, the taxpayer must indicate whether they are aware of any audit into their affairs by SARS.

The application for the certificate will be processed by SARS and this will include checking whether the taxpayer has any outstanding tax returns. SARS will review its records to establish whether the taxpayer has settled all tax liabilities. Where the taxpayer is not in arrears with either tax returns or tax payments a tax clearance certificate will be issued.

Those individuals wishing to invest funds offshore will be required to submit their personal particulars, as well as details of the nature of the investment to be made offshore.

In addition, the taxpayer will be required to supply information regarding the nature of the investment to be made, including the income to be derived therefrom. The taxpayer is also required to indicate the source of the funds to be invested offshore and to supply proof in substantiation of the funds to be transferred. This will enable SARS to ensure that the taxpayer has reflected assets in their return to substantiate those funds.

Those persons who decide to emigrate from SA are required to submit more comprehensive information, and SARS will usually conduct an audit into the person’s affairs prior to issuing a tax clearance certificate for emigration purposes.  This process may take a matter of weeks before the certificate is issued.

In the case of Zikhulise Cleaning Maintenance & Transport CC, the close corporation conducted business by constructing affordable housing as a result of government tenders it was awarded. It applied for a tax clearance certificate on January 17 2012, and SARS initially issued the tax clearance certificate to the taxpayer. On March 16, SARS advised the taxpayer that the tax clearance certificate had been rendered inactive with effect from the date of the SARS letter. This letter was received by the taxpayer only on April 18 and contained SARS’s reasons for withdrawing the certificate.

The taxpayer subsequently queried SARS’s decision to withdraw the certificate, and was then invited to make representations by May 11, if it wished to dispute SARS’s decision. Judge Wright made the point that, by March 16, SARS had already taken a decision for reasons it deemed valid to withdraw the certificate in question, and that SARS’s subsequent decision to call for the taxpayer’s reasons why SARS should change its mind, was not competent in law.

The court decided that the taxpayer was entitled to reasonable notice of SARS’s intention to withdraw the tax clearance certificate, and that this should have taken place prior to the decision to withdraw the certificate on March 16.  The court decided that SARS’s decision was of no force and effect.

The court decided that the taxpayer should be awarded costs of the litigation on the customary basis but, awarded costs on an attorney own client basis regarding the perusal and copying of the annexures to the answering affidavit relating to the pending criminal proceedings.

For SARS to call for an explanation from a taxpayer after a decision has been made is a clear violation of the taxpayer’s right to fair administrative justice enshrined in section 33 of the constitution, and, also, a violation of the taxpayer’s rights contained in the Promotion of Administrative Justice Act, 2000.

It is clear from Goldfields Ltd v Connellan NO, that a court will come to the relief of an applicant where a state organ has made a decision adverse to a person where that person has not been invited to make representations prior to the decision being made.

Once the Tax Administration Bill takes effect, clause 256 thereof will regulate the issue of tax clearance certificates by SARS. This clause provides that taxpayers may apply to SARS for tax clearance certificates in the prescribed form and manner.

Furthermore, SARS is required to issue or decline to issue the certificate within 21 business days from the date the application is filed by a taxpayer. SARS is required to provide a taxpayer with a tax clearance certificate only where it is satisfied the taxpayer is registered for tax and does not have any tax debt outstanding or any outstanding returns, unless an arrangement acceptable to SARS has been made for the submission of that return.

The bill also provides that the tax clearance certificate must be in the prescribed form, and must set out the tax clearance number assigned to that certificate and as reflected in SARS records. It must reflect the name and taxpayer reference number and other identifying details. It is also important that the certificate specifies the expiry date of that tax clearance certificate. In addition, the bill contains a provision which allows SARS to confirm the validity and expiry date of the certificate upon request by any sphere of  government or parastatal, despite the secrecy provisions contained in the bill.

Furthermore, the bill specifically provides that SARS may withdraw a certificate with effect from the date of issue thereof, if that certificate was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts.

The fact that the new legislation specifically caters for the issuing of tax clearance certificates is an improvement over the current legislation which does not refer to the issue of certificates at all.

Clearly, the failure to invite representations from the taxpayer before SARS makes the decision to invalidate a tax clearance certificate will be struck down by a court.

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law & Tax Review July 2012. Image purchased from iStock.

South Africa's New Tax Administration Bill

There has been good media coverage of South Africa's new Tax Administration Bill and the establishment of a Tax Ombud:
TV and Videos:
Candy Guvi  interviews me on Summit TV 
Delays hamper new bill : Michael Bratt interviews me on BusinessLive
Peter Ndoro interviewed me about the Tax Ombud on SABC2's Morning Live (18/06/2012)
Media Articles:
New Tax Law Looms (Business Live)
Tax Ombud to be Established (The Citizen)
SARS gets Power to Search and Seize Without Warrant (2OceansVibe)
New Tax Law Looms (City Press)
SARS getting Tougher (MoneyWebTax)
Experts Query SARS readiness for new tax bill (Business Day)
New tax bill coming soon (BizCommunity)
South Africa: New Tax Law Looms (All Africa)
New Tax Law Looms (IOL Business Report)
New Tax Law Looms (IFlyAfrica)
Radio Interviews (no links)
KayaFMBizz - 20/06/2012
ClassicFMBusiness - 21/06/2012
SAFM -23/06/2012

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