Tax Compliance in the 21st Century

During October 2010, the South African Institute of Tax Practitioners held their 3rd Annual Tax Conference at the Sandton Convention Centre. 

#Left: Dr Beric Croome, passionate about tax.

Speakers included Prof Michael Katz and Dr Beric Croome (both of Edward Nathan Sonnenbergs Incorporated, and both listed as Best Lawyers 2010) as well as other well-known tax personalities such as Judge Dennis Davis (University of Cape Town), Professor Keith Engel (National Treasury), Professor Daniel Erasmus (Thomas Jefferson School of Law, San Diego, California), Professor Walter Geach (University of KwaZulu-Natal),  Jackie Coolidge (World Bank), Nina Olsen (US Taxpayer Ombudsman and Advocate), Telita Snykers (Inland Revenue Service, Singapore), and Gelishan Naidoo(Deloitte).

Focusing on tax compliance in the 21st century, attendees explored:

* the importance of tax compliance for the economic and social development of South Africa;
* current and future National Treasury policy on improving tax compliance;
* how an independent tax ombudsman can assist taxpayers;
* how SARS envisages tax compliance;
* the role of SARS enforcement in improving tax compliance;
* how eFiling and third party data collection will improve tax compliance;
* the impact of tax avoidance and compliance;
* the purpose and impact of trusts in tax compliance;
* how to effectively manage tax risk to enhance tax compliance;
* how to improve their relationship with SARS;
* whether tax policy really improves tax compliance;
* how tax compliance costs impact taxpayer behaviour in complying with tax laws.

Dr Beric Croome spoke on the Tax Administration Bill and Taxpayers' Rights in South Africa. You can see the slides of the presentation by clicking HERE.

Beric says, "It's never easy to find the time to attend conferences, but I found this conference of great value and enjoyed the interaction with the other presenters and meeting attendees from all over South Africa."  

#Photograph and information obtained from SAIT

Lawyer of the Year 2010 - South Africa (Tax )

A jury of one's peers by Sanchia Temkin

Introduction

IN THE October 2010 edition of Business Day Tax & Law Review we feature a special report on Best Lawyers SA 2010. Inclusion in Best Lawyers is based entirely on peer review. For over 25 years in the US and three years in SA, the top lawyers in the US and SA respectively have helped make the publication the leading legal referral guide by candidly evaluating the work of other top lawyers in the same areas of expertise. After more than a quarter of a century in publication, Best Lawyers this year has designated "Lawyers of the Year" in high profile legal practice areas, such as tax and competition law. Unfortunately, Tax & Law Review has not the space to profile all the lawyers who received accolades.

A list of all the lawyers honoured by inclusion can be found on page 12. Best Lawyers – Lawyer of the Year 2010 includes Edward Nathan Sonnenberg’s Dr Beric Croome (left) in the Tax category.

This year was an extremely eventful one and we decided to ask some of SA's Best Lawyers to tell us what stood out for them in their areas of practice and the challenges they foresee in the near future. More than 88 000 top general counsel see Best Lawyers lists in incisive publications such as Corporate Counsel and The American Lawyer, while more than 16-million readers see the lists in dozens of city and regional publications in the US including The Washington Post, The Los Angeles Times, and New York Magazine as well as in major business and general publications around the world, from Business Day in SA to Expansion in Spain.

The editors of Best Lawyers and Business Day Tax & Law Review would like to congratulate all the professionals who have been selected as Best Lawyers SA for 2010.

Passionate about the rights of the taxpayer

“TAXPAYERS and some advisors are usually ignorant when it comes to taxpayers' rights," says Beric Croome, an executive in tax at ENS. Croome has received the honour of "Lawyer of the Year" for 2010 in the tax category, due to the particularly high ratings he received from his peers. For three years in a row, since Best Lawyers was first published in SA, he has been designated as a "Best Lawyer" for tax.

Croome says that there is no doubt that the constitution has changed the face of taxation in SA. "Taxpayers need to be aware of the rights that they have in their dealings with the South African Revenue Service (SARS) so that they may be treated fairly and properly.''

He says that taxpayers are also unfortunately unaware of the fact that rights contained in the constitution may be limited by laws of general application where it is reasonable necessary to do so in a democracy. “I am often consulted by clients who believe that their rights have been violated by SARS but upon further investigation it is established that the limitation of rights contained in section 36 of the constitution allows for that limitation to take place.”

Taxpayers in SA currently also do not have a cost-effective remedy in seeking redress when SARS abuses its powers unduly and this is a matter that should be addressed.

Croome is a non-executive director of the Taxpayers Movement of SA which, among other things, intends to increase taxpayers' awareness of the rights that they have with SARS and is also calling for the creation of the tax ombudsman as a separate independent office to deal with taxpayers' complaints where SARS has abused its powers.

Croome's chosen career path was not initially that of a lawyer. He wanted to become a chartered accountant and, after finishing school, he commenced his undergraduate studies at the University of Pretoria for a BCom degree, which he completed at the University of Cape Town in 1980. He received his Certificate in the Theory of Accountancy in 1981. After successfully completing the final qualifying examination in I992, he began articles as a trainee accountant. In lieu of national service, he worked at the Johannesburg Receiver of Revenue (as it was then known) for a period of four years. “I so enjoyed working in the tax arena that I completed my Higher Diploma in Tax law at the University of Witwatersrand during that period, passing cum laude and garnering the Edward Nathan Friedland prize for the top student.”

It was during these studies that Croome decided that tax was a legal subject and decided to expand on his knowledge of law, and tax law in particular. As he was already working fulltime, he became a part-time student at the University of South Africa and completed the BProc and LLb degrees. “Studying constitutional law, in particular the bill of rights, whetted my appetite for taxpayers’ rights in SA and how the bill of rights affects South Africans taxpayers in their dealings with the Commissioner of SARS."

During 1994 he started to write articles about the constitution, which came into effect on April 27 1994 and the effect it had on the manner in which the revenue authority deals with taxpayers. Subsequently, he started researching the protection of taxpayers' rights in various countries, particularly Australia, Canada, the UK and the US, collecting articles and materials relating thereto. This came in handy during 2001 when Professor Richard Jooste of the University of Cape Town requested that he author an article dealing with taxpayers' rights in SA for publication in the UCT law journal 'Acta Juridica'' which was published n 2002. "My passion for the subject led to an article twice as long as was required by the university. I didn't want to lose the additional material, so when Professor Jooste suggested that I consider applying for admission to the PhD (Doctor of Philosophy) degree at the University of Cape Town, with taxpayers' rights in SA as my topic, I was drawn to the challenge,” says Croome.

He commenced studies under the supervision of professors Richard Jooste and Hugh Corder, then dean at the faculty of law at the University of Cape Town, in 2003. His topic focused on taxpayers’ rights in SA, concentrating on the rights to property, privacy, access to information, administrative justice and access to courts. He received his PhD degree in June 2008.

The University of Cape Town put his thesis forward for the 2009 Deneys Reitz National Tax Thesis Competition. Croome was subsequently advised that his thesis had been given the award in the doctoral category.

The thesis was published by Jutas as the book “Taxpayers' Rights in South Africa” in May this year.

Croome is currently working with two leading overseas tax specialists in the field of taxpayers' rights, co-authoring a book dealing with international taxpayer protection. Publication of this book is aimed at 2011 or 2012.

For many, years he has taken a great interest in the powers of SARS and how it treats taxpayers in light of the rights conferred on taxpayers under the provisions of the bill of rights.

Hopefully, when the process of converting the technical text of “Taxpayers' Rights in South Africa” into a more accessible guide for taxpaying citizens has been completed, this version of the book will give the man-in-the-street the knowledge he requires to understand his rights as a taxpayer.

"I hope that, in the not too distant future, there will be significant developments in the area of taxpayers’ rights in SA, enhancing the protection of taxpayers’ rights in the country," he says.

This article was written by Sanchia Temkin and first appeared in the October 2010 issue of Business Day's "Business Law & tax Review"

Interest paid to non-residents is to be taxed

In the Draft Taxation Laws Amendment Bill released for comment during May it was indicated that provisions would be introduced that interest paid by residents to non-residents would, in certain circumstances, become liable to tax in SA.

Initially, those proposals would have resulted in interest paid to non-residents becoming liable to tax at the rate applicable to branches carrying on business in SA, namely, 33%. The rules were deficient in that they did not deal properly with the manner in which the tax would be collected or administered. In the response document published by the Treasury and the South African Revenue Service (SARS) on submissions received in response to the bill, it was indicated that the initial proposals would be replaced by the introduction of a comprehensive non-residents’ tax on interest.

During August the minister introduced the Taxation Laws Amendment Bill 2010 that contains enabling provisions to implement a withholding tax on interest in SA. Previously, SA levied a withholding tax on interest, which was repealed during 1988.The government has now taken the view that it is appropriate to reintroduce a withholding tax on interest paid by South African residents to non-residents. The rules governing the imposition of the withholding tax on interest are contained at clause 58 of the 2010 Taxation Laws Amendment Bill, which proposes introducing sections 37I to M into the Income Tax Act 1962.

Section 37I contains various definitions that will apply to the withholding tax rules.

"Interest" is defined in section 37I as consisting of interest as defined in section 24J(1) of the act, as well as deemed interest as contemplated in section 8E(2).

It has been proposed that a “listed debt instrument” means any debt instrument that is listed on a recognised exchange as defined in paragraph 1 of the eighth schedule to the act, which includes an exchange licensed under the Securities Services Act, 2004 or an exchange in a country other than SA.

Section 37J provides that the withholding tax on interest must be calculated at the rate of 10% of the amount of any interest received by or accrued to any foreign person that is not a controlled foreign company (CFC). "Foreign person” has, in turn, been defined as any person other than a resident as envisaged in section 1 of the act. It has been provided that any foreign person that is not a CFC that receives any interest, or to which any interest accrues, will be liable to the withholding tax on interest.

The proposals contain a number of exemptions that will apply, thereby reducing the scope of application of the withholding tax on interest.

It has been proposed at section 37K that the following amounts of interest will be exempt from the withholding tax on interest:

• Received by or accrued to any foreign person during any year of assessment:

o In respect of any government debt instrument;

o In respect of any listed debt letter of credit on similar instrument ;

o In respect of any debt owed by any bank or the Reserve Bank;

o In respect of any bill of exchange, letter of credit on similar instrument to the extent that the interest is payable in respect of the purchase price of goods imported into SA, and if an authorised dealer as envisaged under the exchange control regulations has certified on the instrument that a bill of lading or other document covering the importation of the goods has been exhibited to it;

o In respect of any other debt owed by a foreign person unless the foreign person consists of a natural person who is physically present in the country for a period exceeding 183 days in aggregate during that year, or at any time during that year, carried on business through a permanent establishment in the country; or

o If that interest is paid or payable by a headquarter company and in respect of financial assistance that is not subject to section 31, as a result of the application of section 31(4) of the act.

A foreign person will not be subject to the withholding tax on interest when the recipient is a natural person who was physically present in SA for a period exceeding 183 days or at any time carried on business through a permanent establishment in the country.

Section 37L creates the legal obligation whereby any person making payments of interest to the benefit of a foreign person must withhold an amount equal to 10% of the amount of interest due to that foreign person. Once the withholding tax on interest comes into force the amount withheld must be paid over to SARS within 14 days after the end of the month during which the amount is withheld.

When the foreign person resides in a country with which SA has concluded a double taxation agreement, and that treaty provides for the reduction in the ate of the withholding tax in interest, a declaration in the form prescribed by the Commissioner must be submitted to the person paying the interest reflecting the rate of tax applicable.

Left: Waiting. Countries that have a double-taxation agreement with SA could slow down the whole process

The Taxation Laws Amendment Bill provides that the withholding tax on interest will come into operation on January 1 2013 and will apply in respect of any interest that accrues on or after January 1. Therefore, where interest is payable by a South African company to its holding company, withholding tax on interest will be payable at the rate of 10%, unless the rate of tax is reduced by virtue of the provisions of a double-tax agreement concluded with the state in which the parent company resides.

At present, interest received by domestic trusts may be awarded to non-resident beneficiaries without such interest attracting tax in SA. Once the withholding tax on interest takes effect the trust paying interest to non-resident beneficiaries will be required to pay over the withholding tax on interest on such awards, subject to the applicability of a double-taxation agreement.

The Treasury has indicated that SA will renegotiate certain double-tax treaties to ensure that the country can levy the withholding tax on interest.

This will take time, as has been borne out by the process in moving from the secondary tax on companies to the dividends tax, which has been delayed, partly, because of the process required to give effect to changes to double taxation agreements to allow for the introduction of the dividends tax system.

It is, therefore, debatable whether SA will be ready to implement the withholding tax on interest on January1 2013, taking account of the lengthy processes required to amend the treaties concluded by SA and its various trading parties.

 Dr Beric Croome is a tax executive at ENS. This article first appeared in the October 2010 issue of the Business Day "Business Law & Tax  Review".

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Voluntary Disclosure Relief

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

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

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

Qualifying persons

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

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

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

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

Requirements for a valid voluntary disclosure

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

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

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

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

Advantages of applying for the relief

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

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

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

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

Confirmation of eligibility

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

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

Agreement to be concluded by a taxpayer and SARS

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

Withdrawal of relief

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

SARS to issue a tax assessment

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

Reporting of information

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

Exchange control

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

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

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

Conclusion

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

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

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

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

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Agreements set to tighten global tax net

During 2011, South Africa (SA) will be reviewed by its peers as part of the Global Forum on Transparency and Exchange of Information. SA has concluded many double taxation agreements with its trading partners, which typically allow for the exchange of information from SA to other countries and, similarly, for the Commissioner of the South African Revenue Service (SARS) to request information from foreign revenue authorities.

From a review of the SARS website, it is apparent that tax information exchange agreements are being negotiated or are in the process of finalisation, but have not been signed, with the following countries: Argentina, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Gibraltar, Guernsey, Isle of Man, Jersey, Liberia, Lichtenstein, Monaco, Netherlands, Antilles and San Marino.

The move to finalise such agreements with certain countries moved a step closer when, on August 4, 2010 SARS advised the Finance Standing Committee of developments regarding tax information exchange agreements to be concluded with Bahamas, Bermuda, Cayman Islands, Guernsey, Jersey and San Marino.

The purpose in concluding tax information exchange agreements is to allow for one country to request tax information from another jurisdiction to ensure compliance with another with the first country's tax laws.

Taxpayers in SA will, with effect from November 2010 until 31October 2011, be entitled to participate in the voluntary disclosure programme to regularise their tax affairs where they have failed to make full and proper disclosure to SARS. The voluntary disclosure programme does not constitute an amnesty in that the income tax or any other taxes that were not paid timeously, must always be paid.

The advantage of participating in the programme for a defaulting taxpayer is that SARS will be legally required to waive interest, additional tax and penalties that would otherwise have been leviable on the tax not previously paid by the taxpayer. Further, the programme allows for the regularisation of breaches of the exchange control regulations.

The Global Forum on Transparency and Exchange of Information is aimed at enhancing tax compliance internationally and encouraging states to conclude tax information exchange agreements, thereby encouraging taxpayers to make full and proper disclosure of their income to their respective revenue authorities. The purpose of a tax information exchange agreement is to allow for the effective exchange of information between tax authorities of various states.

Tax information exchange agreements, which are in the process of being finalised by SARS, closely follow the Organisation for Economic Co-operation and Development (OECD) Model Tax Information Exchange Agreement which ensures that bank secrecy or the absence of a domestic tax interest can no longer be used to deny a request for the exchange of information.

SARS informed the Standing Committee on Finance on August 4 that article 1 of the proposed Guernsey tax information exchange agreement will allow for the exchange of information that is foreseeably relevant to the enforcement of the domestic laws of SA and Guernsey concerning taxes covered by the agreement. The scope of the agreement covers information that is relevant to the determination, assessment, enforcement or collection of tax in respect of persons subject to those taxes, or to an investigation of tax matters, or the prosecution of criminal tax matters.

Article 7 provides that all information provided and received by the authorities, typically the revenue authorities of the countries, shall be kept confidential.

Once the agreement takes effect, SARS will be entitled to request information pertaining to South African taxpayers from Guernsey regarding income derived by such persons, as well as information pertaining to trusts.

Right: South African Revenue Services will be entitled to request information under the agreements from those countries previously considered tax havens, such as the Bahamas, Bermuda and the Cayman Islands, in order to assist it in assessing South African residents

From a review of the presentation made by SARS to the Standing Committee on Finance, it would appear that the articles contained in the agreements to be concluded with the Cayman Islands, San Marino, Bermuda, Bahamas and Jersey are very similar, if not identical, to those articles contained in the proposed agreement with Guernsey.

The OECD has encouraged countries to enter into tax information exchange agreements to enhance the degree of tax compliance internationally. Those taxpayers in SA who have removed funds from the country in contravention of the exchange control regulations and have failed to comply with their domestic tax obligations should, therefore, seriously consider taking advantage of the voluntary disclosure programme.

lt must be borne in mind that once the tax information exchange agreements are concluded by SA with the countries mentioned above, SARS will be entitled to request information under the agreements from those countries in order to assist it in assessing South African residents to tax on income which such persons may have derived off-shore, or to deal with funds which have escaped the South African tax net and are now located abroad.

From a review of the Organisation for Economic Co-operation and Development (OECD) website, it is apparent that a significant number of countries have already concluded agreements with other countries in order to counter international tax evasion. The OECD has pointed out that those countries that may previously have been treated as tax havens have made commitments to the OECD to implement transparency and effective exchange of information agreements for tax purposes and, as a result, 38 states are no longer listed on the list of uncooperative tax havens.

The OECD has indicated that all jurisdictions surveyed by the Global Forum on Transparency and Exchange of Information have committed to the internationally agreed tax standard. The internationally agreed tax standard was developed by the OECD in cooperation with non-OECD countries and was endorsed by the G20 finance ministers at their meeting in Berlin in 2004 and by the UN's Committee of Experts on International Co-operation in Tax Matters in 2008.

Taxpayers need to be aware, therefore, that the world has become a far smaller place as a result of the OECD initiative to reduce evasion in the international tax arena and those taxpayers in SA who have failed to comply with their obligations should take advantage of the voluntary disclosure programme, failing which SARS will seek to recover tax on undisclosed income and, more than likely, institute criminal prosecutions.

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

Last Resort for SARS to effect collection of dues

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Tricky tax aspects of companies' World Cup gifts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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