SARS can recover taxes from offshore assets

Taxpayers need to be aware that the South African Revenue Service (SARS) can recover South African taxes from assets located in another country where SA has concluded a double taxation agreement, which contains an article dealing with mutual assistance in the recovery of tax debts.

Similarly, SARS would be obliged to assist foreign revenue authorities in the collection of tax debts due to those countries where the double taxation agreement with the country concerned allows that.

Where the taxpayer does not have assets located within SA, the question arises as to how SARS may seek to recover South African tax out of assets owned by the taxpayer, but which are located in another country.

There is a principle of international law that the judicial authority of one country will not enforce the revenue laws of another country.  This rule has become known as “The Revenue Rule” and in COT v McFarland, 27 SATC 15, it was decided that the courts in South Africa will not enforce any claim by a foreign state for taxes due and payable in another country. 

The Revenue Rule is founded on the principle that the imposition of taxation constitutes the exercise of sovereignty by a state and the enforcement thereof in another state would constitute an infringement of the sovereignty rights of that state.  Thus, in the absence of a custom or convention agreeing to reciprocal assistance in the recovery of taxation, SARS cannot recover taxes due by a taxpayer from assets located in a foreign country. 

In terms of section 108 of the Act, parliament may enter into any agreement with the government of any other country, whereby arrangements are made with such government to prevent or mitigate the levying of taxes both in SA and the foreign state or to render reciprocal assistance in the administration of and the collection of taxes under the laws of SA or such other foreign country. 

Section 93 of the Act sets out the procedure that SARS must follow where a foreign government requires assistance from SARS to assist with the collection of taxes due to a foreign revenue authority in respect of assets located in South Africa. 

From a review of the double taxation agreements concluded by South Africa with foreign countries, it appears that African countries lead the way in concluding agreements containing provisions allowing for the assistance in the collection of taxes.

The double taxation agreements concluded with our neighbouring states, namely, Botswana, Namibia, Swaziland, Lesotho and Mozambique, all contain articles providing for assistance in the collection of taxes.  Similar provisions are found in the double taxation agreements concluded with Uganda, Tanzania, Ghana and Nigeria.

Agreements concluded with Australia, the Netherlands and more recently the UK allow for the reciprocal assistance in the collection of taxes.  Article 25A was inserted into the double taxation agreement concluded between SA and the UK by way of Government Notice 52 on 2 February 2012.  

Article 25A of the agreement concluded between SA and the UK requires that the two states assist each other in the collection of revenue claims, and that the competent authorities of the respective states will settle the manner in which the article will be applied.  In the case of SA, the competent authority is the SARS and in the UK it is Her Majesty’s Revenue and Customs (HMRC).  

The article provides that any revenue claim of the one state, which is enforceable in accordance with the laws of that country and is owed by a person who cannot, under the laws of that country, prevent its collection, that revenue claim shall, at the request of the competent authority of that country, be accepted for purposes of collection by the competent authority of the other state. 

It is furthermore provided that the revenue claim shall be collected by the other country in accordance with the provisions of its own laws applicable to the enforcement and collection of its own taxes as if the tax debt where a debt of that state. 

A double taxation agreement which contains an article
dealing with mutual assistance in the recovery of tax
debts must be concluded.

The agreement also provides that where a tax claim of one of the country’s in respect of which that country, under domestic law, may take measures of conservancy to ensure the collection of the tax in issue, that country shall on the request of the competent authority of that state, be accepted for purposes of taking measures of conservancy by the competent authority of the other country. 

In addition, the agreement provides that legal proceedings in respect of the existence, validity of the amount of the revenue claim of one country shall not be brought before the courts or administrative bodies of the other country.  Thus, a taxpayer who is indebted to SARS cannot challenge the validity thereof in the English Courts.

Paragraph 8 of Article 25A of the agreement provides that the provisions of the article cannot be construed as imposing on the United Kingdom, the obligation:

* to carry out administrative measures which conflict with the laws and administrative practice of the United Kingdom;

*to carry out measures which would be contrary to public policy;

*to provide assistance if South Africa has not pursued all reasonable measures of collection or conservancy available under its laws or administrative practice;

*to provide assistance in those cases where the administrative burden for the United Kingdom is disproportionate to the benefit to be derived by South Africa;

*to provide assistance if the United Kingdom considers that the taxes with respect of which the assistance is requested are imposed contrary to generally accepted taxation principles. 

Article 25A of the double taxation agreement concluded by South Africa and United Kingdom was considered by the High Court of Justice, Chancery Division in the United Kingdom in the case of Commissioners for Her Majesty’s Revenue and Customs and Another v  Ben Nevis (Holdings) Ltd and others, [2012] EWHC 1807 (Ch).

SARS requested assistance from HMRC to assist in collecting taxes due by Ben Nevis to SARS in the amount of R2.6 billion.  Ben Nevis is a company associated with Mr David King who has featured in the press over a number of years regarding taxes payable in SA.  Article 25A was inserted into the 2002 agreement concluded by SA and the UK which originally came into force on 17 December 2002.

Ben Nevis argued that the provisions of Article 25 A can only apply to South African taxes for tax years ending on or after 1 January 2003.  It was therefore argued by Ben Nevis that Article 25A could not by utilised by SARS in seeking to recover taxes from assets owned by it in the UK and thus the attempt to recover the taxes due by Ben Nevis to SARS violates the Revenue Rule.

Pelling J referred to Article 27 of the OECD Model Tax Convention on Income and Capital and the Commentary thereon which provides that:

“Nothing in the convention prevents the application of the provision to revenue claims that arise before the convention enters into force, as long as assistance with respect to these claims is provided after the treaty has entered into force and the provisions of the article have become effective.”

The court therefore reached the conclusion that, even though the agreement came into force on 17 December 2002, the provisions dealing with the assistance in the recovery of tax debts applied in respect of taxes which may have arisen prior to that date.  An important factor was that the mutual assistance was only provided after article 25A took effect.

Pelling J reached the conclusion that there was no objectionable retrospective element that arises regarding Article 25A and thus decided that HMRC was authorised to assist SARS in recovering taxes due to SARS in respect of assets owned by Ben Nevis in the United Kingdom. 

The fact that the UK double taxation agreement was only amended recently does not preclude the tax authorities from seeking assistance in respect of tax debts which may have arisen prior to the insertion of Article 25A into the agreement in question. 

·     Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs Inc. An abridged version of this article first appeared in Business Day's Business Law and Tax Review September2012. Free image from ClipArt

Harmonising the administration of all taxes

The Tax Administration Bill was promulgated last month, but aside from two issues that have taken effect already, none of the provisions have taken effect.

The Tax Administration Bill, No 11 of 2011, was promulgated on July 4. The Act shall come into operation on a date to be determined by the president.  It must be pointed out that the date on which the act will come into operation has not yet been proclaimed in the Gazette either.  Section 272(2) of the act provides that the president may determine different dates on which different provisions of the legislation come into operation. 

Paragraph 78 of schedule 1 to the Tax Administration Act is deemed to have come into operation on January 1, 2011 and applies in respect of premiums incurred on or after that date. 

This amendment relates to premiums paid by an employer for an employee regarding the loss of income arising as a result of illness, injury or disability and has the result that such premiums may be deducted from remuneration paid by the employer in determining the amount of PAYE or Employees’ Tax that is payable.

Furthermore, paragraph 184 of schedule 1 is deemed to have come into operation on March 1, 2011 and applies in respect of a mineral resource transferred on or after March 1, 2010.  That paragraph relates to section 4 of the Mineral and Petroleum Resources Royalty (Administration) Act, 2008.

Legislation creates a framework
to facilitate greater access
by SARS to third party data.

In addition, certain amendments made to section 66 of the Income Tax Act, 1962, which section deals with a notice by the Commissioner requiring returns for assessment of taxes under the act, and the manner in which those returns are to be furnished, came into operation on April 1, 2012, that is, the date on which Dividends Tax took effect.

Except for the above, none of the specific provisions contained in the Tax Administration Act have yet taken effect.  The South African Revenue Service (SARS) issued a media release on July 5, indicating that SARS’ preparations for the implementation of the Tax Administration Act are at an advanced stage, and that it is anticipated that the act will come into operation within the next three months.

The Tax Administration Act provides that the Tax Ombud must be appointed within a year from the date on which the act takes effect.  It must be noted that the Minister of Finance indicated in his 2012 budget speech that the Tax Ombud will be appointed during the course of 2012.

The purpose of enacting the Tax Administration Act is to harmonise the administrative provisions of all taxes, other than customs and excise, in South Africa. 

The legislation creates a framework to facilitate greater access by SARS to third party data, to enhance SARS’ initiatives regarding the pre-population of individual tax returns.

Furthermore, the act creates clarity on SARS’ powers of gathering information, and allows for SARS to visit business premises without prior notice to establish if the premises are being used for purposes of conducting a business, and, more importantly, to establish whether that business is, in fact, registered for tax purposes. 

The legislation allows for SARS to conduct a search and seizure operation without a warrant where it is anticipated that the time taken to secure a warrant would result in the destruction of the documents required by SARS. 

On the one hand, SARS must administer the tax laws of South Africa and is entitled to obtain the information to meet its mandate.  On the other hand, taxpayers are entitled to a right to privacy, as enshrined in the Constitution of the Republic of South Africa. 

There is, therefore, tension between the powers of SARS and the right of taxpayers to privacy.  The power to conduct search and seizure operations without a warrant is controversial, and it is hoped that this power will only be used in those instances where it is warranted, and that it is not abused.

The legislation contains requirements and time frames for the issue of tax clearance certificates, which was not previously contained in the Income Tax Act.

Furthermore, SARS will, once the Tax Administration Act takes effect, be compelled to advise taxpayers as to the status of audits being undertaken on their affairs, which was previously not specifically required. 

The legislation contains a permanent voluntary disclosure program similar to that which commenced on November 1, 2010 and ended on October 31, 2011. 

It appears that a number of taxpayers regret not having taken advantage of the voluntary disclosure program, and are waiting for the date on which the permanent voluntary disclosure program will take effect.  Based on the media release published by SARS, it is anticipated that the new voluntary disclosure program should commence within three months.

On July 6, the Treasury released various draft amendment bills. Included in those, was the draft Taxation Administration Amendment Bill 2012, which already seeks to amend certain of the provisions contained in the Tax Administration Act. 

Some of those amendments are refining the definitions contained in that legislation and clarify certain provisions contained in the legislation.  The draft bill seeks to amend certain of the provisions regulating the issue of tax clearance certificates and provides that SARS may withdraw a tax clearance certificate with effect from the date on which the taxpayer no longer complies with their obligations under the fiscal statutes administered by the Commissioner.  Previously, a tax clearance certificate could only be withdrawn from the date of issue thereof, where the certificate was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts.

In addition, the draft bill seeks to commence the process in regulating tax practitioners in South Africa.  The explanatory memorandum on the Taxation Administration Amendment Bill indicates that it is proposed that the regulation of tax practitioners be divided into two distinct phases. 

The first phase will require all tax practitioners to register with a recognised controlling body. 

The second phase will entail the establishment of an independent regulatory board for tax practitioners, and will only commence after the first phase has run its course. 

SARS will review the minimum qualifications and experience requirements, continuing professional education requirements, codes of ethics and conduct and disciplinary procedures of any professional association seeking recognition by SARS.

Furthermore, SARS will ensure that members of the body concerned are required to have tax knowledge that is kept up to date and that the professional body has an effective disciplinary mechanism to discipline members who contravene the codes of ethics and conduct. 

The bill proposes recognising statutory regulators automatically, whereas professional bodies would need to be recognised by SARS so long as those professional bodies are approved in terms of section 30B of the Income Tax Act for purposes of section 10(1)(d)(iv) of the act. 

The bill proposes inserting section 241(2) into the Tax Administration Act, whereby a senior SARS official may lodge a complaint with a recognised controlling body if a registered tax practitioner has, in the opinion of the Commissioner unreasonably delayed the finalisation of any matter before SARS, been grossly negligent with regard to any work performed as a registered tax practitioner, or has committed any one of the other defaults listed in the draft Bill. 

Therefore, SARS wishes to be placed in a position that it can initiate disciplinary proceedings against a registered tax practitioner. This is necessary in order to protect the public where a registered tax practitioner fails to adhere to accepted levels of service that would be expected from a professional person. 

However, a question arises as to what taxpayers can do where a SARS official fails to finalise matters within a reasonable time, or acts negligently and causes undue costs to be incurred by the taxpayer.  The taxpayer would, probably, be entitled to lodge a complaint with the Tax Ombud, once that office has been created. It would be preferable if the legislation dealt with the levels of conduct taxpayers should be able to expect from SARS officials, and what recourse is available where such standards are not complied with, similar to those which SARS is seeking from registered tax practitioners.

The Tax Administration Act clarifies the legislation dealing with tax administration, by removing anomalies which existed in the various pieces of fiscal legislation.  

Thus, it is important that taxpayers, their advisors and the SARS undertake a study of the provisions of the Tax Administration Act, so that they become familiar therewith, as those provisions will affect the manner in which tax is administered in the future.

DR BERIC CROOME is a Tax Executive at Edward Nathan Sonnenbergs Inc. An edited version of this article first appeared in Business Day, Business Law & Tax Review, August 2012. Image purchased from iStock

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