www.TaxRiskManagement.com

Based in

United States – West Palm Beach

Nigeria – Lagos, Port-Harcourt, Abuja

Mauritius – Port Louis

South Africa – Johannesburg, Cape Town, Port Elizabeth

Recent Cases for Clients

Uganda – USD$54m - TP

Malawi – USD$43m - TP

South Africa – USD$80m – TP

South Africa – USD$8m – Income Tax TP related

Zambia – USD$20m – Export goods & VAT

Zimbabwe – USD$20m – TP

South Africa – USD$5m – assessed loss and trade

Info gather before/after TAA

Income Tax Act (sec 74A – D) & VAT Act (sec 57A – D)

o Ordinary information request

o Physical inspection

o Formal inquiry

o Search and seizure

TAA (Chapter 5: information gathering)

PART A (sec 40 – 44): Audit selection (“random”), field audit/criminal investigation (SSO), keeping taxpayer informed, referral for criminal investigation and conduct of criminal investigation

PART Bo Sec 45:Inspection (replaces old s74B/57B)o Sec 46: Request for relevant material (replaces

old s74A/57A o Sec 47: Production of relevant material in person

(“interview”)o Sec 48 & 49: Field audit/criminal investigation and

assistance

PART C (sec 50 – 58): Inquiries (replaces old s74C/57C):

PART D (sec 59 – 66): Search and seizure (replaces old s74D/57D)

Impact of new info gathering powers

TAA international principles: energy not to be wasted on disputes over revenue authority entitlement to info -> ensure all taxpayers pay correct tax “based on timely available information”

TAA Guide (p23): eliminate “protracted debates” re entitlement to info

But: Taxpayer rights to counterbalance extended SARS powers

Nevertheless: Expect more invasive info-gathering going forward:

SARS Strategic Plan 2012/13 – 16/17: "In order to be cost-effective in bringing about greater compliance, SARS focuses on high risk areas with minimal intervention in low risk areas. In order to bring about precision in this focus, the emphasis is on being data-rich and on being able to model compliance effectively." (at p 25) (emphasis added)

International Tax Review (March 2014)

“73% of CFOs are seeing a rise in the frequency of tax audits from governments across the globe”

Interpretation of info gathering powers

Purposive approach to TAA? Eg sec 2 (“Purpose of Act”) and 209 (“Purpose of Chapter”)

Prof George Goldswain

Purposive definitely applies to fiscal legislation -> incorporates principles and values underpinning the Constitution ((2014) 28 Tax Planning 25))

AM Moolla Group v CSARS (TPD 2005)

“Being a creature of statute the first respondent [CSARS] must perform his task as laid down in the Act and not by will.”

First National Bank v CSARS (CC 2002):

“…first necessary to emphasize that even fiscal statutory provisions, no matter how indispensable … for the economic well-being of the country … are not immune to the discipline of the Constitution and must conform to its normative standards.”

Natal Joint Municipal Pension Fund (SCA 2012)

Wallis JA details proper approach to interpretation: “An interpretation will not be given that leads to impractical, unbusinesslike or oppressive consequences or that will stultify broader operation of legislation…”

TAA Guide (p10): PAJA affectsTAA

TAA section 46(1)

For purposes of the administration of a Tax Act

Concept is defined in sec 3(2)

Lists nine potential “administration” functions

Eg sec 3(2)(a): obtain full information iro

o “liability of a person for tax”o “a taxable event” (refer own definition)o “obligation of a person to comply with tax Act”

 

Sec 3(2) is very wide-ranging BUT: 

Rule of law applies: SARS can only use powers for purpose, and in manner, that such powers were conferred (Pharmaceutical Manufacturers case (CC 2000))

SARS must identify particular administration function at time sec 46 info request is made -> insufficient to generally state that SARS is engaged in administration of a tax Act

Info-gathering powers = invasive: SARS must on reasonable grounds believe that identified administration function would be served by information requested

Possible ulterior motive -> Refer Canadian RBC Life case; or Woodlands Dairy case [2010]JOL 26108(SCA) acting beyond jurisdiction

Defn. “Relevant Material”

Defined (sec 1): “any information, document or thing that is foreseeably relevant for the administration of a tax Act as referred to in section 3”

SARS view re “foreseeably relevant” -> “first provide, argue later”?

“Relevant means that any two facts to which it is applied are so related to each other that according to common course of events, one, either taken by itself, or in connection with other facts, proves or renders probable the past, present or future existence or non-existence of the other.” (R v Katz AD 1946)

Relevance -> needs strong nexus between information sought and the particular administration function pursued (sec 3(2)(a) – (i))

“Foreseeably relevant” -> to be determined objectively -> would reasonable person in SARS position regard info as sufficiently related to particular administration function? (Compare Cape Metropolitan Council case iro delictual foreseeability)

Relevance = fact-specific, depends on case, requires common sense and logic to be applied to facts / circumstances of that info request (Van den Bergh case citing R v Matthews) SEE NOTE

How to contain info requestsSee DRAFT engagement letter:

- Sec 46(6) requirement: “Relevant material…must be referred to with reasonable specificity.”

- See Woodlands Dairy case [2010]JOL 26108(SCA) acting beyond jurisdiction

- Argument of “Administrative Conduct” vs. “Principle of Legality”

Relevant material that SARS “Requires”

Prescription?Should principle of finality apply, i.e. can SARS make a sec 46 information post prescription period?

TAA prescription periods:

SARS original assessment -> 3 years (sec 99(a))

Taxpayer self-assess (VAT & PAYE) -> 5 years (sec 99 (a) & (b))

Principles from pre-TAA case law (Natal Estates (“NE”) and Transvaal Suikerkorporasie (“TSK”)):

NE: Onus on SARS to its satisfaction that misrepresentation, non-disclosure or fraud was present; “substantive and far-reaching determination” and must be communicated clearly to taxpayer (e.g. fraud = “grave and ugly imputation”)

NE: Taxpayer to be informed plainly and should “…not have to grope inferentially… for the particular form of dereliction of duty”

TSK: Where unclear about tax return, SARS officials should make necessary inquiries (test: should act like “reasonable auditor”)

TSK: SARS failure to ask necessary questions / do analysis cannot later be equated to taxpayer misrepresentation / non-disclosure / fraud

Be careful to merely accede to SARS sec 46 info request where year of assessment is prescribed

SARS not must first overcome finality hurdle

Strong indications that finality should not be forfeited lightly TAA sec 99 = objective test vs CSARS satisfaction (subjective) (P Dachs article in T’payer)

Refusal to provide informationTAA sec 234(h): non-compliance with SARS info gathering request = criminal offence -> fine or imprisonment not exceeding 2 years

Just cause to refuse SARS sec 46 info request -> consider eg:

Right against self-incrimination Generally Constitution sec 35(3)(j) and Bernstein v Bester case However, see sec TAA sec 57 (Inquiry), 72 (tax return) “overrule” iro taxpayer’s obligations But, where appropriate, third party could use right against self-incrimination  Privilege Claimable wrt info-gathering even under taxation statute (refer Heiman, Maasdorp & Barker case 1968) SA law recognises two forms: Legal professional privilege (client & legal adviser, whether independent or in-house) (Van den Heever case 1999) Litigation privilege (communications iro pending / contemplated litigation) (Arcelormittal case 2013) Privilege belongs to person seeking legal advice -> 3rd party cannot waive same (Arcelormittal case) Legal opinions provided to, procured obo, eg banking client wrt accounting and tax treatment = usually subject to legal

professional privilege or litigation privilege NB! WCD judgment in March 2014 (wrt attorney invoices)

Banker’s confidentiality Banking client’s right to confidentiality (FirstRand Bank case 2008) & Constitutional privacy (Bernstein vs Bester 1996) Sec 46 can impact the above & have pecuniary impact on 3rd party info providers -> thus, interpret sec 46 restrictively

(Dadoo case 1920 AD) and contra fiscum (NST Ferrochrome v CSARS case 2000)

14

INTERNATIONAL COMPARISON: CANADA

Bank of Commerce case (1962)

Debates re obligation of banks to provide customer info started more than 60 years ago!

Principle: there must be a “genuine and serious inquiry” into tax affairs of unnamed taxpayers

Greater Montreal Real Estate Board case

group of real estate agents (unnamed) were ascertainable, despite there being more than 2000 persons in group

eBay Canada case (2007/08)

CRA sought names of eBay “PowerSellers”, i.e. essentially accounts with Canadian addresses that had greatest number of sales on EBay -> courts gave very wide scope to CRA’s info-gathering powers

Canadian libel case (Hennessy v Wright 2004)

does indicate what a “fishing expedition” would be: “…the plaintiff wishes to maintain his questions, and to insist upon answers to them, in order that he may find out something of which he knows nothing now, which might enable him to make a case of which he has no knowledge at present.”

“Fishing expedition”

by revenue authority thus presupposes that there is some degree of non-compliance already taking place

RBC Life case (2013):

Canadian Federal Court of Appeals scathing of info-gathering attempts where there was an ulterior motive -> RBC obtained evidence indicating Minister wanted to “send a message to the (insurance) industry” and intended to “chill” the industry through an “audit blitz”

Canadian info-gathering provisions = not identical, but similar in concept and intent

15

INTERNATIONAL COMPARISON: AUSTRALIA & NEW ZEALAND

Deloitte Touche case (1998)

Deals with Australian sec 264 vs legal privilege and vs right against self-incrimination

Considered whether ATO complied with own published guidelines re info-gathering? (Taxpayer argued there was legitimate expectation for ATO to follow own guidelines)

ANZ Banking Group case (2012)

ANZ argued 1) banker’s confidentiality; 2) no info-gathering possible extra-territorially; and 3) notices were “uncertain”

Court indicated that sec 264 1) conferred “very broad investigative powers”; 2) abrogates privilege against self-incrimination - does not abrogate claim for legal professional privilege; 3) overrides any contractual obligation of confidentiality; 4) info-gathering not restricted to Australian taxpayers; 5) notice must be sufficiently clear to enable addressee to determine info / documents to be provided (test: “whether reasonable man is able to comply?”)

New Zealand Stock Exchange case (1991)

Request for unnamed taxpayers who traded shares

NZSE argued 1) privacy and 2) that request imposed “onerous burden of research and report” i.e. too expensive to obey

Court: though sharebrokers / banks “…will resent time and expense incurred” they nevertheless should comply

Series of Binetter cases (2012)

dismissed all six grounds relied on by taxpayer, including self-incrimination, legal professional privilege, vague and confusing notice, deadline was “manifestly unreasonable” and info-gathering was for improper purpose

Australian & NZ info-gathering regimes = not identical to SA, but offer valuable insights e.g:

Bottom-line: Australian and NZ courts appear quite sympathetic to revenue authority info-gathering powers?

GG 11 July 2014 – s103 TAA Rules

PART A – General provisions

PART B – Reasons for assessment, objection, appeal, test cases

PART C – Alternate Dispute Resolution

PART D – Procedures of tax board

PART E – Procedures of tax court

PART F – Applications in the Tax Court on notice of motion

PART G – Transitional arrangements

PART A: Definitions & General

“assessment” means and includes a decision s104(2) TAA

“assessment” defined in TAA means “the determination of the amount of a tax liabiity or refund” – includes s98 of TAA?

“decision” means one subject to obj & appeal & decisions re: objections and appeals

“grounds of assessment” – see Rules

Time periods may be extended by agreement between parties, or by Application to Tax Court – Rule 52(1)(a)

Index & pagination of documents

PART B: Reasons, assessments, obj., appeal, test cases

Reasons for assessment

Objection against assessment

Request for substantiating documents after request

Decision on objection

Appeal against assessment – tax board/tax court

Test cases

PART C: ADR

Notice of ADR

Rights reserved

Appointment of facilitator – specialized knowledge?

Proceedings before facilitator

Confidentiality of proceedings

Resolution of dispute by agreement/settlement

PART D: Tax Board proceedings

Simplified procedures

Amount of tax excluding penalties and interest not exceeding R200,000

PART E: Procedures of Tax Court

STATEMENT of Grounds of Assessment – SARS

STATEMENT of Grounds of Appeal

REPLY by SARS to Grounds of Appeal

Issues in appeal – can be amended by agreement

Discovery of documents – relevant? Consider relevance tests

Notice of expert witnesses

Pre-Trial conference

Set down, dossier, subpoena of witnesses

Procedures in court & evidence

PART F: Applications

Motion proceedings

Time extensions – good cause shown

SARS fails to provide reasons

Validate an objection

By SARS to designate a test case & test case issues

ADR agreement/settlement made order of court

Subpoena validation & other procedural issues

PART G: Transitional arrangements

Application of rules to prior or continuing action

Application of new procedures