By Louis Botha and Nandipha Mzizi

It seldom happens that the South African Revenue Service (SARS) is compelled to provide documents to a taxpayer, while SARS is conducting an audit. In Carte Blanche Marketing CC and Others v Commissioner for the South African Revenue Service (26244/2015) [2017] ZAGPPHC 253 (26 May 2017), the Gauteng Division of the High Court, Pretoria had to decide whether SARS should be compelled to produce certain documents requested by the applicants (Taxpayers) in the context of a review application brought by the Taxpayers.

The main proceedings in this matter involve a review application which the Taxpayers brought against SARS seeking to set aside the “decision” of SARS to audit them in terms of s40 of the Tax Administration Act, No 28 of 2011 (TAA).

Facts

In August 2014, SARS gave the Taxpayers a notice of its intention to audit them, in terms of s40 of the TAA, based on a risk assessment. This is one of the bases on which an audit can be instigated in terms of s40. In the same notice, SARS requested a range of documents in terms of s46 of the TAA. The Taxpayers refused to hand over the said documents but instead sought reasons for the audit. They alleged that the decision to audit was as a result of SARS’s improper motives.

In its response, SARS said that it had noted discrepancies between the Taxpayers’ turnovers as obtained from the bank statements and their declared gross income. SARS had obtained the bank statements in terms of s46(3) of the TAA. The Taxpayers, dissatisfied with the reasons, instituted the main review application in the High Court, to set aside SARS’s decision to instigate the audit. SARS accordingly filed a record of proceedings in terms of Rule 53(1) of the Uniform Rules of Court (HC Rules), which it asserted it did for “pragmatic reasons”. The Taxpayers were again not satisfied that the record contained all documents and sought access to further documents by bringing an interlocutory application to compel SARS to produce additional documents. SARS opposed the application.

The court had to decide whether the Taxpayers’ interlocutory application to compel discovery should be granted.

Legal Framework

Section 40 of the TAA states that “SARS may select a person for inspection, verification or audit on the basis of any considerations relevant for the proper administration of a Tax Act, including on a random or risk assessment basis”. Furthermore, s46 of the TAA states that “SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer…require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires”.

On the other hand, Rule 53(1) of the HC Rules affords parties the right to review decisions of officers performing administrative functions. Conduct can be reviewed in terms of the Promotion of Administrative Justice Act, No 3 of 2000 (PAJA) or if it was exercised by a public power and had to be rational.

Judgment

As stated above, the issue the High Court had to decide was whether the Taxpayers’ application to compel discovery should be granted. However, the decision was complicated by the fact that the High Court had to consider whether the issues to be decided in the main review application, should also be taken into account to decide whether to grant the interlocutory application.

In its argument, SARS referred to reported cases where it was decided that a court in an interlocutory application could not avoid deciding a purely legal issue. The court held that such cases can only be decided on a case by case basis. It held that the court hearing the interlocutory application must be reasonably certain that a decision on the legal point will put an end to the case, or will dispose of a substantial part of the case. If there is a risk that the early decision of a legal point could complicate the further and full ventilation of the matter, the court should decline the invitation to decide such a legal issue.

The High Court stated that when one has to decide whether conduct is reviewable in principle, it is advisable to err on the side of caution, especially in the light of Constitutional Court decisions which have held that all public power is reviewable on some or other basis. The court held that the threshold to initiate an audit in terms of s40 of the TAA is extremely low and accepted that the instances where the court will interfere are rare. The High Court did, however, state that it would be unlawful for SARS to use the provisions of the TAA for an ulterior purpose. Any decision to audit must therefore be taken for purposes of administration of a tax Act.

SARS further argued that the Taxpayers’ litigation was vexatious and constituted an abuse of process and that if litigants were allowed to take decisions made in terms of s40 of the TAA under review, it would bring the entire tax administration system to a halt. The court rejected this argument and held that the issue was whether the parties used the existing court rules sensibly and efficiently. The court also commented that SARS could not select at what stage it wanted to object to litigation.

In the current matter, SARS argued that as the audit did not have any direct external legal effect, which is a requirement for conduct to constitute administrative action in terms of PAJA, the decision to audit was not reviewable. The court took the view that the main application constituted a review in terms of PAJA and also raised general grounds of rationality review, as the powers under s40 and s46 of the TAA constituted exercises of public power. The court accepted that there are strong arguments to be made against an assertion that the audit constituted administrative action, as the audit is merely provisional and only once the additional assessment is raised then it constitutes administrative action. The court, however, noted that the decisions and processes in tax administration are related to a decision that will ultimately constitute administrative action and as such should not be shielded from judicial scrutiny at the earliest stage possible. Court interference at this stage is very rare and occurs in exceptional cases, it said.

On whether the actions had the necessary “direct legal effect”, the court referred to how the word “audit” is not defined in the TAA, but that an audit can be unobstructive or invasive, depending on the nature thereof. Therefore, the court suggested that an audit will not always constitute administrative action. The court should also be careful in deciding matters before they are ripe for review especially since the notice sent by SARS is the beginning stage of its statutory powers. On the other hand, malice by SARS must be dealt with. It noted that High Court review proceedings could also seriously affect the efficacy of SARS’s work and that some taxpayers have, on occasion, seriously abused court processes.

Interestingly, the court opined that the real complications arising from this matter were due to the issue of jurisdiction of tax courts. The TAA deals with dispute resolution in tax administration extensively and it is therefore unclear why the High Court retains some residual review jurisdiction, but agreed that the legislature appears to have expressly retained High Court jurisdiction over tax cases in limited instances. It considered the provisions of s105 of the TAA and the amendments thereto in 2015, which suggest that the High Court retains residual review jurisdiction. However, it went on to state that in its opinion, there is no reason why an ordinary Tax Court should not be competent to grant urgent interim relief as other courts with similar status to that of a High Court do so, such as labour courts and the land claims courts.

The court concluded that these matters are too complex to be adjudicated in an interlocutory matter and therefore declined to decide the legal issues in the main review application. It ordered SARS to discover the documents requested by the Taxpayers in its discovery notice, in terms of Rule 35(3) of the HC Rules. It also ordered SARS to pay the Taxpayers’ costs of the application to compel.

Comment

Although the comments by the court regarding the reviewability of SARS’s decisions in terms of s40 and s46 of the TAA are not binding and merely constituted obiter dictum, its comments do suggest that an audit could constitute administrative action under certain circumstances. It will therefore be interesting to see what the High Court decides in the main application. At the same time, the judgment serves as an indication that where taxpayers feel that SARS is overstepping the bounds of its powers, taxpayers would be well entitled to approach the courts to review such conduct and to enforce their procedural rights, including the right to request discovery.

The High Court’s statements regarding the jurisdiction of the High Court and the Tax Court are also interesting to note. It remains to be seen, however, whether its suggestion that the Tax Court can consider review applications regarding tax matters in terms of s105 of the TAA, is correct. In Wingate-Pearse v Commissioner of the South African Revenue Service 2017 (1) SA 542 (SCA), the Supreme Court of Appeal (SCA) considered what kind of matters could be heard by the Tax Court. The case concerned a taxpayer wanting to appeal the Tax Court’s decision in an interlocutory application. We discussed this case in our Tax and Exchange Control Alert of 7 October 2016.

Section 117 of the TAA defines the jurisdiction of the Tax Court, and s117(3) states that the Tax Court’s jurisdiction includes hearing any interlocutory application or any application in a procedural matter relating to a dispute under Chapter 9 of the TAA, which is the chapter dealing with disputes and appeals. Without going into the details of that judgment, the court suggested in Wingate-Pearse that as the Tax Court is a creature of statute, its jurisdiction is limited to what is provided by the TAA and the Tax Court Rules. The SCA did not consider whether s105 of the TAA conferred jurisdiction on the Tax Court to consider review applications, as suggested by the High Court in the Carte Blanche case discussed in this article. Therefore this issue remains undecided.

By Jerome Brink, Cliffe Dekker Hofmeyr

On 10 February 2017, SARS published Binding General Ruling 40 (BGR 40), in addition to Binding General Ruling (BGR 41) that was referred to in the article above (Rulings).

BGR 40 dealt with the manner in which non-executive directors (NEDs) should account for tax on their earnings as directors from an employees’ tax (PAYE) perspective, while BGR 41 dealt with the VAT consequences of NEDs’ earnings. While the Rulings provided much needed clarity on various interpretational issues, there were still one or two practical issues, which were not covered. In particular, the Rulings did not provide clear guidance on the manner in which companies and NEDs should have dealt with the taxation of their earnings prior to 1 June 2017. SARS therefore subsequently issued a separate media release on 17 February 2017 setting out further practical guidance.

The 17 February 2017 media release provided, among other things, as follows:

Previously NEDs were subject to employees’ tax because the directors’ fees received for services rendered were considered remuneration. However, due to amendments made in 2007 to the exclusions to the definition of “remuneration” in the Fourth Schedule to the Income Tax Act, No 58 of 1962, there was uncertainty as to whether the amounts payable to a NED were subject to the deduction of PAYE.

After consultation, review and application of the law it has been confirmed that a NED is regarded as an “independent contractor” and any director’s fees paid or payable to a NED for services rendered in that capacity are not regarded as remuneration.

NEDs receiving directors’ fees exceeding the compulsory registration threshold are required to register as VAT vendors from 1 June 2017. However, NEDs will not be required to account for VAT in respect of directors’ fees received prior to this date, provided such NED was subject to PAYE.

Notwithstanding the further guidance provided by SARS in its subsequent media release, published on 17 February 2017, there was still some uncertainty in respect of the position prior to 1 June 2017, particularly where a NED received directors’ fees exceeding the compulsory registration threshold and failed to account for VAT in addition to the fact that the company paying the NED also did not deduct PAYE.

SARS thus issued the updated BGR 41 referred to in the article above and issued a media release on 5 May 2017 in this regard. As per the SARS media release, the updated BGR 41 clarifies that:

• A NED who is liable to register for VAT but has not done so yet, must register and account for VAT with effect from 1 June 2017 unless an earlier date of liability is chosen.
• A NED who was actually registered for VAT before 1 June 2017 for other activities, but did not charge VAT on the director’s fees must charge VAT with effect from 1 June 2017 unless that person chooses to account for VAT on those fees from an earlier date.

The media release further importantly confirms that the above is applicable regardless of whether the fees earned by the NED were subject to PAYE or not. Therefore, whether the fees were subject to PAYE prior to 1 June 2017 does not affect the VAT liability as the obligation to charge VAT only arises from 1 June 2017 henceforth, notwithstanding that persons may choose to charge VAT of their own volition should they wish to do so.

In addition, the revised BGR 41 provides that any NED that carries on an enterprise in the Republic of South Africa and has exceeded the R1 million compulsory VAT registration threshold that has not registered for VAT as at the date of BGR 41 must apply for registration by no later than 1 June 2017. The revised Ruling 41 therefore provides guidance in respect of the provisions set out in s23(4)(b) of the Value-Added Tax Act, No 89 of 1991 (VAT Act) which states as follows:

Where any person has not applied for registration in terms of Chapter 3 of the Tax Administration Act and the Commissioner is satisfied that that person is liable to be registered in terms of this Act, that person shall be a vendor for the purposes of this Act with effect from the date on which that person first became liable to be registered in terms of this Act: Provided that the Commissioner may, having regard to the circumstances of the case, determine that person to be a vendor from such later date as the Commissioner may consider equitable.

Therefore, notwithstanding the fact that a NED may be considered a vendor for purposes of the VAT Act with effect from the date on which that person first became liable to be registered (i.e. a date prior to 1 June 2017), the effective date of such registration (liability date) as determined by the Commissioner of SARS under s23(4)(b) of the VAT Act, must be no later than 1 June 2017.

The further publications, media releases and revised BGR 41 issued by SARS hopefully provide more clarity.

By Magda Snyckers

On 7 June 2017, South Africa was one of more than 70 countries that signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”).

The MLI is the result of certain of the Organisation for Economic Co-operation and Development’s action points aimed at preventing base erosion and profit shifting (“BEPS”). It is aimed at facilitating swift, coordinated and consistent implementation of treaty-related BEPS measures in a bilateral context. In particular, it is intended to function as a mechanism to facilitate agreement to changes to treaties without the need for time consuming bilateral renegotiation.

The MLI applies to the signatories thereof that have taken the necessary steps to ratify it. Each party that has signed or will sign the MLI has provided or will provide a list of reservation and notifications, in terms of which it notifies:

• which agreements are covered by the MLI;
• which agreements contain provisions that are not subject to reservations under specific articles of the MLI; and
• it elects optional provisions/reservations.

Provided that South Africa and the other Contracting State are both parties to the MLI and have both deposited notifications that the agreement is covered by the MLI (“Covered Agreement”), the MLI may, depending on the reservations and notifications of each Contracting State, amended the existing provisions of the Covered Agreement.

The MLI contains certain provisions that apply and cannot be opted out of, as well as certain optional provisions. The manner in which these optional provisions will apply is dictated by each country’s list of reservations and notifications.

For example, article 7(8) of the MLI contains certain Simplified Limitation on Benefits (“SLB”) provisions. This means that if a party qualifies as a resident under a treaty but does not qualify as a “qualified person” under article 7(9) of the MLI, it is not entitled to certain benefits provided by the Covered Agreement, as determined in terms of the SLB provisions.

Article 7(14) states that the SLB provisions shall apply in place of or in the absence of provisions of a Covered Agreement that would limit the benefits of the Covered Agreement. Although a party may reserve the right that the SLB provisions do not apply to a Covered Agreement that already contains such provisions, South Africa has not done so in respect of any of its treaties. As such, from South African perspective, the SLB provisions apply to Covered Agreements.

The question is whether the MLI is relevant to South African pension funds that are exempt from South African income and capital gains tax.

The MLI is relevant to pension funds that invest offshore, as they may be exposed to foreign taxes and the double taxation agreements that South Africa has entered into may provide exemption or reduction from such foreign taxes.

As such, the MLI may impact on the relief that a pension fund is entitled to claim in respect of existing treaties to which South Africa is a party. In particular, the SLB provisions will be very important to the pension fund. If the benefits of a pension fund are limited, it may suffer foreign taxes which it cannot set off against South African taxes.

Provided that the pension fund qualifies as a resident of an existing treaty and such treaty constitutes a “Covered Agreement”, the pension fund will have to consider if it constitutes a “qualified person” in terms of the above in order to be entitled to the benefits of the agreement. Therefore, a pension fund should take advice whether it will constitute a “qualified person” for purposes of the MLI.

It is noted that the MLI contains specific provisions as to when it will enter into force and these should only apply from a South African perspective once the MLI has been promulgated in the Government Gazette.

Disclaimer:

This article was first published by ENSafrica (www.ENSafrica.com) on 21 June 2017.

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