Evaders find it difficult to hide across borders
SARS and UK revenue can assist in targeting tax debtors in each other’s countries
SA AND the UK concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, which was gazetted in Government Gazette 24335 of 31 January 2003. That agreement was subsequently amended by Government Notice 52 in Government Gazette 34971 on February 2 2012 with effect from October 13 2011.
The amendments to the treaty concluded by SA and the UK dealt with the exchange of information regulated by article 25 and article 25A dealing with assistance in the collection of taxes.
Article 25A of the treaty provides that the South African Revenue Service (SARS) and Her Majesty’s Revenue and Customs (HMRC) shall assist each other in collecting taxes.
Article 25A refers to any amount owed in respect of taxes of every kind and description imposed on behalf of SA and the UK or of their political subdivisions or local authorities, so long as the taxation in question is not contrary to the tax treaty or any other instrument to which the two countries are parties, as well as interest, administrative penalties and the cost of collection or conversancy related to such tax.
The treaty provides that, where a tax debt is enforceable under the laws of SA, and is owed by a person who cannot under the laws of SA prevent its collection, that tax debt shall, at the request of SARS, be accepted for purposes of collection by the competent authority of the UK. Article 25A(3) provides that it shall be collected by the UK in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes, as if that debt were an amount due to the UK.
The treaty also requires SA to assist the UK in collecting tax debts due by UK taxpayers from assets they may have in SA.
Before the insertion of article 25A into the tax treaty, neither authority could assist the other in collecting taxes due from their respective taxpayers in each other’s countries. The question that did arise at the time that the article was inserted into the treaty, was whether the assistance in collecting taxes could apply to taxes which arose prior to the insertion of the article.
This question was considered in the UK’s Court of Appeal in the case of Ben Nevis (Holdings) Ltd & Anor v Commissioner for HM Revenue and Customs  EWCA Civ 578. Ben Nevis is a company incorporated in the British Virgin Islands, owned and controlled by a David King and/or his trustees. The judgment indicates that Ben Nevis is liable to SARS for taxes from the 1998 to 2000 years of assessment amounting to about R2.6bn following the final determination of a tax appeal in October 2010. Subsequently, judgment was taken against Ben Nevis in proceedings in courts in SA.
SARS took the view that, when King became aware that SARS was investigating Ben Nevis’s tax affairs, he transferred Ben Nevis’s assets to another company incorporated in British Virgin Islands, and that, as a result thereof, funds of approximately £7.8m had been credited to a bank account in London in the name of Metlika Trading Ltd.
As a result of the protocol amending the tax treaty between SA and the UK taking effect on October 13 2011, a request was made to HMRC that it assist SARS in collecting the tax debt due.
The High Court in the UK had previously dismissed Ben Nevis’s application to set aside the order granting judgment against Ben Nevis in respect of the tax due to SARS.
Historically, the courts in the UK have declined the request to entertain claims for the enforcement of revenue or other public laws of a foreign state. This flows from the well-established principle that the courts of one country will not enforce the revenue laws of another country. However, this principle has been watered down as a result of international agreements concluded by various governments.
Ben Nevis sought to argue that article 25A of the tax treaty could not apply as a result of the fact that the tax debts were due in respect of years of assessment commencing prior to the coming into force of the 2002 convention concluded by SA and the UK. Thus, Ben Nevis sought to argue that the effect of article 25A and article 27 of the 2002 convention limited the scope of article 25A to tax debts on or after January 1 2003. The tax owed by Ben Nevis related to the 1998 to 2000 assessments, that is, prior to the 2002 convention and most certainly prior to the date on which article 25A was inserted.
Lord Justice Lloyd Jones reviewed various cases dealing with the interpretation of international agreements and also the relevant articles of the Vienna Convention on Treaties and considered the retrospective effect of article 25A.
The court also referred to a memorandum of understanding that was agreed to by SA and the UK and criticised the fact such memorandum could only be obtained by taxpayers by making a Freedom of Information Act request.
The court concluded that the application of article 25A to a request for assistance in the enforcement of tax debts arising before the protocol came into effect did not amount to retrospective application, nor was it unfair that the protocol should apply to such pre-existing tax liabilities. The court also considered the effect of the Finance Act of 2006, and whether that act permitted HMRC to conclude an agreement with another country such that mutual assistance in the collection of tax debt should apply retrospectively.
At the end of the day, the court decided that the presumption against retrospective effect did not apply to Ben Nevis, because the application of article 25A in respect of taxes arising before July 19 2006, that is, the date on which the relevant provisions of the Finance Act took effect, or January 1 2003, did not involve any objectionable retrospective effect. The court accordingly decided that article 25A could be utilised by HMRC in assisting SARS in recovering tax liabilities which arose prior to the insertion of article 25A into the SA-UK tax treaty.
It is interesting to note that the tax treaty concluded by SA and Australia contains a similar provision dealing with the assistance in the collection of taxes at article 25A which appeared in Government Gazette 31721 of December 23 2008. The press has reported that Barry Tannenbaum, the alleged mastermind of a Ponzi scheme, is indebted to SARS in the amount of R747,990,921.00. Tannenbaum would appear to currently reside in Australia, and, when reference is made to the decision in the Ben Nevis case, it is more than likely that SARS will seek assistance from the Australian Tax Office to recover the taxes due as a result of the alleged Ponzi by relying on article 25A of the treaty concluded by SA and Australia.
Previously, tax treaties did not envisage countries assisting each other in the collection of tax debts, but this has changed, and the OECD’s Model Convention now contains such provisions. The Joint Convention on Mutual Administrative Assistance in Tax Matters includes a provision for the assistance in recovery of taxes.
Dr Beric Croome is a tax executive at ENS.