Evaders find it dif­fi­cult to hide across bor­ders

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

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 [2013] 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.

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