Tax col­lec­tor seems to be hav­ing a field day

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

TAX au­thor­i­ties world­wide have cer­tain pow­ers aimed at en­abling them to ver­ify in­for­ma­tion sub­mit­ted by tax­pay­ers and the ad­min­is­tra­tion of tax leg­is­la­tion in their re­spec­tive ju­ris­dic­tions. Chap­ter 5 of the Tax Ad­min­is­tra­tion Act 28 of 2011 grants the South African Rev­enue Ser­vice (SARS) in­for­ma­tion gath­er­ing pow­ers, which in­clude the power to in­spect, ver­ify, au­dit and con­duct crim­i­nal in­ves­ti­ga­tions.

A con­tentious is­sue is whether SARS has the author­ity to ex­er­cise its in­for­ma­tion gath­er­ing pow­ers vis-à-vis a con­trolled for­eign com­pany and, in par­tic­u­lar, does SARS have the power to con­duct a field au­dit at the premises of a con­trolled for­eign com­pany in a for­eign ju­ris­dic­tion?

A con­trolled for­eign com­pany is a for­eign com­pany where more than 50% of the to­tal par­tic­i­pa­tion rights or vot­ing rights in that com­pany are di­rectly or in­di­rectly held or ex­er­cis­able, re­spec­tively by one or more per­sons that are tax res­i­dent in SA. The com­pany it­self is not sub­ject to tax in SA and there­fore not a South African tax­payer. The net in­come of the con­trolled for­eign com­pany (a no­tional amount) is, how­ever, in­cluded in the (tax­able) in­come of the com­pany’s con­trol­ling South African share­hold­ers.

Sec­tion 46 of the Tax Ad­min­is­tra­tion Act deals with re­quests for rel­e­vant ma­te­rial (in­for­ma­tion, doc­u­men­ta­tion or things that in the opin­ion of SARS are fore­see­ably rel­e­vant to the ad­min­is­tra­tion of tax leg­is­la­tion). It pro­vides that SARS may, in re­la­tion to a tax­payer, re­quire the tax­payer or an­other per­son to sub­mit rel­e­vant ma­te­rial that SARS re­quires. Sec­tion 48 of the act deals with field au­dits and crim­i­nal in­ves­ti­ga­tions and pro­vides that an au­tho­rised SARS of­fi­cial may re­quire a per­son to make avail­able, at the per­son’s premises spec­i­fied in the no­tice, rel­e­vant ma­te­rial that the of­fi­cial may re­quire to au­dit or crim­i­nally in­ves­ti­gate in con­nec­tion with the ad­min­is­tra­tion of a tax act in re­la­tion to the per­son or an­other per­son. The no­tice must in­di­cate the ini­tial ba­sis and scope of the au­dit or in­ves­ti­ga­tion.

It goes with­out say­ing that SARS re­quires in­for­ma­tion gath­er­ing pow­ers to be able to en­force tax leg­is­la­tion and col­lect rev­enue, which is nec­es­sary for the up­keep of the coun­try. How­ever, do th­ese pow­ers en­ti­tle SARS to en­force its pow­ers ex­tra-ter­ri­to­ri­ally in terms of do­mes­tic tax leg­is­la­tion?

Although SARS is of the view that the word­ing of do­mes­tic law em­pow­ers it to per­form a for­eign field au­dit, it is our con­sid­ered view that, for a num­ber of com­pelling rea­sons, nei­ther sec­tion 46 nor sec­tion 48 pro­vide SARS with such power in re­spect of an en­tity over which SA does not have sovereign ju­ris­dic­tion. Any such ac­tion by SARS will be un­law­ful.

SARS may ob­tain in­for­ma­tion in re­spect of a for­eign com­pany by re­ly­ing ei­ther on a bi­lat­eral or mul­ti­lat­eral tax con­ven­tion to which SA is a sig­na­tory and which is in force and ef­fect. With ef­fect from March 1 2014, SA be­came a sig­na­tory to the Con­ven­tion on Mu­tual Ad­min­is­tra­tive As­sis­tance in Tax Mat­ters. Over 85 coun­tries are sig­na­to­ries to the con­ven­tion, which fa­cil­i­tates in­ter­na­tional co-op­er­a­tion among tax au­thor­i­ties.

In terms of the con­ven­tion, par­ties shall ex­change any in­for­ma­tion that is fore­see­ably rel­e­vant for the ad­min­is­tra­tion or en­force­ment of their do­mes­tic laws which con­cerns par­tic­u­lar per­sons or trans­ac­tions at the re­quest of a state. The con­ven­tion de­tails the man­ner in which tax ex­am­i­na­tions abroad should be con­ducted. In terms of the con­ven­tion, SARS would be re­quired to re­quest the tax author­ity of the con­trolled for­eign com­pany’s for­eign ju­ris­dic­tion to con­duct a tax ex­am­i­na­tion/au­dit of the com­pany.

The tax author­ity of the for­eign ju­ris­dic­tion may ac­cede to or decline such re­quest. Should the tax author­ity of the for­eign ju­ris­dic­tion ac­cede to the re­quest, SARS would be al­lowed to have a rep­re­sen­ta­tive present “at the ap­pro­pri­ate part of a tax ex­am­i­na­tion”.

This is dif­fer­ent to SARS con­duct­ing a field au­dit in the for­eign ju­ris­dic­tion with a full team of peo­ple. All de­ci­sions with re­spect to the con­duct of the tax ex­am­i­na­tion are to be made by the tax author­ity of the for­eign state and will be sub­ject to the laws and prac­tice of that state. The pow­ers of SARS un­der the con­ven­tion may thus be limited in com­par­i­son to its pow­ers un­der the act.

In light of SARS’s ex­pan­sive views on the ex­tent of its pow­ers vis-à-vis in­for­ma­tion gath­er­ing, it is in the in­ter­est of any en­tity that is the sub­ject of a SARS au­dit to seek pro­fes­sional ad­vice to en­sure that its rights are suf­fi­ciently pro­tected.

While SARS is sig­na­tory to a tax con­ven­tion, just how far its in­for­ma­tion gath­er­ing pow­ers ex­tend is de­bat­able

Peter Dachs and Bernard du Plessis are di­rec­tors and joint heads of ENSafrica’s tax depart­ment.

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