Re­spond timeously to SARS’ hard ques­tions

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

IN TERMS of chap­ter 5 of the Tax Ad­min­is­tra­tion Act No. 22 of 2011 (the “act”), the South African Rev­enue Ser­vice (“SARS”) is em­pow­ered to seek in­for­ma­tion from tax­pay­ers to en­sure that the re­turns that they have sub­mit­ted to SARS are com­plete.

Orig­i­nally, the act did not pro­vide a means for SARS to com­pel tax­pay­ers to sup­ply in­for­ma­tion re­lat­ing to for­eign­re­lated en­ti­ties. In prac­tice, SARS would re­quest in­for­ma­tion from tax­pay­ers per­tain­ing to over­seas sub­sidiaries or on other oc­ca­sions in­di­cate that they wished to con­duct an au­dit in the coun­try in which the for­eign sub­sidiary was lo­cated. It is clear from a re­view of South African and in­ter­na­tional law that SARS’ pow­ers do not ex­tend be­yond the bor­ders of SA and that it would have been un­law­ful for SARS of­fi­cials to ar­rive in a for­eign coun­try to con­duct an au­dit on a com­pany or en­tity lo­cated abroad.

That is the rea­son why states con­clude dou­ble tax­a­tion agree­ments to elim­i­nate dou­ble tax­a­tion but also to al­low for co-op­er­a­tion and to re­ceive in­for­ma­tion from a tax­payer lo­cated in one ju­ris­dic­tion for trans­mis­sion to a rev­enue au­thor­ity in an­other coun­try. SARS could only pro­cure in­for­ma­tion from an­other coun­try un­der ei­ther a bi­lat­eral tax treaty or in ac­cor­dance with the Con­ven­tion On Mu­tual Ad­min­is­tra­tive As­sis­tance In Tax Mat­ters which al­lows for a rev­enue au­thor­ity in one coun­try to seek as­sis­tance from an­other rev­enue au­thor­ity to au­dit and in­ves­ti­gate the affairs of the tax­payer lo­cated in the other coun­try.

Coun­tries such as Canada and Aus­tralia have his­tor­i­cally had pro­vi­sions in their fis­cal leg­is­la­tion al­low­ing the rev­enue au­thor­ity to re­quest in­for­ma­tion from do­mes­tic tax­pay­ers re­gard­ing en­ti­ties re­lated to the do­mes­tic tax­payer which are lo­cated abroad. It was there­fore no sur­prise that sec­tion 46 of the Tax Ad­min­is­tra­tion Act was amended by way of sec­tion 42 of the Tax Ad­min­is­tra­tion Laws Amend­ment Act No. 23 of 2015 which now con­fers on SARS the power to call for in­for­ma­tion from a South African tax­payer in re­spect of a con­nected per­son lo­cated abroad.

Sec­tion 46 (2) now pro­vides that a se­nior SARS of­fi­cial may re­quire rel­e­vant ma­te­rial from a tax­payer held or main­tained by a con­nected per­son as de­fined in para­graph (d)(i) of the def­i­ni­tion of con­nected per­son con­tained in sec­tion 1 of the In­come Tax Act 58 of 1962, as amended in re­la­tion to the tax­payer where that per­son is lo­cated out­side SA. The def­i­ni­tion of con­nected per­son is com­pre­hen­sive but tax­pay­ers must re­mem­ber that the con­nected per­son def­i­ni­tion par­tic­u­larly in re­la­tion to a com­pany is very wide and clearly would ap­ply where, for ex­am­ple, a South African com­pany owns more than 50% of the equity shares or vot­ing rights in a com­pany lo­cated abroad, or meets cer­tain other re­quire­ments spec­i­fied in para­graph (d)(i) of the def­i­ni­tion of con­nected per­son.

Sec­tion 46 also reg­u­lates the time pe­riod within which in­for­ma­tion lo­cated abroad must be pro­vided to SARS. Where the in­for­ma­tion is held by a con­nected per­son in re­la­tion to a South African tax­payer, the tax­payer must sup­ply the in­for­ma­tion within 90 days from the date of SARS’ re­quest for the in­for­ma­tion and it is im­por­tant that SARS, when call­ing for the in­for­ma­tion re­lat­ing to the con­nected per­son lo­cated abroad, sets out the con­se­quences should the tax­payer fail to pro­vide the in­for­ma­tion. The time pe­riod re­ferred to is 90 days and not busi­ness days as de­fined in sec­tion 1 of the act and in de­ter­min­ing the pe­riod avail­able within which to re­spond tax­pay­ers would need to take ac­count of cal­en­dar days, not busi­ness days.

Where a tax­payer fails to pro­vide the in­for­ma­tion re­quested by SARS in ac­cor­dance with sec­tion 46 of the act it must be noted that the ma­te­rial in ques­tion may not be pro­duced by the tax­payer in any sub­se­quent pro­ceed­ings with SARS un­less a com­pe­tent court di­rects oth­er­wise on the ba­sis of cir­cum­stances be­yond the con­trol of the tax­payer and any con­nected per­son re­ferred to in para­graph (d)(i) of the def­i­ni­tion of con­nected per­son as de­fined in the In­come Tax Act in re­la­tion to the tax­payer.

Other coun­tries have a sim­i­lar pro­vi­sion that where a tax­payer de­clines to pro­vide in­for­ma­tion re­lat­ing to a for­eign re­lated en­tity that in­for­ma­tion can­not be used in pro­ceed­ings against the rev­enue au­thor­ity of that coun­try. Sec­tion 46 (9) of the act which pro­vides that in­for­ma­tion may not be used by the tax­payer should they not make it avail­able to SARS is not un­com­mon.

Where a tax­payer is as­sessed by SARS, the onus is on the tax­payer in ac­cor­dance with sec­tion 102 of the act to prove that an amount, trans­ac­tion, event or item is ex­empt or oth­er­wise not tax­able, or that an amount or item is de­ductible or maybe set off.

Thus, should a tax­payer not pro­vide the in­for­ma­tion to SARS it may be­come dif­fi­cult for the tax­payer to dis­charge the bur­den of proof as pre­scribed in sec­tion 102 of the act.

Fail­ure to pro­vide in­for­ma­tion to SARS is specif­i­cally re­garded as a crim­i­nal of­fence un­der sec­tion 234 of the act. Tax­pay­ers should not lightly refuse or ne­glect to fur­nish in­for­ma­tion to SARS when called on to do so, in­clud­ing in­for­ma­tion re­lat­ing to a con­nected per­son lo­cated abroad.

Fail­ure to pro­vide in­for­ma­tion, par­tic­u­larly in­for­ma­tion held by a con­nected per­son abroad, could be con­strued as ob­struc­tive and re­sult in an in­crease in the un­der­state­ment penalty which SARS may seek to im­pose if it ad­justs the tax­able in­come of the tax­payer. Tax­pay­ers who are re­quested to pro­vide in­for­ma­tion held or kept by a con­nected per­son as en­vis­aged in sec­tion 46 read to­gether with the def­i­ni­tion of con­nected per­son in sec­tion 1 of the In­come Tax Act need to be aware of the con­se­quences should they fail to pro­vide the in­for­ma­tion timeously.

The law now al­lows SARS to com­pel tax­pay­ers to pro­vide in­for­ma­tion on for­eign-re­lated en­ti­ties

Dr Beric Croome is a tax ex­ec­u­tive at ENSafrica.

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