Tax trans­parency trend erodes pri­vacy rights

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

GREATER de­mands are be­ing placed on tax­pay­ers as tax au­thor­i­ties around the world seek in­creased pow­ers to ac­cess in­for­ma­tion. Al­though le­gal mech­a­nisms do ex­ist to pro­tect per­sonal pri­vacy, such as the com­mon law rule of le­gal pro­fes­sional priv­i­lege and the con­sti­tu­tional right to pri­vacy, the scope of this pro­tec­tion is cur­tailed by the power that the South African Rev­enue Ser­vice (SARS) and other tax au­thor­i­ties pos­sess to ac­cess in­for­ma­tion on tax­pay­ers. Tax­pay­ers should thus al­ways be mind­ful of what in­for­ma­tion is and is not pro­tected. Some re­cent changes and trends are dis­cussed be­low.

SARS is in­creas­ingly ask­ing pro­fes­sional ad­vi­sors such as law and ac­count­ing firms to pro­vide copies of in­voices raised in re­spect of ad­vice pro­vided to tax­pay­ers. The de­tailed de­scrip­tions on in­voices pro­vide use­ful in­for­ma­tion for any rev­enue au­thor­ity to un­der­stand what ad­vice has been pro­vided and which doc­u­ments to ask for. This trend is not lim­ited to SA.

Sec­tion 46 of the Tax Ad­min­is­tra­tion Act per­mits SARS to se­cure in­for­ma­tion on a tax­payer from third par­ties, pro­vided that it is “rel­e­vant in­for­ma­tion re­lated to the records main­tained … by the per­son in re­la­tion to the tax­payer”. The act gives SARS the dis­cre­tion to de­ter­mine what ma­te­rial is rel­e­vant.

In A Com­pany and Two Oth­ers v SARS Com­mis­sioner [2014] ZAWCHC 33, 2014 (4) SA 549 (WCC) the court had to de­ter­mine whether SARS was en­ti­tled to ask the ap­pli­cants to pro­vide it with, in terms of sec­tion 46 of the act, copies of in­voices is­sued to the ap­pli­cants by their at­tor­neys for the ren­der­ing of le­gal ser­vices. The is­sue to be set­tled was whether in­voices fell to be pro­tected from the op­er­a­tion of sec­tion 46 of the act by le­gal pro­fes­sional priv­i­lege. Judge Ash­ley Binns-Ward held that “… at­tor­neys’ feenotes (in­voices) are not amenable to any blan­ket rule that would char­ac­terise them as priv­i­leged com­mu­ni­ca­tions per se”.

Tax­pay­ers should there­fore be aware of what in­for­ma­tion is con­tained in their in­voices from ad­vi­sors, be­cause in­voices are not al­ways, as is ap­par­ent from this case, sub­ject to le­gal pro­fes­sional priv­i­lege and are thus not al­ways pro­tected from dis­clo­sure to SARS.

Ad­di­tional record-keep­ing re­quire­ments, as set out in the draft no­tice is­sued by SARS on De­cem­ber 15 last year in terms of sec­tion 29 of the act, have been pre­scribed for mem­bers of groups of com­pa­nies with a con­sol­i­dated South African turnover of above R1bn. Some of these re­quire­ments ap­pear to be par­tic­u­larly oner­ous on tax­pay­ers.

Pro­vi­sion of the tax­payer’s “own­er­ship struc­ture, with de­tails of shares or own­er­ship in­ter­est held therein”, the “ma­jor eco­nomic and le­gal is­sues af­fect­ing the per­son and the in­dus­try”, the tax­payer’s “busi­ness strat­egy”, the tax­payer’s “po­si­tion within the in­dus­try” and in­for­ma­tion on “key value driv­ers sup­ported by in­de­pen­dent in­dus­try re­search find­ings or re­ports” are some of the oner­ous record-keep­ing re­quire­ments con­tained in the draft no­tice. The in­for­ma­tion re­quired to be pro­vided is gen­er­ally not read­ily avail­able to tax­pay­ers. There­fore, tax­pay­ers will have to gather ad­di­tional in­for­ma­tion and pre­pare fur­ther doc­u­men­ta­tion.

The re­quest is specif­i­cally aimed at en­abling SARS to have ready ac­cess to im­por­tant in­for­ma­tion on trans­fer pric­ing, but could also be used in a much wider con­text.

On Fe­bru­ary 3 a no­tice was gazetted in terms of sec­tion 35(2) and 36(4) of the act that sets out spe­cific re­portable ar­range­ments, and ex­clu­sions to the re­portable ar­range­ments. Apart from the items deal­ing, among oth­ers, with share re­pur­chase and sub­scrip­tion ar­range­ments, hy­brid eq­uity in­stru­ments and ac­qui­si­tion of com­pa­nies with an as­sessed loss in ex­cess of R50m, it also in­cludes an im­por­tant re­portable ar­range­ment deal­ing with con­sul­tancy ser­vices.

In terms of this, any ar­range­ment for the ren­der­ing of con­sul­tancy, con­struc­tion, en­gi­neer­ing, in­stal­la­tion, lo­gis­ti­cal, man­age­rial, su­per­vi­sory, tech­ni­cal or train­ing ser­vices to a res­i­dent or a per­ma­nent es­tab­lish­ment in SA will be a re­portable ar­range­ment if there are non-res­i­dent per­sons or rep­re­sen­ta­tives present in SA and the ex­pen­di­ture to be in­curred af­ter Fe­bru­ary 3 ex­ceeds R10m.

This pro­vi­sion will pro­vide SARS with ex­ten­sive in­for­ma­tion and the abil­ity to iden­tify per­ma­nent es­tab­lish­ments in SA.

On Jan­uary 28, the Euro­pean Com­mis­sion adopted an an­ti­avoid­ance pack­age which pro­poses the im­ple­men­ta­tion of some of the base ero­sion and profit shift­ing ac­tion plans of the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment Model Con­ven­tion by all mem­ber states of the Euro­pean Union. Trans­parency is a key prin­ci­ple un­der­pin­ning the ac­tion plans. This re­cent devel­op­ment, there­fore, re­in­forces the trend for in­creased trans­parency and ac­cess to in­for­ma­tion.

When pro­duc­ing this an­ti­avoid­ance pack­age Pierre Moscovici, the com­mis­sioner for eco­nomic and fi­nan­cial af­fairs, said: “Today we are tak­ing a ma­jor step to­wards creat­ing a level play­ing field for all our busi­nesses, for fair and ef­fec­tive tax­a­tion for all Euro­peans.”

It is ap­par­ent that a new era of tax­ing is de­vel­op­ing rapidly. There are in­creas­ing de­mands for trans­parency and ac­cess to in­for­ma­tion by tax au­thor­i­ties, and it is hap­pen­ing on an in­ter­na­tional scale. SARS and other tax­ing au­thor­i­ties are fu­elling this pro­gres­sion to­wards trans­parency.

Al­though this will cre­ate a “level play­ing field for all our busi­nesses, for fair and ef­fec­tive tax­a­tion”, it also places a sig­nif­i­cant bur­den on tax­pay­ers to main­tain records, as well as in­fring­ing on tax­pay­ers’ pri­vacy. Tax­pay­ers must take heed of these de­vel­op­ments and those that will in­evitably fol­low.

Au­thor­i­ties are ask­ing law and ac­count­ing firms to hand over in­voices re­lat­ing to ad­vice given to tax­pay­ers

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

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