Tax transparency trend erodes privacy rights
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  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.