SA needs variation to ‘pay now, argue later’ in tax disputes

The Davis tax committee, which was established to make nonbinding proposals on tax reform to the National Treasury, recently concluded its work.

In one of its reports on tax administration, the committee suggests a taxpayer bill of rights with effect. The bill would also confer enforceable rights on taxpayers, to improve interactions with the South African Revenue Service (SARS) and make SARS responsible in its dealings with taxpayers.

Interestingly, one of the rights suggested is the right not to pay disputed tax amounts before the taxpayer has had an impartial review of the dispute, which the committee suggests is not compatible with the “pay now, argue later” principle.

The committee is of the view that the “pay now, argue later” principle is being applied by SARS savagely, despite its constitutionality not having been tested and the probability that it is an infringement of the right of property enshrined in the Constitution.

The committee also notes that the principle creates a psychological bias in favour of SARS in discouraging taxpayers from pursuing appeals or reviews against assessments after they have paid the assessed tax.

To strike a balance between taxpayer rights and SARS’s powers to collect taxes without the impediment of frivolous objections, the committee recommends as a variation to the “pay now, argue later” principle that taxpayers be required to deposit a portion of the assessed tax in dispute with SARS before being allowed to proceed with the dispute.

The committee considers a deposit of 40% of the amount of the assessed tax in dispute as appropriate.

While the “pay now, argue later” principle may well infringe on a taxpayer’s right to property, it does not follow that the infringement is necessarily unconstitutional. The tax committee does not reach any conclusion on the constitutionality of the principle, despite its various suggestions on the matter.

In considering the constitutionality of the principle, the main points adopted by the Constitutional Court in Metcash Trading vs the tax commissioner in deciding that the principle did not breach of section 34 of the Constitution (access to courts) must be borne in mind:

● The public interest in obtaining full and speedy settlement of tax debts, which taxpayers should not be able to delay through frivolous objections;

● The prevalence of the principle in many other jurisdictions suggests it is accepted as reasonable in an open and democratic society based on freedom, dignity and equality; and

● The effect of the rule on individual taxpayers is ameliorated by the power conferred on SARS to suspend the payment of disputed tax.

While the committee’s findings are to be welcomed as part of the development of taxpayer rights, it has not explained whether the “pay now, argue later” rule is really unconstitutional, having regard to the considerations applied by the Constitutional Court in the Metcash case.

From our reading of the committee’s suggested variation, it is not clear if it would be available to taxpayers in addition to, or instead of, the existing remedy in section 164 of the Tax Administration Act, which allows taxpayers to apply to SARS for the suspension of the disputed tax pending an objection or appeal.

THE DAVIS TAX COMMITTEE IS OF THE VIEW THAT THE ‘PAY NOW, ARGUE LATER’ PRINCIPLE IS BEING APPLIED BY SARS SAVAGELY

It appears the committee’s suggestion conflicts with the existing rights of taxpayers to submit an objection or appeal without paying the disputed tax, as the taxpayer’s failure to pay the committee’s deposit to SARS would prevent the taxpayer from objecting to the disputed assessment.

The suggested requirement to deposit 40% of the assessed tax in dispute before objecting to an assessment could be a significant hurdle for many taxpayers. Thus, the committee’s suggested variation to the “pay now, argue later” principle has the potential to infringe on the rights of taxpayers to property and access to courts. Further consideration should be given to the remedies that are available to a taxpayer.

For example, could the committee’s suggested deposit be reduced or waived by SARS? As an alternative, the committee suggests that interest rates applicable to amounts paid to SARS in disputed assessments be linked to the prime lending rate, so that taxpayers are not left out of pocket due to the time that lapses over the course of an open tax dispute.

This recommendation does not tackle all of the shortcomings of the “pay now, argue later” principle, such as the psychological bias that is created in favour of SARS.

Despite the above reservations, it is to be hoped that the use of the “pay now, argue later” principle will, in the light of the Davis tax committee’s findings, be given serious consideration by the Treasury and SARS.