Major tax headache in store for the corrupt
The tax treatment of bribes depends on how they were declared on annual returns
MANY PEOPLE may soon have a tax problem after being implicated in some kind of corruption in one of the commissions and inquiries under way in the country. Recent revelations of alleged corruption by the VBS Bank Heist Report and the Commission of Inquiry into State Capture have exposed significant amounts of money changing hands. But what of the tax consequences of such actions for those companies, entities and individuals involved in alleged corrupt activities?
The general offence of corruption in the Prevention and Combating of Corrupt Activities Act (PCCAA) covers any person who, directly or indirectly, accepts “any gratification” or bribe to act or influence another person to perform an illegal act, or to abuse his or her authority, or not to do anything. The PCCAA’s coverage is wide and should cover any person or institution allegedly involved in any corrupt activities in the VBS Bank Heist, those uncovered by the Inquiry into State Capture, or any other commission of inquiry.
For income tax purposes, what needs to be determined by the South African Revenue Service (Sars) or any tax adviser advising the parties involved in alleged corruption is the following:
◆ How did the entities, companies or individuals (the corruptors) account in their annual tax returns to Sars for any gratification or bribes paid to persons in order for them to act in a corrupt manner?
◆ How did those persons who received any gratification or bribes (the corrupted) account for the receipt in their annual tax returns to Sars?
◆ Did any party to the alleged corruption (the corruptors and corrupted) declare any gratification or bribes received or paid to Sars?
For tax purposes, the payment of a bribe or receipt of a bribe or any illegal amount will be regarded as income received and accrued to that person, and liable to be taxed in that person's hands. The manner in which the corruptor accounted for those payments and the manner in which the corrupted accounted for them in their annual tax returns will determine how they will be taxed by Sars in terms of the Income Tax Act.
Normally, any expenditure incurred by any person or business in the production of its income will be deductible in terms of section 11(a) of the act. This means that any bribes paid by any corruptor to solicit some business would be a deductible expense. However, according to a number of tax cases, the expense must be closely linked to the business of the corruptor and be part of the normal cost of doing that type of business. Of course, the business must be legal. It is clear that paying bribes fails these tests and will not be deductible.
Furthermore, section 23(o)(i) of the Income Tax Act prohibits any deduction of any expenditure incurred where the payment of that expenditure or the agreement or offer to make that payment constitutes corruption as defined in the PCCAA.
However, it is highly unlikely that the corruptors would have declared them as such to Sars, if at all. It is more likely that they were declared as commissions paid, or disguised as some other types of expenses or inflated some other expenses or created fictitious expenses in order to claim them as a deductible in order to reduce their taxable income.
In the case of the corrupted, the courts decided in numerous tax cases that illegal income, such as bribes, are taxable. However, in most instances, the tax treatment of those bribes will depend on how they were declared by them in their annual tax returns to Sars. If they were declared, they would most probably have declared it as commission income, which will automatically increase their taxable income.
However, Sars requires the source of any income, such as commissions, to be disclosed, which would pose a risk for the corrupted, because they would normally not want to be exposed. Therefore, it is more likely that the corrupted will not disclose such receipts. Such non-disclosure amounts to tax evasion.
Sars would normally have to conduct an audit into the corrupter and the corrupted’s finances to uncover non-disclosure of any income, false declarations or deductions of non-qualifying expenses. During such audits, a lifestyle audit may be conducted into any corrupted individual in order to compare his or her expenses, assets and liabilities with his or her income during that particular year/s. At the end of the audit, Sars will issue a revised or additional assessment on the corruptor or corrupted, detailing the amounts received and/or accrued, the deductions allowed and disallowed on that income, and the revised or additional tax due.
If Sars finds any intentional incorrect, false declaration or non-declaration of income or fraudulent deduction of expenses that amounts to tax evasion, in terms of the Tax Administration Act (TAA), it may impose:
◆ Understatement penalties, which vary from 10 percent to 200 percent of the tax that should have been payable.
◆ Administrative non-compliance penalties if no return was submitted or was not submitted on time.
◆ Refer the case to the National Prosecution Authority for criminal prosecution for non-compliance with the TAA or the Income Tax Act.
If you are implicated in any corruption, you should be very afraid, because the chances are that Sars will soon be knocking on your door.