Advance ruling system bogs down in committees
MANY TAX PRACTITIONERS have stopped using the SA Revenue Service’s advance tax ruling system because it’s too slow, rigid and publishing rulings of limited value to taxpayers. The system was introduced several years ago to give certainty to companies in relation to tax treatment of transactions. Prior to that, companies could informally discuss a transaction with Revenue, but any view could be changed later and would not be binding on either Revenue or the tax courts.
The new system is a highly rules-based process, whereby Revenue gives a formal and binding ruling. The problem is the rules are applied so pedantically that taxpayers can’t even apply on the basis they’d like to and there are too many exclusions, resulting in Revenue not being willing (or able) to provide a ruling. Consequently, many rulings have been found to be so narrow as to be of limited value.
Gary Vogelman, a tax director at Edward Nathan Sonnenbergs, says all the rulings so far, published are so basic that any practitioner could have guessed at that outcome anyway. “So few of them are of any real interest or complexity. I’m not sure if the published rulings are being used by the profession or taxpayers to any great degree,” Vogelman says.
Considering the value of those rulings, it’s an expensive route for a company to take. The taxpayer’s own tax practitioner has to write up the whole transaction, together with his opinion – a process duplicated at Revenue, with the company being charged accordingly. “The costs of both the practitioner and Revenue can be substantial,” says Vogelman.
“The solution is for us to revert to the earliest solution: to not interact with Revenue but rather come to our own conclusion, possibly with senior counsel, and trust the courts will agree if ever asked to adjudicate on the matter.
“It’s unfortunate, because tax laws have changed so much over the past decade and there are very few judgments or interpretations to guide you – and that’s not good in a tax system. What would have been ideal for the tax profession is to have a series of advance rulings from Revenue on complex issues. Perhaps they’ll come if practitioners gain faith in the system,” says Vogelman.
One reason for the dearth of advance rulings may be the pace at which tax laws themselves change. Vogelman says because of many other regulations a transaction has to comply with, it can take six to 24 months to reach finalisation and the tax law might have changed during that time – more than once.
Says Vogelman: “If SA wants to create a more certain tax system – which is necessary for investment – then this has to be resolved. In my view this underutilisation of the advance ruling system is caused by practitioners’ perception of scepticism on the part of Revenue as to corporate tax morality. Revenue doesn’t like parties to a transaction to apply rules in a way that favours the taxpayer. And in my view Revenue is likely to shoot down a transaction if tax benefits are evident.”
Werksmans tax director Ernest Mazansky says he has “mixed experience” of applying for advanced rulings. “In general the people involved are extremely helpful and nice to work with. I’ve had some good experiences and quick turnaround times. On the other hand I’ve also had a lot of frustration in most cases.”
The difficulty appears to lie in Revenue’s fear of making a mistake it will thereafter be obliged to honour. Decisions therefore get bogged down in interminable committees. Says Mazansky: “There tends to be overkill on the checks and balances they employ. These are often complex issues and the involvement of too many people in the decision-making makes it even more complex. However, it’s still a relatively new structure and Revenue is getting to grips with some issues.
A “mixed” experience. Ernest Mazanksy