SARS can re­cover taxes from off­shore as­sets

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

A dou­ble tax­a­tion agree­ment which con­tains an ar­ti­cle deal­ing with mu­tual as­sis­tance in the re­cov­ery of tax debts must be con­cluded

TAX­PAY­ERS need to be aware that the South African Rev­enue Ser­vice (SARS) can re­cover South African taxes from as­sets lo­cated in an­other coun­try where SA has con­cluded a dou­ble tax­a­tion agree­ment which con­tains an ar­ti­cle deal­ing with mu­tual as­sis­tance in the re­cov­ery of tax debts.

Sim­i­larly, SARS would be obliged to as­sist for­eign rev­enue au­thor­i­ties in the col­lec­tion of tax debts due to those coun­tries where the dou­ble tax­a­tion agree­ment with the coun­try con­cerned al­lows for that.

Where the tax­payer does not have as­sets lo­cated within SA the ques­tion arises as to how SARS may seek to re­cover South African tax out of as­sets owned by the tax­payer, but which are lo­cated in an­other coun­try.

There is a prin­ci­ple of in­ter­na­tional law that the ju­di­cial author­ity of one coun­try will not en­force the rev­enue laws of an­other coun­try. This rule has be­come known as “The Rev­enue Rule” and in COT v McFar­land, 27 SATC 15, it was de­cided that the courts in SA will not en­force any claim by a for­eign state for taxes due and payable in an­other coun­try.

The Rev­enue Rule is founded on the prin­ci­ple that the im­po­si­tion of tax­a­tion con­sti­tutes the ex­er­cise of sovereignty by a state and the en­force­ment thereof in an­other state would con­sti­tute an in­fringe­ment of the sovereignty rights of that state. Thus, in the ab­sence of a cus­tom or con­ven­tion agree­ing to re­cip­ro­cal as­sis­tance in the re­cov­ery of tax­a­tion, SARS can­not re­cover taxes due by a tax­payer from as­sets lo­cated in a for­eign coun­try.

In terms of sec­tion 108 of the Act, par­lia­ment may en­ter into any agree­ment with the gov­ern­ment of any other coun­try whereby, ar­range­ments are made with such gov­ern­ment to pre­vent or mit­i­gate the levy­ing of taxes both in SA and the for­eign state or to ren­der re­cip­ro­cal as­sis­tance in the ad­min­is­tra­tion of and the col­lec­tion of taxes un­der the laws of SA or such other for­eign coun­try.

Sec­tion 93 of the Act sets out the pro­ce­dure that SARS must fol­low where a for­eign gov­ern­ment re­quires as­sis­tance from SARS to as­sist with the col­lec­tion of taxes due to a for­eign rev­enue author­ity in re­spect of as­sets lo­cated in SA.

From a re­view of the dou­ble tax­a­tion agree­ments con­cluded by SA with for­eign coun­tries, it ap­pears that African coun­tries lead the way in con­clud­ing agree­ments con­tain­ing pro­vi­sions al­low­ing for the as­sis­tance in the col­lec­tion of taxes. The dou­ble tax­a­tion agree­ments con­cluded with our neigh­bour­ing states, namely, Botswana, Namibia, Swazi­land, Le­sotho and Mozam­bique, all con­tain ar­ti­cles pro­vid­ing for as­sis­tance in the col­lec­tion of taxes. Sim­i­lar pro­vi­sions are found in the dou­ble tax­a­tion agree­ments con­cluded with Uganda, Tan­za­nia, Ghana and Nige­ria.

Agree­ments con­cluded with Aus­tralia, the Nether­lands and more re­cently the UK al­low for the re­cip­ro­cal as­sis­tance in the col­lec­tion of taxes. Ar­ti­cle 25A was in­serted into the dou­ble tax­a­tion agree­ment con­cluded be­tween SA and the UK by way of Gov­ern­ment Notice 52 on Fe­bru­ary 2 2012.

Ar­ti­cle 25A of the agree­ment con­cluded be­tween SA and the UK re­quires that the two states as­sist each other in the col­lec­tion of rev­enue claims and that the com­pe­tent au­thor­i­ties of the re­spec­tive states will set­tle the man­ner in which the ar­ti­cle will be ap­plied. In the case of SA the com­pe­tent author­ity is the SARS and in the UK it is Her Majesty’s Rev­enue and Cus­toms (HMRC).

The ar­ti­cle pro­vides that any rev­enue claim of the one state which is en­force­able in ac­cor­dance with the laws of that coun­try and is owed by a per­son who can­not un­der the laws of that coun­try pre­vent its col­lec­tion, that rev­enue claim shall, at the re­quest of the com­pe­tent author­ity of that coun­try be ac­cepted for pur­poses of col­lec­tion by the com­pe­tent author­ity of the other state. It is fur­ther­more pro­vided that the rev­enue claim shall be col­lected by the other coun­try in ac­cor­dance with the pro­vi­sions of its own laws ap­pli­ca­ble to the en­force­ment and col­lec­tion of its own taxes as if the tax debt were a debt of that state. The agree­ment also pro­vides that where a tax claim of one of the coun­try’s in re­spect of which that coun­try, un­der do­mes­tic law, may take mea­sures of con­ser­vancy to en­sure the col­lec­tion of the tax in is­sue, that coun­try shall on the re­quest of the com­pe­tent author­ity of that state, be ac­cepted for pur­poses of tak­ing mea­sures of con­ser­vancy by the com­pe­tent author­ity of the other coun­try.

In ad­di­tion, the agree­ment pro­vides that le­gal pro­ceed­ings in re­spect of the ex­is­tence and va­lid­ity of the amount of the rev­enue claim of one coun­try shall not be brought be­fore the courts or ad­min­is­tra­tive bod­ies of the other coun­try. Thus, a tax­payer who is in­debted to SARS can­not chal­lenge the va­lid­ity thereof in the English courts.

Ar­ti­cle 25A of the dou­ble tax­a­tion agree­ment con­cluded by SA and the UK was con­sid­ered by the High Court of Jus­tice, Chancery Division in the UK in the case of Com­mis­sion­ers for Her Majesty’s Rev­enue and Cus­toms and An­other v Ben Ne­vis (Hold­ings) Ltd and oth­ers, [2012] EWHC 1807 (Ch).

SARS re­quested as­sis­tance from HMRC to as­sist in col­lect­ing taxes due by Ben Ne­vis to SARS in the amount of R2.6bn. Ben Ne­vis is a com­pany as­so­ci­ated with Mr David King who has fea­tured in the press over a num­ber of years re­gard­ing taxes payable in SA. Ar­ti­cle 25A was in­serted into the 2002 agree­ment con­cluded by SA and the UK which orig­i­nally came into force on De­cem­ber 17 2002. Ben Ne­vis ar­gued that the pro­vi­sions of Ar­ti­cle 25A can only ap­ply to South African taxes for tax years end­ing on or af­ter Jan­uary 1 2003. It was there­fore ar­gued by Ben Ne­vis that Ar­ti­cle 25A could not by utilised by SARS in seek­ing to re­cover taxes from as­sets owned by it in the UK and thus the at­tempt to re­cover the taxes due by Ben Ne­vis to SARS vi­o­lates the Rev­enue Rule.

Pelling J re­ferred to Ar­ti­cle 27 of the OECD Model Tax Con­ven­tion on In­come and Cap­i­tal and the Com­men­tary thereon which pro­vides that: “Noth­ing in the con­ven­tion pre­vents the ap­pli­ca­tion of the pro­vi­sion to rev­enue claims that arise be­fore the con­ven­tion en­ters into force, as long as as­sis­tance with re­spect to these claims is pro­vided af­ter the treaty has en­tered into force and the pro­vi­sions of the ar­ti­cle have be­come ef­fec­tive.”

The court there­fore reached the con­clu­sion that even though the agree­ment came into force on De­cem­ber 17 2002, the pro­vi­sions deal­ing with as­sis­tance in the re­cov­ery of tax debts ap­plied in re­spect of taxes which may have arisen prior to that date. An im­por­tant fac­tor was that the mu­tual as­sis­tance was only pro­vided af­ter ar­ti­cle 25A took ef­fect.

Pelling J reached the con­clu­sion that there was no ob­jec­tion­able ret­ro­spec­tive el­e­ment that arises re­gard­ing Ar­ti­cle 25A and thus de­cided that HMRC was au­tho­rised to as­sist SARS in re­cov­er­ing taxes due to SARS in re­spect of as­sets owned by Ben Ne­vis in the UK.

The fact that the UK dou­ble tax­a­tion agree­ment was only amended re­cently does not pre­clude the tax au­thor­i­ties from seek­ing as­sis­tance in re­spect of tax debts which may have arisen prior to the in­ser­tion of Ar­ti­cle 25A into the agree­ment in ques­tion.

Dr Beric Croome is tax ex­ec­u­tive at ENS.

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