Tax collector seems to be having a field day
TAX authorities worldwide have certain powers aimed at enabling them to verify information submitted by taxpayers and the administration of tax legislation in their respective jurisdictions. Chapter 5 of the Tax Administration Act 28 of 2011 grants the South African Revenue Service (SARS) information gathering powers, which include the power to inspect, verify, audit and conduct criminal investigations.
A contentious issue is whether SARS has the authority to exercise its information gathering powers vis-à-vis a controlled foreign company and, in particular, does SARS have the power to conduct a field audit at the premises of a controlled foreign company in a foreign jurisdiction?
A controlled foreign company is a foreign company where more than 50% of the total participation rights or voting rights in that company are directly or indirectly held or exercisable, respectively by one or more persons that are tax resident in SA. The company itself is not subject to tax in SA and therefore not a South African taxpayer. The net income of the controlled foreign company (a notional amount) is, however, included in the (taxable) income of the company’s controlling South African shareholders.
Section 46 of the Tax Administration Act deals with requests for relevant material (information, documentation or things that in the opinion of SARS are foreseeably relevant to the administration of tax legislation). It provides that SARS may, in relation to a taxpayer, require the taxpayer or another person to submit relevant material that SARS requires. Section 48 of the act deals with field audits and criminal investigations and provides that an authorised SARS official may require a person to make available, at the person’s premises specified in the notice, relevant material that the official may require to audit or criminally investigate in connection with the administration of a tax act in relation to the person or another person. The notice must indicate the initial basis and scope of the audit or investigation.
It goes without saying that SARS requires information gathering powers to be able to enforce tax legislation and collect revenue, which is necessary for the upkeep of the country. However, do these powers entitle SARS to enforce its powers extra-territorially in terms of domestic tax legislation?
Although SARS is of the view that the wording of domestic law empowers it to perform a foreign field audit, it is our considered view that, for a number of compelling reasons, neither section 46 nor section 48 provide SARS with such power in respect of an entity over which SA does not have sovereign jurisdiction. Any such action by SARS will be unlawful.
SARS may obtain information in respect of a foreign company by relying either on a bilateral or multilateral tax convention to which SA is a signatory and which is in force and effect. With effect from March 1 2014, SA became a signatory to the Convention on Mutual Administrative Assistance in Tax Matters. Over 85 countries are signatories to the convention, which facilitates international co-operation among tax authorities.
In terms of the convention, parties shall exchange any information that is foreseeably relevant for the administration or enforcement of their domestic laws which concerns particular persons or transactions at the request of a state. The convention details the manner in which tax examinations abroad should be conducted. In terms of the convention, SARS would be required to request the tax authority of the controlled foreign company’s foreign jurisdiction to conduct a tax examination/audit of the company.
The tax authority of the foreign jurisdiction may accede to or decline such request. Should the tax authority of the foreign jurisdiction accede to the request, SARS would be allowed to have a representative present “at the appropriate part of a tax examination”.
This is different to SARS conducting a field audit in the foreign jurisdiction with a full team of people. All decisions with respect to the conduct of the tax examination are to be made by the tax authority of the foreign state and will be subject to the laws and practice of that state. The powers of SARS under the convention may thus be limited in comparison to its powers under the act.
In light of SARS’s expansive views on the extent of its powers vis-à-vis information gathering, it is in the interest of any entity that is the subject of a SARS audit to seek professional advice to ensure that its rights are sufficiently protected.
While SARS is signatory to a tax convention, just how far its information gathering powers extend is debatable
Peter Dachs and Bernard du Plessis are directors and joint heads of ENSafrica’s tax department.