Poor odds of taking on Sars and winning
• With taxman winning eight of every 10 cases that go to court, count opportunity costs before doing so
THE DISPUTE RESOLUTION PROCESS PLAYS A CRUCIAL PART IN RESOLVING TAX DISPUTES
In the revenue announcement made by South African Revenue Service (Sars) on April 2 2024 announcing preliminary revenue collection outcome for 2023/24 fiscal year, Sars announced that its total tax collections were R1.741-trillion with an unexpected surplus of R10bn.
Some of the main reasons for this better-than-expected collection was credited to its compliance efforts. As part of its compliance efforts, Sars has a litigation strategy that seeks to provide certainty and clarity for taxpayers through the courts on tax and customs laws and when justifiable, to make noncompliance both difficult and costly. This strategy has been implemented over several years and is continually producing better results, each fiscal year.
According to Sars, in this fiscal year 110 judgments were handed down in which Sars was successful in 94 cases — resulting in an 84% litigation success rate. On the face of it, this means that Sars wins eight out of 10 times against taxpayers when a tax case is decided by a court. This high success rate has been the trend for the past few years. This is something that taxpayers and their advisers must take into consideration whenever they are considering taking Sars to court on their decisions. Based on Sars’ current success rate, taking Sars to court is risky for taxpayers in many respects.
In recent years, SA has become a very litigious country. Reports on court cases in SA are a daily reality, but we as the public are sometimes not aware of the litigation strategy of the parties involved, the amount to of time spent on those cases, opportunities lost and the financial costs thereof. For taxpayers to finally litigate and their cases to be heard in the courts against Sars, it normally means that all the internal remedies available to a taxpayer has been exhausted. Practically, it means the dispute resolution (DR) process provided in the Tax Administration Act of 2011 (TAA) has been exhausted. A taxpayer would have spent thousands of rand during the DR process and, if the case is eventually heard by the Tax Court, the judgment of the Tax Court is appealed to the High Courts, the judgment of the of the High Court is appealed to the Supreme Court of Appeal (SCA) and, in some cases, the judgment of the SCA is appealed to the Constitutional Court, the costs thereof can run into millions. Years will be spent without any certainty on how to apply the relevant tax laws which would, in almost all cases, have resulted in lost business opportunities for most taxpayers.
However, what the 84% litigation success rate does not tell you is that the number of judgments handed down constitute a small number of disputed cases lodged against Sars by taxpayers. As usual, we hope Sars will provide us with a full analysis of disputed tax cases in their annual report later in the year for the 2023/24 fiscal year. Sars’ annual reports provide a useful analysis of the tax and customs disputes handled by Sars for taxpayers and their advisers.
In the annual report, Sars provides a breakdown per fiscal year of the tax disputes handled and finalised within the internal review process, as part of the DR process. For the 2022/23 fiscal year, Sars received 161,115 objections (first step in tax dispute process). Just over 21,900 of the objections were disallowed and only 10,285 were referred to be litigated on by taxpayers in the Tax Board and Tax Court. Of the 10,285 cases to be litigated, about 7,644 were finalised with Sars or taxpayer conceding or withdrawing or settling the cases. This was similar in many respects for fiscal year 2021/22.
We expect a similar trend for the 2023/24 fiscal year.
Based on the above statistics on tax disputes for fiscal year 2021/22 and 2022/23, it is clear the DR process plays a crucial part in resolving tax disputes and taxpayers should fully utilise this process and not rush in litigating in the courts against Sars, when, for now at least, it seems to favour Sars. Even with ultimate success in the courts by the taxpayers, they may have lost the war considering the time, money and opportunities lost and that Sars (and the National Treasury) may ultimately decide to amend the provisions in the tax legislation that was an issue in dispute in the courts.
Taxpayers and their advisers must always remember that they are underdogs when they are litigating tax cases against Sars. There are eight out of 10 chances that Goliath, not David, will be the victor in any tax dispute that is ultimately decided by a court of law. In simple terms, when taxpayers ask their counsels what their chances of success against Sars in court in a disputed tax case are, counsel should reply, based on current successes by taxpayers, at least 20%.