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SynopsisTax today
August 2015
A monthly journalpublished by PwC SouthAfrica providing informed commentary on current developments inthe tax arena, both locallyand internationally.Through analysis andcomment on new law and judicial decisions ofinterest, it assistsbusiness executives toidentify developmentsand trends in tax law and revenue practice that might impact their business.
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Contents
The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The right of tax authorities to demand production of documents . . . . . . . . . . . . . . . . . . . 5
SARS Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Editor: Ian Wilson
Contributors to this issue: RC (Bob) Williams, Ian WIlson and Zarene Viljoen
Dis tri bu tion: Elizabeth Ndlangamandla [email protected]
To ensure that you continue to receive our publication, please see page 12.
The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer
Mark Lifman has recently been the subject ofmany lurid newspaper stories, with City Pressdescribing him as ‘one of South Africa’s biggestunderworld bosses and one of Cape Town’srichest and most feared underworld figures’. It has been reported that he owes SARS someR388 million in tax.
Not for the first time in history has
a powerful underworld figure met
his Waterloo when engaging with
the tax authorities.
A judgment of the Cape Town
High Court delivered on 17 June
2015 (but not yet reported)
recorded that Lifman and various
close corporations of which he
was the sole member owed an
undisputed tax debt to SARS of
over R13 million (some R3 million
of which was owed by Lifman
personally) that had accumulated
over some ten years. Further tax
debts (see para [6]) were still in
issue.
This tax liability had come to light
in an inquiry held in 2014–2015 in
terms of section 50(1) of the Tax
Administration Act 28 of 2011
into alleged non-compliance with
tax obligations on the part of
Lifman and 35 juristic entities
making up ‘the Lifman Group’.
SARS had given notice of its
intention to seek a civil judgment
against Lifman and his close
corporations if they failed to
adhere to a date for payment of
31 March 2015 that had been
agreed with SARS. When payment
as agreed was not forthcoming,
SARS took a civil judgment
against them in terms of section
172(1) of the Tax Administration
Act.
Application to interdictSARS from enforcing thejudgment
On learning that a judgment had
been taken against them, Lifman
and his controlled close
corporations attempted to
interdict SARS from executing on
that judgment.
The main argument put forward
by Lifman was that SARS did not
give the notice required by section
172(1). This provision states
that –
If a person has an outstanding tax
debt, SARS may, after giving the
person at least 10 business days
notice, file with the clerk or
registrar of a competent court a
certified statement setting out the
amount of tax payable and
certified by SARS as correct.
August 2015 3
Contents
The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The right of tax authorities to demand production of documents . . . . . . . . . . . . . . . . . . . 5
SARS Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Editor: Ian Wilson
Contributors to this issue: RC (Bob) Williams, Ian WIlson and Zarene Viljoen
Dis tri bu tion: Elizabeth Ndlangamandla [email protected]
To ensure that you continue to receive our publication, please see page 12.
Section 174 goes on to provide
that –
A certified statement filed under
section 172 must be treated as a
civil judgment, lawfully given in
the relevant court in favour of
SARS for a liquid debt for the
amount specified in the
statement.
Read together, the import of
these provisions is that, having
secured what amounts to a civil
judgment on the basis of a mere
‘certified statement’, SARS can
enforce the judgment in all the
ways open to a judgment
creditor, including the
attachment and sale in execution
of the taxpayer’s property.
This is the most draconian aspect
of the notorious pay-now-argue-
later rule.
Potentially catastrophicconsequences
The taking of such a judgment
has potentially catastrophic
consequences for a taxpayer.
Consequently, the statutory
requirement in section 172(1)
that SARS must give the taxpayer
at least ‘ten business days’ notice’
assumes great importance, for it is
the only procedural safeguard
interposed between assessment
and the taking of judgment.
It might therefore be expected
that a court would adopt a strict
interpretation of this solitary
procedural bulwark for the
taxpayer, bearing in mind that the
taking of judgment in terms of
these provisions is not preceded
by any judicial scrutiny of the
assessment to tax on which it is
based. The assessment may thus
be revealed in a subsequent
appeal to have been completely
wrong, by which time the
taxpayer may, through sales in
execution, have been stripped of
his funds, his assets and his
business.
In the Lifman case, however, the
potential for a judgment based on
an inaccurate assessment to tax
was absent, for Lifman (see para
[5] of the judgment) had, in the
course of the statutory inquiry in
terms of section 50(1) of the Tax
Administration Act, admitted
liability for the R13 million tax
debt in issue and (see para [8])
caveats had been voluntarily
entered against some properties,
which SARS no doubt intended to
sell in execution.
Lifman was left with fewcards to play
In the circumstances, Lifman had
few cards to play in attempting
(see para [1]) to have the
statutory judgment set aside or
suspended.
The strongest argument available
to him was that the notice given
by SARS in terms of section
172(1) did not comply with the
statutory requirements.
The judgment recounts in this
regard (see para [9]) that at a
meeting on 3 March 2015 between
Lifman (represented by his legal
team) and SARS, he was –
notified in writing about [SARS’s]
intention to seek civil judgment
on the outstanding tax debt of the
applicants should applicants fail
to adhere to the agreed payment
date, that is, 31 March 2015.
Mark Lifman judgment
4
Mark Lifman judgment
Regrettably, given the central importance of
the contents of this written notification in this
litigation, the judgment does not quote the
precise words of the notification. The
judgment merely states (see para [30]) that
on 3 March 2015, SARS’s attorneys –
caused a letter to be despatched to [Lifman’s]
attorneys informing them that the current tax
debt must be met by end March 2015 failing
which SARS will resort to all procedures
available to it to collect the debt from the
taxpayers which may include obtaining civil
judgments.
Lifman argued that he had been deprived of
his right to be given the notice required by
section 172(1).
In particular, he argued (see para [13]) that
he was, in terms of this letter, merely given a
general notice by SARS that it would apply for
judgment in terms of section 172; and
moreover, that such notice had been given
more than ten days before payment was due
in terms of the agreement.
In ruling on the interpretation of the
requirement in section 172(1) of ten business
days’ notice, the court (at para [26]) quoted a
dictionary definition, saying –
The word ‘notice’ in the Oxford Dictionary
means ‘notification or warning of something
especially to allow preparations to be made
and the court then adopted this meaning,
saying that –
the purpose of giving notice is to give
notification or warning . . . to allow
preparations to be made.
The Promotion of AdministrativeJustice Act
The point that the judgment seems to overlook is that
the Commissioner’s decision to invoke the provisions
of section 172 to take a civil judgment against a
taxpayer constitutes administrative action and
thereby triggers the taxpayer’s rights in terms of the
Promotion of Administrative Justice Act 3 of 2000.
Thus, a taxpayer can, in terms of PAJA, require SARS
to provide the reasons for the decision and then take
the decision on review to the High Court in terms of
that Act.
If the judgment in Lifman is correct, SARS could just
routinely add a postscript to every notice of
assessment saying that if the amount due in terms of
this assessment is not paid forthwith, SARS reserves
the right to take a civil judgment in terms of section
172(1).
Such a general and conditional notice would leave
the taxpayer completely in the dark as to whether or
not SARS actually intended to take such action.
It is strongly arguable that what section 172(1)
requires is a notice expressed as an unequivocal
decision taken by SARS that, unless payment of the
assessed and currently outstanding tax is
forthcoming by a specified date –
a certified statement will be filed with the clerk or
registrar of the court in terms of section 172(1) of the
Tax Administration Act
and that such a notice should not be given unless and
until SARS has actually made a decision to take
judgment in terms of section 172(1).
In other words, an interpretation of section 172(1)
should be in harmony with a taxpayer’s
constitutional right to fair administrative action.
August 2015 5
The right of tax authorities to demand productionof documents
A recent decision in the Federal Court of Canada in the matter of Minister of National Revenue v BP Canada Energy Company 2015 FC 714 dealt withthe Canadian law concerning the right of the Canadian Revenue Authority(‘CRA’) to demand information from taxpayers.
In the preparation of its annual
financial statements, BP Canada
Energy Company (‘BP’) prepared
workings in which it analysed tax
positions that it had taken in
which there might have been a
difference between its
interpretation of the law and the
interpretation of the CRA. These
working papers supported a
reserve for tax contingencies.
They also listed issues on which
the interpretation was uncertain
(‘issues list’).
In the course of evaluating audit
risk for the years 2005, 2006 and
2007, CRA requested BP to
provide it with copies of the
working papers in respect of its
tax contingencies. BP supplied the
workings but redacted the issues
list and statements of subjective
opinion relating to the issues. CRA
therefore made application to
court for an order compelling the
production of unredacted working
papers.
The law
The relevant provision of the
Canadian Income Tax Act is found
in section 231.1(1)(a), which
provides:
(1) An authorized person may, at
all reasonable times, for any
purpose related to the
administration or enforcement of
this Act,
(a) inspect, audit or examine the
books and records of a taxpayer
and any document of the
taxpayer or of any other person
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that relates or may relate to the
information that is or should be in
the books or records of the
taxpayer or to any amount
payable by the taxpayer under
this Act.
Issues
The case of the CRA was based
upon the following submission:
Publicly traded corporations such
as BP p.l.c., the ultimate parent
company of the respondent, are
required for financial reporting
and other regulatory purposes to
prepare consolidated financial
statements in accordance with
generally accepted accounting
principles (‘GAAP’). To prepare
financial statements that comply
with GAAP, the corporation and
its subsidiaries must calculate
reserves to account for contingent
tax liabilities. Those calculations
must include an estimate of the
liability BP would face if the
Minister were to challenge
uncertain positions on BP’s
self-assessed tax return.
The working papers maintained
by BP identify the issues [the
Issues List] which BP knows may
merit adjustment. BP’s list of
uncertain tax positions would
identify the areas at highest risk
for loss of tax revenue. The
Minister seeks disclosure of this
list to verify whether BP’s
uncertain tax positions are
compliant with the Act.
The critical issue from BP’s
perspective was that the
information did not relate to any
information that it was required to
maintain under the Income Tax
Act, but to information that was
required to be recorded in the
consolidated financial statements
in terms of GAAP. This position
was clearly stated in the following
submission by its counsel:
The Minister is afforded broad
authority to access the
information that is (or should be)
in the books and records of a
taxpayer – the source documents
that evidence the transactions or
activities that result in the income
that is (or should be) reported.
However, the Act does not require
taxpayers to prepare GAAP
financial statements or the reserve
analysis reflected therein. The
Issues Lists reflect BP Canada’s
subjective opinion regarding
potential tax risk in taxation years
that are now statute barred.
The ruling
The Court ruled that the CRA
could compel the production of
unredacted working papers. Its
finding was summarised in
paragraphs [18] to [27] of the
judgment of Campbell J:
• As a taxpayer, BP must decide
what amounts are to be
declared as taxable;
• By an authority other than the
Income Tax Act, BP is required
to create reserves that represent
the tax and interest that may be
payable if its decisions prove to
be incorrect;
• The accounting entries are the
working papers required to be
kept, and include the Issues
List;
• While the CRA may not need
the Issues List to conduct the
audit, the CRA requires the list
to establish its audit scope;
• The CRA is not asking for
information to be
manufactured – the Issues List
is in existence and reflects an
opinion on tax liability based on
a choice to create a reserve;
• It is irrelevant that the Issues
List is required to be kept under
an authority other than the
Income Tax Act; and
• The working papers containing
the Issues List are related to the
enforcement of tax, relate to
information in BP’s records and
relate to an amount payable
under the Income Tax Act –
they are within the scope of
section 231.1(1) because they
are relevant to BP’s intention in
creating the reserve.
It is interesting to note that the
Canadian law does not use the
term ‘relevant’; it refers to
information that ‘relates to or may
relate to’ information in the books
or records of a taxpayer. It must
therefore be understood in that
context.
BP has a right to appeal the
decision, which must be exercised
no later than 8 September 2015,
and it will be interesting to see
whether an appeal is noted.
The right of tax authorities to demand production of documents
7
The right of tax authorities to demand production of documents
A South African perspective
In the South African context,
Section 46(1) of the Tax
Administration Act (‘TAA’)
prescribes the circumstances
under which SARS may require a
person to produce material:
SARS may, for the purposes of the
administration of a tax Act in
relation to a taxpayer, whether
identified by name or otherwise
objectively identifiable, require
the taxpayer or another person to,
within a reasonable period,
submit relevant material
(whether orally or in writing) that
SARS requires.
For purposes of income tax, South
Africa taxes persons on
assessment but, increasingly, the
filing processes introduced by
SARS in recent years are
propelling us towards a
self-assessment system. As a
result, a return of income is
prepared through responding to
specific questions in an on-line
questionnaire, from which a
return of income, setting out the
information that SARS requires to
be submitted, is generated.
Whereas under the classical
assessment system the taxpayer
was required, in addition to the
return, simultaneously to submit
explanatory information in
support of the information
contained in the return, the
taxpayer now merely populates
the return and submits it to SARS
with no supporting information.
Assessment usually involves the
electronic capture of the data
supplied online, the automated
checking of arithmetic accuracy
and the issue of an electronically
generated assessment.
In terms of section 40 of the TAA,
SARS may select a taxpayer’s
return for audit or verification. In
that event, SARS will call for
material to be made available, and
rely on section 46(1) of the TAA as
its justification for requiring the
material.
8
In terms of section 46(6) of the
TAA:
Relevant material required by
SARS under this section must be
referred to in the request with
reasonable specificity.
The term ‘relevant material’ is
defined in section 1 of the TAA as
being:
any information, document or
thing that in the opinion of SARS
is foreseeably relevant for the
administration of a tax Act as
referred to in section 3.
The relevance is therefore
determined (and limited) by what
constitutes the administration of a
tax act. Section 3 of the TAA
prescribes the powers and duties
involved in the administration of a
tax act. These (inter alia and to the
extent applicable in this context)
include:
• obtaining information in
relation to anything that may
affect a liability for tax, a
taxable event or an obligation of
a person to comply with a tax
act;
• ascertaining whether correct
returns, information or
documents have been filed;
• establishing a person’s identity;
and
• determining the liability of a
person for tax.
All of the activities referred to
above involve establishing the
factual position. Information
means the facts about a person or
an event. The activities that are
part of the administration of a tax
act must, in their context, all be
interpreted as giving SARS the
right to establish the facts upon
which to base its determinations.
SARS’ duty in administering a tax
act is to identify the facts, identify
the law that applies to those facts
and determine the liability based
upon its (SARS’) interpretation of
the law applicable to those facts.
Thus, where SARS is interrogating
a taxable event, it may request
evidence by which the facts may
be identified. It cannot, it is
submitted, require production of
documents that are of no
probative value in relation to the
facts. Whether a taxpayer’s
interpretation of the law may
differ from SARS’ interpretation is
a question of opinion and not of
fact, and is certainly not relevant
to determining a person’s liability
to tax. It is submitted that the term
‘information’ in section 3 of the
TAA does not extend to
expressions of opinion, whether in
documents from advisors or in
internal risk assessment records
maintained by a taxpayer.
Where a notice requiring the
production of material is received
from SARS, recipients should be
astute to establish whether the
material requested goes to a
purpose or activity specified in
section 3 of the TAA, namely
whether it is required to:
• obtain facts about a liability,
event or obligation to comply;
• ascertain the correctness of
information already in SARS’
possession;
• establish a person’s identity; or
• determine a liability to tax.
The right of tax authorities to demand production of documents
August 2015 9
SARS Watch - 21 July to 20 August 2015
Legislation
30 Jul Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to remove certain items to provide for spirits
obtained from grape wine or grape marc with an
alcoholic strength in excess of 80% by volume
The notice was published in Government
Gazette No. 93035, with commencement
from 31 July 2015.
30 Jul Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to exclude 'number of units' (u) to be applied
proportionately
The notice was published in Government
Gazette No. 93035, with commencement
from 31 July 2015.
30 Jul Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to remove certain items to maintain and
amend anti-dumping duties on stainless steel sinks
originating in or imported from China and Malaysia
The notice was published in Government
Gazette No. 93035, with commencement
from 31 July 2015.
13 Aug Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to reflect the new Special Economic Zones
Act, 2014 for SEZ operators to be entitled to a full duty
rebate on imported goods that will be used for
construction and maintenance of the infrastructure of a
customs controlled area
The notice was published in Government
Gazette No. 39100, with effect from the date
on which the Regulations to be published in
terms of the Special Economic Zones Act,
2014 come into operation.
13 Aug Notice of Amendment to Paragraph 8 of Schedule 1 to
the Value-Added Tax Act, 1991 to reflect the change
from 'IDZ', where it appears in the item, to 'SEZ'
The notice was published in Government
Gazette No. 39100, with effect from the date
on which the Regulations to be published in
terms of the Special Economic Zones Act,
2014 come into operation.
20 Aug Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to provide for a rebate on steel panels used
for the manufacture of raised access flooring systems
The notice was published in Government
Gazette No. 39126, with commencement
from 21 August 2015.
20 Aug Notice of Tariff Amendment to the Customs and Excise
Act, 1964 to reduce customs duty rate on wheat and
wheaten flour
The notice was published in Government
Gazette No. 39126, with commencement
from 21 August 2015.
Interpretation
12 Aug Interpretation Note 63 (issue 2) This IN was updated to provide guidance on
the application of the foreign currency
translation rules, other than in section 24I
and the Eighth Schedule of the Income Tax
Act.
17 Aug Interpretation Note 64 (issue 3) This IN was updated to incorporate
reference and guidance on the new
Companies Act 2008, Dividends Tax; and
the changes to section 10(1)(e)(i) of the
Income Tax Act.
18 Aug Interpretation Note 10 (issue 2) This IN was updated to provide guidance on
the interpretation and application of section
4(c) of the Skills Development Levies Act.
10
SARS Watch - 21 July to 20 August 2015 cont
Binding rulings
3 Aug Binding Private Ruling 200: Source of income of
commission payable to non-resident junket agents
This BPR deals with the source of income of
commission payable to non-resident junket
agents by a resident casino operator.
13 Aug Binding Private Ruling 201: Issue of capitalisation
shares
This BPR deals with the issuing of
capitalisation shares by a company to its
sole shareholder.
14 Aug Binding Private Ruling 202: Application of section
13quin subsequent to an intra-group transaction under
section 45
This BPR deals with whether the transferee
company will be entitled to claim the section
13quin allowance for the commercial
buildings on a property transferred to it by
way of an intragroup transaction.
17 Aug Binding Private Ruling 203: Renunciation of a usufruct
over shares
This BPR deals with whether securities
transfer tax is payable on the renunciation of
a usufruct over shares.
20 Aug Binding General Ruling 29: Unbundling Transactions:
Meaning of 'as at the end of the day after that
distribution'
This BGR addresses the interpretation of the
words 'at the end of the day after that
distribution' as used in section 46(3)(a)(v) in
relation to an unbundling company listed on
the JSE.
Case law
17 Aug TC-VAT 867 The Tax Court held that the assessments
had been raised in respect of the incorrect
vendor and rejected the claim of SARS to
output tax and the appellant's claim to input
tax.
SARS publications
21 Jul Hong Kong ratified the Treaties for the Avoidance of
Double Taxation; no ratification instrument received as
yet
The DTA was ratified in Hong Kong.
22 Jul 2015 Draft Taxation Laws Amendment Bill The draft TLAB was published for comment,
which had to be submitted no later than 24
August 2015.
22 Jul 2015 Draft Tax Administration Laws Amendment Bill The draft TALAB was published for
comment, which had to be submitted no
later than 24 August 2015.
3 Aug Draft Interpretation Note on reduction of debt This draft IN was published for comment to
be submitted no later than 31 October 2015.
5 Aug Brazil Protocol to the Treaty for the Avoidance of
Double Taxation, signed but not yet ratified
The Protocol to the DTA was signed in
Pretoria on 31 July 2015.
11
SARS Watch - 21 July to 20 August 2015 cont
SARS publications
7 Aug Zimbabwe Treaty for the Avoidance of Double
Taxation, signed but not yet ratified
The DTA was signed in Bulawayo on 4
August 2015.
11 Aug Uruguay Tax Information Exchange Agreements,
signed but not yet ratified
The TIEA was signed on 7 August 2015 in
Pretoria.
14 Aug Second Draft Guide on Employment Tax Incentives The draft Guide was published for a second
round of comments to be submitted no later
than 16 October 2015.
18 Aug Draft Interpretation Note on PBOs This Draft IN was published for comment to
be submitted no later than 18 September
2015.
19 Aug Guide on valuation of assets for Capital Gains Tax
purposes (issue 3)
This Guide provides general guidance on
valuations.
19 Aug Zimbabwe Customs Mutual Assistance Agreements
ratified in South Africa
The Customs MAA was ratified in South
Africa.
12
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