Absa’s recent court victory fuelled hope that taxpayers could bypass the protracted and prohibitively expensive dispute resolution process when engaging in battle with the SA Revenue Service (Sars). The existing process is daunting and many taxpayers settle in the end because of “dispute-fatigue”.
However, tax experts warn that the Absa victory is not a “silver bullet” to circumvent the process in all instances.
Aneria Bouwer, tax partner at law firm Bowmans, said it was important to understand that the Absa case was “quite unusual”. It is only in “specific or exceptional circumstances” that the courts will allow taxpayers to approach them directly.
The internal remedies through the objection, appeal and tax court process cannot be ignored, unless the matter involves legal principle or it is in the public interest to have the matter resolved urgently, Althea Soobyah, tax consulting director at Mazars, confirmed.
Absa argued that the scope of its dispute with Sars was “a pure point of law”. It requested the North Gauteng High Court to review and set aside two decisions by Sars, allowing them to circumvent the long and protracted dispute resolution process.
The court allowed the review and overturned Sars’s decisions.
Bouwer says in this instance Absa was also able to circumvent the pay-now-argue-later process. Generally, when a taxpayer enters the dispute resolution process, that principle applies.
“In a tax context, an objection or appeal does not suspend the obligation to make payment. You can apply for a suspension of payment until the matter is resolved, but SarsS is quite sticky about that.” In other words, it is seldom suspended, placing taxpayers on the back foot from the start. It causes financial hardship since the taxpayer will have to find funds to pay the disputed tax and fight Sars.
But, says Suzanne Smit, fiduciary and tax consultant at Fidelis Vox, if Sars dismisses a suspension of payment while the tax dispute is ongoing, the taxpayer can apply directly to the high court to review the decision.
Smit says there has been an increase in review applications under the Promotion of Administrative Justice Act (Paja) in instances where there was not a dispute on facts, but on the interpretation of statutory provisions.
Elle-Sarah Rossato, head of dispute resolution and tax controversy at PwC, says where SARS is either reluctant to apply their minds, or to agree to a taxpayer’s interpretation of the law, it necessitates a direct approach the high court. The intervention of a higher court is then appropriate.
The Absa dispute arose when Sars issued an anti-avoidance notice stating that Absa and its wholly owned subsidiary, United Towers, were “party to an impermissible tax avoidance scheme” and derived a tax benefit from it. Absa requested Sars to withdraw the notice, informing the tax agency that it was unaware of any scheme.
Furthermore, it did not have a tax avoidance motive in mind, nor did it “procure a tax benefit” to which it was not entitled to. Instead of withdrawing the notice, Sars issued tax assessments on the perceived tax benefit. In terms of the Income Tax Act Sars has the power to impose tax liability in circumstances where tax is “impermissibly avoided”.
In the transactions, Absa bought tranches of preference shares in PSIC3, an SA company, who bought preference shares in another SA company, PSIC4. The preference share transactions amounted to more than R1bn . PSIC4 invested capital in an offshore trust, DI Trust.
The trust then lent money to MMSA (another SA company and subsidiary of Australia’s Macquarie) and invested in Brazilian bonds. The aspect that provoked the belief by Sars that a tax avoidance arrangement was constructed was the DI Trust’s investment in the Brazilian government bonds.
In the anti-avoidance notice, Sars acknowledged that Absa was ignorant of the “labyrinthine mechanics” in the other transactions. However, in the answering affidavits before the high court, Sars claims it was not “convinced” of Absa’s ignorance. It wanted to “test the veracity” of Absa’s claim of ignorance through its process of objections, appeals and the tax court.
Judge Ronald Sutherland would have none of that. It might have been “a cogent argument had Sars not put its eggs into one basket” by issuing letters of assessment based on the facts in the notice, he said.
“To put it bluntly: if you seek to assess and collect tax on the basis that this is due despite Absa being ignorant, then it is not open to claim that you deserve a chance to go behind the premise of an assessment levied, so you can afterwards attempt to prove Absa did have knowledge." “A semantic gyration cannot turn a naartjie into an orange,” the judge added.
Bouwer says in essence the court reminded Sars that it had made its contentions and should stick with it.
The cost and length of time associated with litigation often deter taxpayers from challenging tax matters, Soobyah said. The current dispute process was a good alternative to litigation.
“In a perfect world, following the process should result in a more cost effective and efficient manner to resolve disputes without incurring exorbitant legal costs,” she says.
In practice, however, the timelines are not adhered to from a Sars perspective. This inhibits taxpayers who then find themselves caught up in a time-consuming and rather frustrating dispute process, Soobyah adds. Rossato, who chairs the tax administration work group of the South African Institute of Tax Professionals, says the objection process has been less than efficient in recent times.
There are several reasons for this, including Sars not applying their mind to the dispute, or internal Sars committees not functioning optimally. Taxpayers may also request an Alternative Dispute Resolution (ADR) meeting — where both parties attempt to resolve the matter.
“In our experience, these meetings can result in a quicker resolution of the dispute. Unfortunately, the convening of an ADR meeting can take as a long as a year.” This is despite the fact that the Tax Administration Act only affords Sars 30 days to revert on whether the matter is appropriate for ADR or not. Smit adds that the timeframe within which a taxpayer may lodge and objection, compared to the timeframe it takes Sars to make a decision is “vastly imbalanced”.
One could only speculate as to why Sars was not abiding by its timelines, Bouwer said. “What is clear, however, is that even for wealthier taxpayers it is expensive and time-consuming to enter into a dispute with Sars,” she said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.