The SA Revenue Service (Sars) says it has reasonable grounds to believe the fiscus is suffering “severe financial prejudice” due to the illegal smelting of Krugerrands into gold bars.
The tax authority told the high court in Pretoria in its VAT dispute with Kusasa Refining, a company that buys, sells and refines precious metals, that it suspects tax graft is rife in the second-hand gold industry, which also features the so-called zama zamas.
The VAT dispute exposes a potential loophole in the tax system that could be exploited by unscrupulous actors and which could have a negative impact on the country’s economy and revenue collection.
It also reveals the challenges Sars faces in auditing and investigating complex and secretive businesses, such as those involved in refining precious metals, and raises questions about the sources and destinations of the smelted and refined gold, the involvement of zama zamas, and conflict regions.
Sars withheld R164m of the company’s VAT refund in 2021 while it audited its tax returns and those of other vendors it does business with. The receiver of revenue has to date not completed its audit, highlighting the complex nature of investigations like this one.
The two-year delay in finalising the audit led Kusasa to approach the court for an order compelling Sars to complete its audit. The company said the withholding of VAT has caused great harm to the business and it was forced to sell core assets and retrench its staff.
It is unable to pay commissions to its agents.
Kusasa also said the money held by Sars has affected its
ability to secure financing of its VAT obligations from its loan financier. It said the financier, a Swiss entity called Valcambi Suisse, has since terminated its revolving VAT loan facility with Kusasa.
According to Valcambi Suisse’s website, the company offers “flexible financial solutions based on our good credit rating, our long-standing and immaculate reputation, and on our close and long-term relationships”.
Swiss media reports have previously questioned Valcambi for sourcing gold from conflict regions in Africa. There is no indication from Sars’ papers that Valcambi is being investigated.
One of Kusasa’s gripes is that it was not kept informed of its audit, even when it asked the tax agency to do so.
Sars told the court it is worried about tax avoidance in the second-hand gold industry and is determined to rein in tax dodgers. One of the reasons behind the delay in completing its audit was that it was probing the entire value chain.
“The unlawfully claimed input tax reduces liability to pay tax, reduces the purchase considerations payable by the vendors in the supply chain and gives rise to an unlawful VAT refund claim. Therefore on this basis, before making any determination in this regard, the entire supply chain must be audited and investigated,” the tax agency said.
“Therefore, the applicant’s contention that there is no need to further audit and investigate the applicant is entirely invalid as Sars has concerns relating to the supply to the applicant, specifically in respect of one of its main suppliers, Millennium.”
Attempts to track an entity called Millennium proved futile as it seems to have no online presence. A company search returned more than 500 companies that bear the name.
Sars argued that the motive for the application by Kusasa was to prevent it from auditing its VAT affairs.
The court dismissed this argument and said the evidence before it suggests Kusasa has co-operated with Sars.
Judge Cassim Sardiwalla said that while Sars was entitled to conduct an investigation and determine procedures relating to it at its own discretion, it is prudent in a fact-finding investigation to inform and interact with a person whose rights may be adversely affected.
“In the present matter, the respondent (Sars) did not at any stage of its investigation find it necessary to engage with the applicant (Kusasa), who by the respondent’s version and information may be clearly implicated, until the institution of this application of November 11 2021. This goes against the principles of natural justice and fair procedure,” Sardiwalla said.
Rights
“At this stage, I am satisfied that this failure to do so renders the conduct an administrative action. It cannot be denied that the decision adversely affected the applicant in having the VAT refunds suspended, and that if the applicant is not granted the relief that he seeks that the
finalisation of the audit could continue for a protracted period, the results of which will interfere with the rights of the applicant in the future.”
The judge ordered Sars make a decision within a month on whether to finalise the Kusasa audit and opened the door for the company to seek urgent court relief should Sars fail to comply with the order.
Sars declined to comment.
Kusasa director Gregory Magid said the company is not involved in any tax avoidance and to date no indication of any impropriety has been advanced by Sars.
“The audit is still not finalised. Sars has applied for leave to appeal to the Supreme Court of Appeal. The parties are awaiting a date of set down for the hearing of the application. Kusasa is experiencing severe and ongoing uncertainty, as the scope of the Sars VAT audit has been extended on multiple separate occasions (since the initial notification in 2020) and is still not finalised,” Magid said.
A note by law firm ENSafrica said that though concerns about VAT refund fraud in the second-hand gold industry are not new, a new modus operandi whereby the fraud is supposedly committed has been identified.
“In recent years, fictitious businesses are registered for VAT and required documentation (for example tax invoices) is fabricated. This is done to enable the purchasing vendor to claim actual (not notional) input tax deductions in respect of VAT at 15% supposedly charged by a fictitious supplier.
“Typically, the VAT reflected on the false documentation is never paid over to Sars.”
The law firm said the fraudulent scheme is premised on vendors introducing illicit gold, which does not carry VAT, into the supply chain and unlawfully claiming VAT refunds using fabricated documents.
The illicit gold is believed to originate mainly from illegally melted Krugerrands, and illegally mined and imported gold.
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