Taxpayers cannot obtain the benefits of tax amnesty, which “wipes their slate clean”, but later request remission of tax interest, the SA Revenue Service (Sars) argued at the Constitutional Court on Tuesday.
The case, which involves a R171m tax interest dispute between Sars and Medtronic International, a trading company, is expected to affect every taxpayer and determine how Sars must administer tax amnesty agreements in future.
In 2017, Medtronic discovered one of its accountants, Hildegard Steenkamp, had embezzled over half a billion rand. Steenkamp’s fraudulent scheme involved submitting false VAT returns to Sars over a 10-year period. As a result of Steenkamp’s criminal activity, Sars allowed input tax claims of about R286m. She was convicted and sentenced to 50 years.
On discovering Steenkamp’s fraud, Medtronic approached Sars’ voluntary disclosure programme (VDP). It allows taxpayers to voluntarily approach Sars to rectify tax anomalies, before Sars begins investigating or auditing. Errant taxpayers obtain various benefits, such as no prosecution and a guarantee of “wiping the slate clean”.
However, a VDP agreement is permanent and binding, and taxpayers cannot later object to the payment amounts.
Medtronic signed a VDP agreement and undertook to pay R457m: unpaid capital tax of R286m and interest of R171m. In return, Sars would not pursue criminal prosecution or impose R150m in tax penalties.
After the agreement, Medtronic applied for a remission of the R171m of interest. It argued the huge interest arose as a result of Steenkamp’s fraud, not its own fault.
Sars, however, refused, noting it was not permitted to even consider the request. According to Sars, the interest amount was part of a signed agreement. Part of the agreement was Meditronic’s total payment of R457m, part of which was made of the R171m interest. If Sars granted a remission, it would undermine the agreement.
Dissatisfied, Medtronic successfully challenged Sars in the high court. After an appeal, the Supreme Court of Appeal made a ruling which satisfied neither party. Sars took it the Constitutional Court.
On Tuesday, Jonathan Berger for Sars said Medtronic wanted its “bread buttered on both sides”, getting the benefit of both the VDP route and a remission of interest. But, by going the VDP route, it had “made an election”. It could not now double-back.
Constitutional Court justice Leona Theron pointed out the law did not expressly forbid Sars from considering remission for a taxpayer that has gone the VDP route. But Berger stressed a VDP was “the end of the road”.
If taxpayers could undermine the agreed amounts in VDP agreements by later asking for remissions, this would undermine finality for an important institution like Sars.
But Hein Snyman, for Medtronic, stressed remissions are handled differently to VDP. Indeed, the VDP unit “does not deal” with remissions at all. Medtronic was challenging the outright refusal “to even consider” whether to grant remission.
Constitutional Court justice Mbuyiseli Madlanga argued that if a taxpayer could sign a VDP agreement amount on Monday then ask for a remission on Tuesday “this makes nonsense of what you agreed to”. Snyman denied this.
The implications for the case are wide, as Sars noted.
“Clarity is needed [from the court] on whether a taxpayer may seek the remission of interest after having committed to paying interest in a VDP agreement,” Sars said in court papers. “Not only will such clarity have a direct impact on how Sars deals with similar requests in future, but it may also determine whether previous decisions of Sars may now be subject to review.”
Judgment was reserved.
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