Author: Pieter van der Zwan (North-West University)
Being a corporate taxpayer in an environment with constant developments in legislation and regulations coupled with complex tax issues that arise on a regular basis is not an easy task. One need not look further than a number of cases that appeared before the courts over the past year to see evidence of this. It is submitted that the nature of the challenges faced highlights the fact that the role of a corporate tax advisor’s involvement in the tax affairs of a client has evolved to be much more than merely assisting to complete an income tax or provisional tax return just before the submission deadline arrives. This article deals with four of the challenges that a corporate taxpayer in South Africa may face as well as the role that a corporate tax advisor could, and arguably should, be fulfilling in addressing these challenges.
Response in respect to assessments issued
Raising objection to assessments issued by SARS is often a process that is left until the last minute and that is completed rather hastily by taxpayers. The dangers of this approach were pointed out in the judgment in the VAT Case 759 heard in the South Gauteng Tax Court in May 2013. The taxpayer objected to and appealed against the imposition of interest and penalties, but it appears never to the assessment of the tax itself. The taxpayer pointed out that in this particular case no such objection was raised as this was the only way to unlock its bank accounts. The taxpayer’s evidence in court however indicated that it wished to also object to the amount of tax assessed. The court had to determine whether the taxpayer was allowed to appeal against the tax amount or not. In the judgment Pretorius J referred to the following view from the Matla Coal Ltd v Commissioner for Inland Revenue[1] case: “And in terms of s 83(7)(b) the appellant in an appeal against the disallowance of his objection is limited to the grounds stated in his notice of objection. This limitation is for the benefit of the Commissioner and may be waived by him”. This view is supported by the Rules promulgated under section 107A of the Income Tax Act, which were still in operation at the time of writing awaiting a new set of rules to be published by SARS, that require a taxpayer to indicate the grounds of objection when objecting and from there onwards generally limit the taxpayer to those grounds in subsequent dispute resolution procedures and processes, such as when it appeals against the assessment.
Despite the taxpayer in the case referred to above appearing to have had certain reasons for not objecting to the capital tax amount, many taxpayers neglect to object to all aspects of an assessment or to provide complete or alternative grounds of objection should more than one ground exist. This is often as a result of time pressure or not being aware of all such grounds. The dangers of omitting grounds of objection are well described by the judgment in the Matla Coal Ltd case, as referred to in Case 759. The involvement of a corporate tax advisor who can be of assistance in ensuring complete and thorough grounds of argument at a stage as early as objection is clearly evident. Calling on the help of an advisor later in the process may cause a taxpayer to have placed itself in a position where it is extremely limited in terms of the options and grounds of argument available to it.
Difficulties in fulfilling the burden of proof
An aspect that is closely related to the grounds or arguments on which assessments raised are objected to, is the matter of being able to support those views when it comes to the push. It is important to note that section 102 of the Tax Administration Act (TAA) requires the taxpayer to prove that, amongst other, an amount is not taxable or that it is entitled to a deduction. In two recent cases the appeals of taxpayers’ to the courts were unsuccessful due to the fact that they were unable to fulfil the burden of proving the facts on which they based their view to the courts. Extracts from the judgments in these cases illustrate the areas where the taxpayers’ positions were found wanting. In the case of GB Mining v Commissioner: SARS[2] Swain AJA stated that:
“GB Mining did not provide credible and reliable evidence to explain the alleged errorin describing the amount in question as an ‘OTR loan’ in its financial statements and why its auditors KPMG had done so. Indeed, all the information at hand points emphatically in the opposite direction”.
In the other case heard in the Cape Tax Court, Case 13002, the taxpayer based its view on the argument that it was not involved in any farming, agricultural or other pastoral activities that would fall under the First Schedule of the Income Tax Act. In this judgment it was stated:
“When the objective evidence, particularly the range of documents to which I have references, including contracts and financial statements are considered. They all indicate in the direction that appellant was conducting a business of plantation farming”.
It is not the purpose of this article to consider the validity of the taxpayers’ technical arguments, but rather to point out the challenges that evidence in financial statements, contracts and other documentation may have caused if in fact the taxpayers’ contentions were correct and valid. In this light it is submitted that the involvement of a corporate tax advisor in certain critical activities may stand a taxpayer in good stead if the situation ever arises where it would be necessary to provide further evidence to support the tax treatment or position taken in respect of a transaction. From the two cases briefly considered above, one aspect that is of utmost importance is to obtain the inputs and review of financial statements by a corporate tax advisor to determine any areas of potential contradiction between the financial statements and tax positions taken. This would of course require a corporate tax advisor to be sufficiently closely involved with the entity’s affairs on a regular basis to be able to provide useful inputs in this regard. The other area highlighted by case number 13002 is the importance of the involvement of a corporate tax advisor when drafting agreements and other documentation to ensure that such documents accurately reflect the facts and intention of a taxpayer for a transaction or deal from a tax perspective. Reviewing transaction documents from a tax perspective should be standard operating practice, even in instances where tax advice has been obtained on the matter as even the best tax advice or opinion will be of no value if the documentation does not ultimately reflect this correctly.
Exposure to understatement penalties
Most taxpayers are at this stage, close to two years from the date when the TAA became effective, already familiar with the understatement penalties imposed using the table of behaviours and circumstances in section 223 of the TAA. As more additional assessments are issued under the provisions of the TAA following requests for information or audits performed, with understatement penalties being imposed in respect of such assessments, taxpayers may find that they are possibly stuck in a position on the table in section 223 where they cannot support an argument for a lower rate of penalty or even perhaps the remittance of the penalty. In these circumstances, the importance of implementing measures to manage the exposure to such penalties where an argument for reduction could exist is becoming more evident.
The involvement of a corporate tax advisor in areas where a risk of requests for information, audits and additional assessments by SARS exist may be of value to a taxpayer. Evidence of the involvement and documented views of a corporate tax advisor may go a long way in proving that a taxpayer did not act with complete disregard for the law (grossly negligent), had grounds for the position taken and even that reasonable care was taken when the tax returns were complete as the views and inputs of a specialist were obtained. In addition, section 223(3) of the TAA specifically makes provision for understatement penalties imposed for substantial understatement (the lowest behaviour that could result in an understatement penalty) to be remitted if a tax opinion is obtained from an independent tax practitioner. It is important to note that this remission provision however only applies if the opinion was obtained before the date when the relevant return was submitted. The decision of a taxpayer to obtain such an opinion would therefore have to be taken on a risk basis well before the matter is raised or queried by SARS. This suggests that a corporate taxpayer should have an active and timely tax risk management process, which may involve the use of an advisor, as and when transactions take place rather than as an after-thought when the penalties have already been imposed.
Dealing with changes in legislation
The last challenge for taxpayers that is considered in this article relates to the ability to plan and structure transactions taking into the latest amendments and future developments. As legislation and regulations change at a rapid rate is it difficult to stay ahead and be able to have a thorough understanding of the latest amendments that may result in risk or provide an opportunity from a tax perspective. Being aware and update to date with the latest amendments is however non-negotiable in a corporate tax environment. What complicates the matter when it comes to new developments or amendments is the fact that in recent years certain amendments were made with retrospective effective dates. A good example of this, which is also very relevant for corporate taxpayers, is section 43 of the Income Tax Act that was introduced at the start of 2013. This section was initially worded in such a manner that it allowed substitutions of any equity share for another equity share while enjoying the roll-over treatment allowed by that section. The section was however amended retrospectively to have a narrower application at the end of 2013 with certain amendments taking effect from 1 April 2013 and others from 4 July 2013. Numerous taxpayer planned or perhaps may even have implemented transactions during 2013 that made use of the roll-over relief in section 43 as initially worded while being unaware of the changes that were eventually enacted on 12 December 2013 with this retrospective effect.
This brief discussion illustrates the importance of not only being up to date with the amendments to legislation, but also have an understanding of the broader picture as to the intention of the legislature as to the purpose of an amendment and the development of the wording of a provision that resulted in the final provision. It is once again evident that a corporate tax advisor who is sufficiently closely involved in or aware of the development of the legislation can in such instances be an invaluable asset to a taxpayer’s team.
Concluding thoughts
The world of corporate tax is an interesting area but also one which poses a number of challenges to taxpayers that should not be neglected or lost sight of until it is too late. This article was aimed at raising the awareness of corporate taxpayers of some general areas that may require their attention or at the very least require some consideration. It is submitted that the discussion in the article should prompt corporate taxpayers to consider current practices and approach to the challenges critically. This includes the role that an advisor could, and arguably should, be playing in assisting corporate taxpayers negotiate the challenges that the corporate tax environment holds.
Footnotes:
[1] 1987 (1) SA 108 (A)
[2](903/2012) [2014] ZASCA 29 (28 March 2014)