The recently promulgated Tax Administration Act, No. 28 of 2011 (TAA) contains provisions that grant some dramatically increased powers to the South African Revenue Service (Sars).
Tax recovery on behalf of foreign governments
Section 185 of the TAA contains the measures available to Sars to recover tax on behalf of foreign governments. Broadly defined, the provisions of section 185 provide that revenue authorities of a foreign country (with which South Africa has a tax treaty) can request Sars to assist in the collection of foreign taxes due by a person to that country.
These powers are not an entirely new development. Similar provisions were contained in the repealed section 93 of the Income Tax Act, No. 58 of 1962 (the Income Tax Act), and some remain in section 75 (not repealed) of the Value-Added Tax Act, No. 89 of 1991.
The TAA envisages two types of mutual assistance requests from foreign governments. The first is a request for conservancy of an amount of tax alleged to be due in a foreign country, where there is a risk of dissipation or concealment of assets located in South Africa. The second is a request for the collection of an amount of tax due under the laws of a foreign country. Whereas the latter is not a new concept, the provision dealing with a request for conservancy was not previously dealt with under the Income Tax Act.
If Sars receives a request for conservancy, section 185 of the TAA enables Sars to bring an ex parte application to a High Court for a preservation order. Preservation orders are, in turn, governed by section 163 of the TAA. Such an order, if granted, prohibits any person from dealing with the assets at the risk of dissipation or concealment. If there is sufficient urgency, Sars may even seize and remove such assets up to 24 hours before applying for a preservation order.
If a pre-emptive seizure is carried out, however, Sars must preserve and safeguard the assets seized. If a preservation order is granted and Sars has reasonable grounds to believe that assets that are subject to the order are at risk of being disposed of or removed, Sars may seize such assets.
It should be noted that Sars’ power to apply for a preservation order in terms of section 163 is not limited to instances when a foreign government has sought assistance with tax collection by way a request for conservancy. In fact, Sars can apply for a preservation order in any instance when it has a reasonable suspicion that tax collection will be frustrated because assets are or will be removed or dissipated.
The provisions contained in section 185, read in conjunction with section 163 of the TAA, equip Sars with important measures to assist with tax collection under South Africa’s tax treaties. In particular, the powers to apply for an ex parte preservation order and even to pre-emptively seize assets are considerable additions to Sars’ arsenal, and taxpayers should take careful note thereof.
On the other hand, Sars will presumably seek to employ such pre-emptive measures only if it has compelling evidence to justify its suspicion that assets will be removed or dissipated. If it has incorrectly or unjustly seized assets, it could face litigation from taxpayers who may have been unduly prejudiced.
Compulsory repatriation of foreign assets
The TAA also provides for a new tax recovery provision in section 186. This section affords Sars the power to apply for a High Court order to compel a taxpayer to repatriate assets situated abroad. Sars can only do so, however, when a taxpayer does not have sufficient assets in South Africa to satisfy a tax debt in full.
A senior Sars official must furthermore have a reasonable belief that the taxpayer either has assets situated outside South Africa, or has transferred assets out of South Africa for no consideration or for less than market value. This provision was most likely introduced in the light of Sars’ widely publicised and on-going legal battles with certain prominent South African businesspersons.
An important distinction between this provision and section 163 (described above) is that Sars cannot apply to a Court for an order to compel the repatriation of assets on an ex parte basis. Sars must give notice to the taxpayer, who will then have the opportunity to respond with reasons as to why the order should not be granted.
If the Court decides in favour of Sars, however, it has wide powers regarding the content of the order. Section 186 determines that the Court may specify the period within which the assets must be repatriated; may impose certain limitations on the taxpayer until the tax debt is satisfied, including limitations on the taxpayer’s right to travel (requiring the surrender of passports); may withdraw the taxpayer’s right to do business in South Africa (if applicable); and may require the taxpayer to cease trading; or may issue any other appropriate order.
A taxpayer who fails to comply with the Court order could be charged with contempt of court and may face imprisonment if found guilty. These Court sanctions are far-reaching and can clearly have serious consequences for delinquent taxpayers.
The wording of section 186 of the TAA introduces some technical concerns. Firstly, the definition of a “tax debt” in section 1 of the TAA is very wide, being defined as “an amount of tax due by a person in terms of a Tax Act“. It is submitted that this definition could even include tax debts that are subject to dispute.
A “Tax Act”, in turn, is defined in section 1 of the TAA as comprising the statutes referred to in the Sars Act, No. 34 of 1997 (see section 4, read with schedule 1 of the Sars Act). It as such includes an extensive list of tax legislation administered by the Commissioner of Sars, and excludes only the Customs and Excise Act, No. 91 of 1964.
Accordingly, Sars can apply for a High Court order to compel the repatriation of assets to satisfy a wide variety of tax debts; potentially even for disputed tax debts (except if the taxpayer has applied for a deferment; for instance under section 88 of the Income Tax Act).
If the repatriation order is granted and assets or funds are repatriated, but the relevant tax dispute is ultimately settled in favour of the taxpayer, the taxpayer would likely have been subject to considerable inconvenience. For instance, a taxpayer could potentially have been compelled by the Court order to sell foreign immovable property and repatriate the proceeds. Sars could face litigation from taxpayers in such situations, especially if it is found that the tax debt was incorrectly or unjustifiably disputed by Sars.
There is furthermore uncertainty as to whether the limitations that the Court may impose in terms of section 186 of the TAA – particularly orders requiring a taxpayer to cease trading or to restrict his or her right to travel – will stand up to a Constitutional challenge.
It will be interesting to monitor how the balance is maintained between Sars’ application of the powerful measures discussed above, and taxpayers’ rights to just administrative action and Constitutional protection. More pertinently, these measures highlight the importance of ensuring that tax debts are timeously settled; because unlike the new Tax Ombud (introduced by the TAA), Sars has plenty of teeth and seems to constantly grow new ones.
By Rudi Katzke, associate, Webber Wentzel