Chapter 5 of the Tax Administration Act, No 28 of 2011 (TAA) confers a broad range of information-gathering powers on the South African Revenue Service (SARS).
Taxpayers are often assessed for more than one tax period at a time, however, the waters become muddied when there are parallel processes carried on in which the issues being investigated by SARS, overlap with disputes pending before the Tax Court. The taxpayer is then saddled with defending itself in respect of a tax period before court while simultaneously sourcing and providing relevant material pertaining to the same legal issues for an audit of a later tax period. In these circumstances, there is often an overlap of facts, law and witnesses which will ultimately be presented in court, thus rendering the information gathering process questionable.
The following question arises: Is it procedurally fair for a taxpayer engaged in a dispute before the Tax Court to be subjected to a parallel process under the TAA concerning essentially the same dispute? Parallel processes are concerning because they give SARS the potential to gain insight into the taxpayer’s litigation strategy as well as obtaining a preview of witnesses’ testimony prior to trial. This is, of course, impermissible in law as it is a direct infringement of a taxpayer’s right to litigation privilege. In civil and criminal litigation these problems are avoided by means of the lis albi pendens rule, which prevents parties from replicating proceedings in different forums and protects the litigants from breaching the rules of litigation such as litigation privilege.
The correlating rule of lis albi pendens is res judicata, the purpose of which is to prevent a party from reopening a case where a court has already ruled on the matter. Section 99(1)(e) of the TAA provides that SARS may not make an assessment that has been resolved under Chapter 9 of the TAA. In effect this section is similar to the concept of res judicata. The question that then arises is whether SARS can conduct parallel proceedings, such an audit to gather information in respect of later years of assessment, where the very same issues are already pending before the Tax Court? Consequently, can a taxpayer use the rules of litigation to prevent SARS from proceeding with an audit?
An immediate difficulty of raising these rules of litigation in tax matters is that the provisions of the tax acts are amended on an annual basis and thus issues in a particular tax period may be factually identical but legally different from those in later tax periods. In other words, the parties and the facts of the matters may be the same, but the applicable taxing provisions may be different.
The other problem is that the rules of res judicata and lis albi pendens apply specifically in the context of litigation. The provisions dealing with information gathering are contained in Chapter 5 of the TAA and are primarily investigative mechanisms used by SARS “for purposes of the administration of a tax Act”. It would thus not be possible to invoke the rules of lis albi pendens in matters where there is an overlap between a field audit, which is administrative in nature, and pending litigation. SARS is, however, constrained from exceeding the scope of its powers in the following respects:
- SARS may only request information, in terms of s46(1) of the TAA, “for purposes of the administration of a tax Act”. It may not use its investigative powers with the intention of seeking evidence to conduct its defence in a matter before the Tax Court; and
- SARS is precluded from interviewing witnesses without having regard to the rules of litigation privilege. SARS may use the information gathering provisions in Chapter 5 to interrogate the taxpayer’s witnesses but only for a legitimate purpose and in a manner that does not undermine the fairness of litigation.
In cases where there is a dispute running in parallel with a field audit, a taxpayer may have limited grounds to prevent the latter from proceeding. To the extent that the taxpayer is prejudiced, in that its right to litigation privilege is infringed, it will need to make out a clear case of prejudice in order to prevent SARS’s investigation from proceeding.
Should SARS continue to use its investigative powers to probe the taxpayer’s privileged information and exceed the scope of its powers, the taxpayer will have the option of challenging SARS to a review in terms the Promotion of Administrative Justice Act, No 3 of 2000.