Tax Administration Act – Tax clearance certificates

court hood 1Taxpayers who wish to tender for State contracts do not qualify unless they can produce a valid tax clearance certificate. The refusal, withdrawal or non- renewal of such a certificate would consequently be the death knell of any business whose lifeblood is the securing of state tenders.

A taxpayer’s unsuccessful attempt to compel SARS to grant a tax clearance
certificate

The decision in Chittenden NO v CSARS [2014] ZAGPPHC 51, handed down by the High Court on 18 February 2014, concerned a taxpayer company that was under supervision in terms of the business rescue provisions of the Companies Act No 71 of 2008 (Companies Act) and its attempt to secure the renewal of a tax clearance certificate.

One of the company’s creditors was SARS in respect of some R12 million in outstanding taxes.

SARS, as a creditor in respect of unpaid tax, opposed the business rescue plan
A business plan had been prepared by the business rescue practitioner and, at a creditors’ meeting held on 23 August 2013, SARS in its capacity as a creditor had voted against the plan.

The business rescue practitioner then applied to court in terms of section 153(1)(a)(ii) read with section 153(7) of the Companies Act to have the vote set aside on the grounds that it was inappropriate – the rubbery expression used in the new Companies Act and described by Cassim, Contemporary Company Law 2 ed at 908 as “strange and perhaps too wide”.

There is as yet no judicial decision to throw light on how the courts will interpret and apply these provisions of the new Companies Act and, in the case under discussion; the taxpayer’s application in this regard had not yet been heard.

The company was plunged into crisis by the imminent expiration of its tax clearance certificate
The taxpayer was in the meantime plunged into crisis when the Department of Defence reminded the company that its tax clearance certificate was due to expire on 22 February 2014. It seems implicit that the non-renewal of the tax clearance certificate would have scuppered any prospect of a successful business rescue.

The imminent lapsing of the tax certificate seems to have taken the company by surprise for it was already 5 February 2014 – less than three weeks before the expiry of the certificate – when it applied to SARS for a new tax clearance certificate, a request that SARS declined two days later.

Within the next fortnight, the taxpayer launched the urgent application that is the subject of this reported judgment.

The flawed basis of the taxpayer’s urgent application to court
Regrettably, the judgment is silent as to the legal basis on which the taxpayer made the application, but it seems that the relief sought was a court order that SARS must provide the taxpayer with a renewed tax clearance certificate.

As the court correctly pointed out, a negative decision by SARS in response to an application for a tax clearance certificate constitutes administrative action, as defined in the Promotion of Administrative Justice Act 3 of 2000 (PAJA) and can be taken on review to the High Court in terms of that Act.

However, it is plain that it would be futile to take on review an administrative action by SARS in circumstances where SARS was legally barred from making any other decision than the one it took, for there is nothing in PAJA or the common law that empowers a court to order an administrator to take an action – including the making of a decision – that he is not lawfully allowed to take.

The language of the Tax Administration Act, 28 of 2011(the TAA) is plain in limiting the circumstances in which SARS can issue a taxpayer with a tax clearance certificate, for section 256(3) states that–

“A senior SARS official may provide a taxpayer with a tax clearance
certificate…. only if satisfied that the taxpayer is registered for tax and does not have any—
(a) tax debt outstanding, excluding a tax debt contemplated in section 167
or 204 or a tax debt that has been suspended under section 164 or does not exceed the amount referred to in section 169(4) [namely R100]; or
(b) outstanding return unless an arrangement acceptable to SARS has been made for the submission of the return.”

It is clear from these provisions that if the taxpayer has an outstanding tax   liability (and it must be borne in mind that an objection or appeal against an assessment does not, of itself, suspend the obligation to pay the tax) then SARS cannot lawfully grant a tax clearance certificate unless it has formally suspended the obligation to pay.

In short, the taxpayer in this case was in a legal cul de sac in seeking a court order compelling SARS to issue a tax clearance certificate in circumstances where it could not lawfully issue such a certificate. The application was thus an exercise in futility and doomed to failure.

With the benefit of hindsight
What, in hindsight, might the taxpayer in this case have done?

First, it would have been useful if the expiry date of the tax clearance certificate had been noticed well in advance so as to obviate an urgent application to court.

Secondly, the taxpayer could have objected to the assessment (if it had grounds to do so) and then immediately applied to SARS for a suspension of the obligation to pay the disputed tax in terms of section 164(2) and (3) of the TAA
which provides that –

“(2) A taxpayer may request a senior SARS official to suspend the payment of tax or a portion thereof due under an assessment if the taxpayer intends to dispute or disputes the liability to pay that tax under Chapter 9.
(3) A senior SARS official may suspend payment of the disputed tax having regard to—
(a) the compliance history of the taxpayer;
(b) the amount of tax involved;
(c) the risk of dissipation of assets by the taxpayer concerned during the period of suspension;
(d) whether the taxpayer is able to provide adequate security for the payment of the amount involved;
(e) whether payment of the amount involved would result in irreparable financial hardship to the taxpayer;
(f) whether sequestration or liquidation proceedings are imminent;
(g) whether fraud is involved in the origin of the dispute; or
(h) whether the taxpayer has failed to furnish information requested under this Act for purposes of a decision under this section.”

These provisions of the TAA thus give SARS a discretion (signalled by the word may in the opening phrase of section 164(3)) to grant a suspension of the obligation to pay tax, and enumerates – by way of what appears to be a closed list – the considerations to be taken into account in determining whether or not to grant the taxpayer’s request for suspension.

The TAA accords no relative weight to the items on that list and it seems that none of them is, of itself, decisive either for or against the granting of a suspension.

The taxpayer’s remedy if SARS declines the request to suspend the obligation to pay the disputed tax
If SARS had declined the taxpayer’s request to suspend the obligation to pay the disputed tax, then this would have constituted administrative action and the taxpayer could have taken that decision on review in terms of PAJA, arguing in essence that the decision was irrational or perhaps – in the circumstances of this particular case – that the decision to refuse to suspend the obligation to pay the tax was tainted by an ulterior motive on the part of SARS to scupper a business rescue plan that (presumably) would have compromised SARS’s claim to the outstanding tax.

Success in that review application could not be guaranteed, but at least the court would have had the power to set aside SARS’s adverse decision on the taxpayer’s request for suspension of the obligation to pay the tax and substitute its own decision.

With that suspension under its belt, the taxpayer could then have made a further application to SARS for a tax clearance certificate and challenged a negative decision in terms of PAJA.

The language of section 256(3) signals by the word may that the suspension of an obligation to pay assessed tax involves a discretionary decision by SARS, which is again administrative action, and a negative response, could therefore have been taken on review by the taxpayer in terms of PAJA.

There is, as yet, no reported decision in which a taxpayer, acting in terms of PAJA, has challenged a decision by SARS to refuse a request to suspend the obligation to pay an assessed amount of tax to which the taxpayer has objected, or challenged a refusal to grant a tax clearance certificate. Such applications are still uncharted territory, and the approach that the courts will take in adjudicating such challenges is a matter for speculation.

PwC
TAA: Sections 164, 167,169, 204 and 256
Companies Act: Section 153
PAJA: Section 1 definition of ‘administrative action’ and 8

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