Author: Ernest Mazansky (Werksmans)
Tax controversy has become a fairly common term to refer to what is, in reality, nothing more than a factual or legal dispute with the tax authorities and how these are to be handled in terms of the legal rules regarding taxation.
The fact is that this issue is no longer merely of concern to tax authorities and tax practitioners (whether the latter be in-house or in professional practice, either in accounting or law firms or otherwise), but issues relating to tax avoidance and “morality” in regard to the amount of tax payable are now making headline news in the lay press. One needs to go no further than reading reports of the travails of Amazon and Starbucks in their interactions with the committees of MPs in the House of Commons, or of the CEO of Apple defending his company’s position before committees in Congress in the USA (with even the finance minister of the Republic of Ireland getting in on the act and denying that any special deal was done with Apple and that it merely complied with the laws). And then, of course, one reads of the tax authorities targeting individuals for political purposes (and if we thought that this happened only in South Africa, we might draw some comfort from the fact that this action occurred within the IRS which caused a suitable scandal in Washington DC).
All these issues, of course, do not make the tax practitioner’s functions any easier and, no doubt, tax authorities around the world are rubbing their hands in glee. Logically, of course, it is somewhat disingenuous for a government of a leading country such as the UK or the USA to lambaste large multinational companies about structuring their affairs to take advantage of various double taxation agreements which those very same governments themselves negotiated, debated in the legislature and ratified. If granting such concessions in double taxation agreements to countries such as Luxembourg and Ireland facilitated the evil of base erosion, why did they grant the concessions in the first place? Why is it that the companies were immoral but the governments are blameless?
Unfortunately, to make these arguments is nothing but to shout into the wind. Undoubtedly certain companies will, if for no other reason than to protect their image amongst their customers, feel obliged to offer to pay more tax than they need to (Starbucks has already offered this) and will feel less inclined to consider other potential tax mitigation strategies. Whether or not this is a good thing is for each individual to determine for themselves. Where the problem might get a little out of hand is when a Revenue Authority (or, more likely, an individual working for such an Authority) takes advantage of the current atmosphere to seek to extract more than is rightfully due to the fiscus, simply because he or she is aware that a company might be reluctant to defend its legal position to the hilt.
There is no doubt that there are companies and other taxpayers all over the world who not only push the envelope, but pierce it, and go well beyond what is legally acceptable (I leave the decision as to what is morally acceptable to each individual to decide for themselves, as I have already stated). It becomes somewhat regrettable when one finds fiscal authorities doing the same, except in the opposite direction. Unfortunately one sees that sort of attitude in South Africa as well.
I am not suggesting that such an attitude can be attributed to the current international furore over tax mitigation – on the contrary, such an attitude has been with us before this all started – and nor am I suggesting that this attitude is inculcated in the operational staff by the leadership at the top. In fact, I think that personal experience will bear out that the attitude of the more senior officials at the SARS is far more objective and reasonable than the attitude of operational staff lower down the line (and by “reasonable” I do not mean more lax, but rather more driven by reason as to what is legally correct or incorrect).
Regrettably, at the coal face, one has to deal with individuals whose technical tax knowledge is less than ideal, and whose experience is less than acceptable, and unfortunately it is very difficult to try and convince someone, who does not really understand the law, or commercial practice, that he or she is wrong in principle. Personally I would much rather deal with someone who is very knowledgeable and very skilled in the tax law, because such a person can very quickly understand the points I am making and whether I am correct, and likewise such a person can more easily convince me if I am wrong. But when one faces an individual who does not have a good understanding of the law and practical matters, it is nigh impossible to persuade that individual that the facts or the law favour the taxpayer. The inevitable result is an unfavourable assessment, or an unfavourable response to an objection to an assessment.
It would be interesting to know what percentage of objections are allowed before proceeding to the filing of appeals; and what percentage of appeals are ultimately conceded by the SARS and never get to court. Unfortunately, with the ADR (ie mediation) process, often matters are settled on some compromise basis, and it is not possible to determine whether, and to what extent, either party has settled simply to avoid the costs and inconvenience of litigation, as opposed to the situation where they are unsure of the soundness of their legal arguments.
This aspect is exacerbated, unfortunately, by the state of the Tax Courts in South Africa (a problem recognised both by taxpayers and the tax collector alike). The fact is that the Tax Court, although a specialised court dealing with fiscal matters, falls under the jurisdiction of the Judge President in each division, so that very often it is the most available High Court judge that sits in a tax case, rather than the most suitable. Ideally a Tax Court judge should himself or herself have an in-depth knowledge and understanding of fiscal laws. All too often the judges will admit from the bench that they know nothing about tax. In this scenario who can blame a taxpayer who wishes to avoid going to court? In any country any courtroom is often seen as a lottery. This is even more so in the case of Tax Courts in this country, so much so that there are some practitioners who view the appearance in the Tax Court as nothing more than one of the steps along the way until one can get to the Supreme Court of Appeal, where the issues will be properly aired and addressed for the first time.
Every country has its own problems. Maybe taxpayers in the UK and the USA do not face the difficulties we face here. But then, for the moment at any rate, our large companies can be thankful that they don’t face the kind of embarrassment and moral outrage which other large companies are facing in those other countries when dealing with their committees of Parliament