Author: Mark Bovey (PwC)
A discussion of the interpretational issues that may arise when a taxpayer needs to prove behaviour under the Voluntary Disclosure Programme
On 1 October 2012, SARS launched a Voluntary Disclosure Programme under the provisions of sections 225 to 233 of the Tax Administration Act, No. 28 of 2011, as amended (“the TAA”). The main aim of the Programme is to encourage taxpayers to disclose, on a voluntary basis, previous non-compliance which may have prejudiced SARS, without the fear of understatement and other administrative penalties.
There are however challenges a taxpayer may face once a voluntary disclosure application (VDA) has been made to SARS. In this article all references to legislation refer to the TAA.
What happens after application
Once a taxpayer submits a VDA, it is assigned to a SARS official. At this point the taxpayer will usually receive an email or letter requesting further information regarding:
(i) Confirmation that no previous VDA has been made in respect of the current default;
(ii) Confirmation that there is no audit or investigation pending with regard to the default; and
(iii) Specific details of which behavior resulted in the understatement/default and provision of substantiating reasons to support your selection (in this regard SARS refers to the understatement penalty in column 5 or 6 of the understatement penalty percentage table in section 223(1));
On receipt of this submission, a decision will be taken on the applicable voluntary disclosure relief to be granted in terms of section 229. The response to SARS regarding points (i) and (ii) are straightforward and need not be a cause for concern. The reason for this is that the SARS VDP Unit operates in isolation to the rest of SARS and it would not be aware of any pending audits or investigations being conducted. Thus the main purpose of these questions is to protect the integrity of the Programme. Without this additional information, the Unit would not be able to make an informed decision in accepting or rejecting a VDA.
Responses to SARS regarding point (iii) have the potential to be somewhat more prejudicial to the taxpayer. This view is premised on the understanding that SARS has no basis for requesting the taxpayer to make this determination. The support for this view is contained in section 104(2), although in the dispute resolution chapter (Chapter 9), which states that “The burden of proving…the imposition of an understatement penalty…is upon SARS”. When one reads the VDP provisions in the TAA, there is no section therein that allows SARS to reverse this onus and place it upon the taxpayer. Nevertheless, the power of negotiation lies with SARS in that if a taxpayer does not make a submission in this regard, SARS will not accept the VDA. In essence, a taxpayer is forced to make a submission at the request of SARS. The writer is of the view that this onus lies with SARS and SARS should be able to make this determination based on the contents of the VDA.
The pitfalls in making a submission on ‘behaviour’ to SARS is that if VDP relief is withdrawn for any reason, there is a possibility that the taxpayer’s rights will be prejudiced. In terms of section 231(1), when SARS withdraws VDP relief, all penalties that were waived are re-imposed, including understatement penalties. A taxpayer, in terms of section 231(2), is entitled to object to the withdrawal of the VDP relief and while the taxpayer would be objecting to the decision to withdraw the VDP relief, the associated result is that assessments may be issued with regard to the original default as well. One must then ask the question, would a taxpayer be able to challenge SARS’ decision to impose understatement penalties when they have already conceded to a behavior in section 223 with SARS?
That is indeed a vexed question. Needless to say, the VDP provisions provide much needed relief to a taxpayer who requires his tax affairs to be regularised. However, certain interpretational issues still need to be ironed out before the full purpose and effects of the Disclosure Programme can be felt by a taxpayer. It is recommended that when a taxpayer is requested to make a submission to SARS regarding the behavior that resulted in the default, due consideration must be given to such a response.
This article first appeared on the May/June 2015 edition on Tax Talk.