Synopsis August 2015 - PwC1 Synopsis Tax today August 2015 A monthly journal published by PwC South Africa providing informed commentary on current developments in the tax arena, both

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SynopsisTax today

August 2015

A monthly journalpublished by PwC SouthAfrica providing informed commentary on current developments inthe tax arena, both locallyand internationally.Through analysis andcomment on new law and judicial decisions ofinterest, it assistsbusiness executives toidentify developmentsand trends in tax law and revenue practice that might impact their business.

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Contents

The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The right of tax authorities to demand production of documents . . . . . . . . . . . . . . . . . . . 5

SARS Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Editor: Ian Wilson

Contributors to this issue: RC (Bob) Williams, Ian WIlson and Zarene Viljoen

Dis tri bu tion: Elizabeth Ndlangamandla [email protected]

To ensure that you continue to receive our publication, please see page 12.

The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer

Mark Lifman has recently been the subject ofmany lurid newspaper stories, with City Pressdescribing him as ‘one of South Africa’s biggestunderworld bosses and one of Cape Town’srichest and most feared underworld figures’. It has been reported that he owes SARS someR388 million in tax.

Not for the first time in history has

a powerful underworld figure met

his Waterloo when engaging with

the tax authorities.

A judgment of the Cape Town

High Court delivered on 17 June

2015 (but not yet reported)

recorded that Lifman and various

close corporations of which he

was the sole member owed an

undisputed tax debt to SARS of

over R13 million (some R3 million

of which was owed by Lifman

personally) that had accumulated

over some ten years. Further tax

debts (see para [6]) were still in

issue.

This tax liability had come to light

in an inquiry held in 2014–2015 in

terms of section 50(1) of the Tax

Administration Act 28 of 2011

into alleged non-compliance with

tax obligations on the part of

Lifman and 35 juristic entities

making up ‘the Lifman Group’.

SARS had given notice of its

intention to seek a civil judgment

against Lifman and his close

corporations if they failed to

adhere to a date for payment of

31 March 2015 that had been

agreed with SARS. When payment

as agreed was not forthcoming,

SARS took a civil judgment

against them in terms of section

172(1) of the Tax Administration

Act.

Application to interdictSARS from enforcing thejudgment

On learning that a judgment had

been taken against them, Lifman

and his controlled close

corporations attempted to

interdict SARS from executing on

that judgment.

The main argument put forward

by Lifman was that SARS did not

give the notice required by section

172(1). This provision states

that –

If a person has an outstanding tax

debt, SARS may, after giving the

person at least 10 business days

notice, file with the clerk or

registrar of a competent court a

certified statement setting out the

amount of tax payable and

certified by SARS as correct.

August 2015 3

Contents

The Mark Lifman judgment: the High Court refuses to interdict the enforcement by SARS of a judgment taken against the taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The right of tax authorities to demand production of documents . . . . . . . . . . . . . . . . . . . 5

SARS Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Editor: Ian Wilson

Contributors to this issue: RC (Bob) Williams, Ian WIlson and Zarene Viljoen

Dis tri bu tion: Elizabeth Ndlangamandla [email protected]

To ensure that you continue to receive our publication, please see page 12.

Section 174 goes on to provide

that –

A certified statement filed under

section 172 must be treated as a

civil judgment, lawfully given in

the relevant court in favour of

SARS for a liquid debt for the

amount specified in the

statement.

Read together, the import of

these provisions is that, having

secured what amounts to a civil

judgment on the basis of a mere

‘certified statement’, SARS can

enforce the judgment in all the

ways open to a judgment

creditor, including the

attachment and sale in execution

of the taxpayer’s property.

This is the most draconian aspect

of the notorious pay-now-argue-

later rule.

Potentially catastrophicconsequences

The taking of such a judgment

has potentially catastrophic

consequences for a taxpayer.

Consequently, the statutory

requirement in section 172(1)

that SARS must give the taxpayer

at least ‘ten business days’ notice’

assumes great importance, for it is

the only procedural safeguard

interposed between assessment

and the taking of judgment.

It might therefore be expected

that a court would adopt a strict

interpretation of this solitary

procedural bulwark for the

taxpayer, bearing in mind that the

taking of judgment in terms of

these provisions is not preceded

by any judicial scrutiny of the

assessment to tax on which it is

based. The assessment may thus

be revealed in a subsequent

appeal to have been completely

wrong, by which time the

taxpayer may, through sales in

execution, have been stripped of

his funds, his assets and his

business.

In the Lifman case, however, the

potential for a judgment based on

an inaccurate assessment to tax

was absent, for Lifman (see para

[5] of the judgment) had, in the

course of the statutory inquiry in

terms of section 50(1) of the Tax

Administration Act, admitted

liability for the R13 million tax

debt in issue and (see para [8])

caveats had been voluntarily

entered against some properties,

which SARS no doubt intended to

sell in execution.

Lifman was left with fewcards to play

In the circumstances, Lifman had

few cards to play in attempting

(see para [1]) to have the

statutory judgment set aside or

suspended.

The strongest argument available

to him was that the notice given

by SARS in terms of section

172(1) did not comply with the

statutory requirements.

The judgment recounts in this

regard (see para [9]) that at a

meeting on 3 March 2015 between

Lifman (represented by his legal

team) and SARS, he was –

notified in writing about [SARS’s]

intention to seek civil judgment

on the outstanding tax debt of the

applicants should applicants fail

to adhere to the agreed payment

date, that is, 31 March 2015.

Mark Lifman judgment

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Mark Lifman judgment

Regrettably, given the central importance of

the contents of this written notification in this

litigation, the judgment does not quote the

precise words of the notification. The

judgment merely states (see para [30]) that

on 3 March 2015, SARS’s attorneys –

caused a letter to be despatched to [Lifman’s]

attorneys informing them that the current tax

debt must be met by end March 2015 failing

which SARS will resort to all procedures

available to it to collect the debt from the

taxpayers which may include obtaining civil

judgments.

Lifman argued that he had been deprived of

his right to be given the notice required by

section 172(1).

In particular, he argued (see para [13]) that

he was, in terms of this letter, merely given a

general notice by SARS that it would apply for

judgment in terms of section 172; and

moreover, that such notice had been given

more than ten days before payment was due

in terms of the agreement.

In ruling on the interpretation of the

requirement in section 172(1) of ten business

days’ notice, the court (at para [26]) quoted a

dictionary definition, saying –

The word ‘notice’ in the Oxford Dictionary

means ‘notification or warning of something

especially to allow preparations to be made

and the court then adopted this meaning,

saying that –

the purpose of giving notice is to give

notification or warning . . . to allow

preparations to be made.

The Promotion of AdministrativeJustice Act

The point that the judgment seems to overlook is that

the Commissioner’s decision to invoke the provisions

of section 172 to take a civil judgment against a

taxpayer constitutes administrative action and

thereby triggers the taxpayer’s rights in terms of the

Promotion of Administrative Justice Act 3 of 2000.

Thus, a taxpayer can, in terms of PAJA, require SARS

to provide the reasons for the decision and then take

the decision on review to the High Court in terms of

that Act.

If the judgment in Lifman is correct, SARS could just

routinely add a postscript to every notice of

assessment saying that if the amount due in terms of

this assessment is not paid forthwith, SARS reserves

the right to take a civil judgment in terms of section

172(1).

Such a general and conditional notice would leave

the taxpayer completely in the dark as to whether or

not SARS actually intended to take such action.

It is strongly arguable that what section 172(1)

requires is a notice expressed as an unequivocal

decision taken by SARS that, unless payment of the

assessed and currently outstanding tax is

forthcoming by a specified date –

a certified statement will be filed with the clerk or

registrar of the court in terms of section 172(1) of the

Tax Administration Act

and that such a notice should not be given unless and

until SARS has actually made a decision to take

judgment in terms of section 172(1).

In other words, an interpretation of section 172(1)

should be in harmony with a taxpayer’s

constitutional right to fair administrative action.

August 2015 5

The right of tax authorities to demand productionof documents

A recent decision in the Federal Court of Canada in the matter of Minister of National Revenue v BP Canada Energy Company 2015 FC 714 dealt withthe Canadian law concerning the right of the Canadian Revenue Authority(‘CRA’) to demand information from taxpayers.

In the preparation of its annual

financial statements, BP Canada

Energy Company (‘BP’) prepared

workings in which it analysed tax

positions that it had taken in

which there might have been a

difference between its

interpretation of the law and the

interpretation of the CRA. These

working papers supported a

reserve for tax contingencies.

They also listed issues on which

the interpretation was uncertain

(‘issues list’).

In the course of evaluating audit

risk for the years 2005, 2006 and

2007, CRA requested BP to

provide it with copies of the

working papers in respect of its

tax contingencies. BP supplied the

workings but redacted the issues

list and statements of subjective

opinion relating to the issues. CRA

therefore made application to

court for an order compelling the

production of unredacted working

papers.

The law

The relevant provision of the

Canadian Income Tax Act is found

in section 231.1(1)(a), which

provides:

(1) An authorized person may, at

all reasonable times, for any

purpose related to the

administration or enforcement of

this Act,

(a) inspect, audit or examine the

books and records of a taxpayer

and any document of the

taxpayer or of any other person

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that relates or may relate to the

information that is or should be in

the books or records of the

taxpayer or to any amount

payable by the taxpayer under

this Act.

Issues

The case of the CRA was based

upon the following submission:

Publicly traded corporations such

as BP p.l.c., the ultimate parent

company of the respondent, are

required for financial reporting

and other regulatory purposes to

prepare consolidated financial

statements in accordance with

generally accepted accounting

principles (‘GAAP’). To prepare

financial statements that comply

with GAAP, the corporation and

its subsidiaries must calculate

reserves to account for contingent

tax liabilities. Those calculations

must include an estimate of the

liability BP would face if the

Minister were to challenge

uncertain positions on BP’s

self-assessed tax return.

The working papers maintained

by BP identify the issues [the

Issues List] which BP knows may

merit adjustment. BP’s list of

uncertain tax positions would

identify the areas at highest risk

for loss of tax revenue. The

Minister seeks disclosure of this

list to verify whether BP’s

uncertain tax positions are

compliant with the Act.

The critical issue from BP’s

perspective was that the

information did not relate to any

information that it was required to

maintain under the Income Tax

Act, but to information that was

required to be recorded in the

consolidated financial statements

in terms of GAAP. This position

was clearly stated in the following

submission by its counsel:

The Minister is afforded broad

authority to access the

information that is (or should be)

in the books and records of a

taxpayer – the source documents

that evidence the transactions or

activities that result in the income

that is (or should be) reported.

However, the Act does not require

taxpayers to prepare GAAP

financial statements or the reserve

analysis reflected therein. The

Issues Lists reflect BP Canada’s

subjective opinion regarding

potential tax risk in taxation years

that are now statute barred.

The ruling

The Court ruled that the CRA

could compel the production of

unredacted working papers. Its

finding was summarised in

paragraphs [18] to [27] of the

judgment of Campbell J:

• As a taxpayer, BP must decide

what amounts are to be

declared as taxable;

• By an authority other than the

Income Tax Act, BP is required

to create reserves that represent

the tax and interest that may be

payable if its decisions prove to

be incorrect;

• The accounting entries are the

working papers required to be

kept, and include the Issues

List;

• While the CRA may not need

the Issues List to conduct the

audit, the CRA requires the list

to establish its audit scope;

• The CRA is not asking for

information to be

manufactured – the Issues List

is in existence and reflects an

opinion on tax liability based on

a choice to create a reserve;

• It is irrelevant that the Issues

List is required to be kept under

an authority other than the

Income Tax Act; and

• The working papers containing

the Issues List are related to the

enforcement of tax, relate to

information in BP’s records and

relate to an amount payable

under the Income Tax Act –

they are within the scope of

section 231.1(1) because they

are relevant to BP’s intention in

creating the reserve.

It is interesting to note that the

Canadian law does not use the

term ‘relevant’; it refers to

information that ‘relates to or may

relate to’ information in the books

or records of a taxpayer. It must

therefore be understood in that

context.

BP has a right to appeal the

decision, which must be exercised

no later than 8 September 2015,

and it will be interesting to see

whether an appeal is noted.

The right of tax authorities to demand production of documents

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A South African perspective

In the South African context,

Section 46(1) of the Tax

Administration Act (‘TAA’)

prescribes the circumstances

under which SARS may require a

person to produce material:

SARS may, for the purposes of the

administration of a tax Act in

relation to a taxpayer, whether

identified by name or otherwise

objectively identifiable, require

the taxpayer or another person to,

within a reasonable period,

submit relevant material

(whether orally or in writing) that

SARS requires.

For purposes of income tax, South

Africa taxes persons on

assessment but, increasingly, the

filing processes introduced by

SARS in recent years are

propelling us towards a

self-assessment system. As a

result, a return of income is

prepared through responding to

specific questions in an on-line

questionnaire, from which a

return of income, setting out the

information that SARS requires to

be submitted, is generated.

Whereas under the classical

assessment system the taxpayer

was required, in addition to the

return, simultaneously to submit

explanatory information in

support of the information

contained in the return, the

taxpayer now merely populates

the return and submits it to SARS

with no supporting information.

Assessment usually involves the

electronic capture of the data

supplied online, the automated

checking of arithmetic accuracy

and the issue of an electronically

generated assessment.

In terms of section 40 of the TAA,

SARS may select a taxpayer’s

return for audit or verification. In

that event, SARS will call for

material to be made available, and

rely on section 46(1) of the TAA as

its justification for requiring the

material.

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In terms of section 46(6) of the

TAA:

Relevant material required by

SARS under this section must be

referred to in the request with

reasonable specificity.

The term ‘relevant material’ is

defined in section 1 of the TAA as

being:

any information, document or

thing that in the opinion of SARS

is foreseeably relevant for the

administration of a tax Act as

referred to in section 3.

The relevance is therefore

determined (and limited) by what

constitutes the administration of a

tax act. Section 3 of the TAA

prescribes the powers and duties

involved in the administration of a

tax act. These (inter alia and to the

extent applicable in this context)

include:

• obtaining information in

relation to anything that may

affect a liability for tax, a

taxable event or an obligation of

a person to comply with a tax

act;

• ascertaining whether correct

returns, information or

documents have been filed;

• establishing a person’s identity;

and

• determining the liability of a

person for tax.

All of the activities referred to

above involve establishing the

factual position. Information

means the facts about a person or

an event. The activities that are

part of the administration of a tax

act must, in their context, all be

interpreted as giving SARS the

right to establish the facts upon

which to base its determinations.

SARS’ duty in administering a tax

act is to identify the facts, identify

the law that applies to those facts

and determine the liability based

upon its (SARS’) interpretation of

the law applicable to those facts.

Thus, where SARS is interrogating

a taxable event, it may request

evidence by which the facts may

be identified. It cannot, it is

submitted, require production of

documents that are of no

probative value in relation to the

facts. Whether a taxpayer’s

interpretation of the law may

differ from SARS’ interpretation is

a question of opinion and not of

fact, and is certainly not relevant

to determining a person’s liability

to tax. It is submitted that the term

‘information’ in section 3 of the

TAA does not extend to

expressions of opinion, whether in

documents from advisors or in

internal risk assessment records

maintained by a taxpayer.

Where a notice requiring the

production of material is received

from SARS, recipients should be

astute to establish whether the

material requested goes to a

purpose or activity specified in

section 3 of the TAA, namely

whether it is required to:

• obtain facts about a liability,

event or obligation to comply;

• ascertain the correctness of

information already in SARS’

possession;

• establish a person’s identity; or

• determine a liability to tax.


August 2015 9

SARS Watch - 21 July to 20 August 2015

Legislation

30 Jul Notice of Tariff Amendment to the Customs and Excise

Act, 1964 to remove certain items to provide for spirits

obtained from grape wine or grape marc with an

alcoholic strength in excess of 80% by volume

The notice was published in Government

Gazette No. 93035, with commencement

from 31 July 2015.


Act, 1964 to exclude 'number of units' (u) to be applied

proportionately



from 31 July 2015.


Act, 1964 to remove certain items to maintain and

amend anti-dumping duties on stainless steel sinks

originating in or imported from China and Malaysia



from 31 July 2015.

13 Aug Notice of Tariff Amendment to the Customs and Excise

Act, 1964 to reflect the new Special Economic Zones

Act, 2014 for SEZ operators to be entitled to a full duty

rebate on imported goods that will be used for

construction and maintenance of the infrastructure of a

customs controlled area


Gazette No. 39100, with effect from the date

on which the Regulations to be published in

terms of the Special Economic Zones Act,

2014 come into operation.

13 Aug Notice of Amendment to Paragraph 8 of Schedule 1 to

the Value-Added Tax Act, 1991 to reflect the change

from 'IDZ', where it appears in the item, to 'SEZ'


Gazette No. 39100, with effect from the date

on which the Regulations to be published in

terms of the Special Economic Zones Act,

2014 come into operation.


Act, 1964 to provide for a rebate on steel panels used

for the manufacture of raised access flooring systems



from 21 August 2015.


Act, 1964 to reduce customs duty rate on wheat and

wheaten flour



from 21 August 2015.

Interpretation

12 Aug Interpretation Note 63 (issue 2) This IN was updated to provide guidance on

the application of the foreign currency

translation rules, other than in section 24I

and the Eighth Schedule of the Income Tax

Act.

17 Aug Interpretation Note 64 (issue 3) This IN was updated to incorporate

reference and guidance on the new

Companies Act 2008, Dividends Tax; and

the changes to section 10(1)(e)(i) of the

Income Tax Act.

18 Aug Interpretation Note 10 (issue 2) This IN was updated to provide guidance on

the interpretation and application of section

4(c) of the Skills Development Levies Act.

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SARS Watch - 21 July to 20 August 2015 cont

Binding rulings

3 Aug Binding Private Ruling 200: Source of income of

commission payable to non-resident junket agents

This BPR deals with the source of income of

commission payable to non-resident junket

agents by a resident casino operator.

13 Aug Binding Private Ruling 201: Issue of capitalisation

shares

This BPR deals with the issuing of

capitalisation shares by a company to its

sole shareholder.

14 Aug Binding Private Ruling 202: Application of section

13quin subsequent to an intra-group transaction under

section 45

This BPR deals with whether the transferee

company will be entitled to claim the section

13quin allowance for the commercial

buildings on a property transferred to it by

way of an intragroup transaction.

17 Aug Binding Private Ruling 203: Renunciation of a usufruct

over shares

This BPR deals with whether securities

transfer tax is payable on the renunciation of

a usufruct over shares.

20 Aug Binding General Ruling 29: Unbundling Transactions:

Meaning of 'as at the end of the day after that

distribution'

This BGR addresses the interpretation of the

words 'at the end of the day after that

distribution' as used in section 46(3)(a)(v) in

relation to an unbundling company listed on

the JSE.

Case law

17 Aug TC-VAT 867 The Tax Court held that the assessments

had been raised in respect of the incorrect

vendor and rejected the claim of SARS to

output tax and the appellant's claim to input

tax.

SARS publications

21 Jul Hong Kong ratified the Treaties for the Avoidance of

Double Taxation; no ratification instrument received as

yet

The DTA was ratified in Hong Kong.

22 Jul 2015 Draft Taxation Laws Amendment Bill The draft TLAB was published for comment,

which had to be submitted no later than 24

August 2015.

22 Jul 2015 Draft Tax Administration Laws Amendment Bill The draft TALAB was published for

comment, which had to be submitted no

later than 24 August 2015.

3 Aug Draft Interpretation Note on reduction of debt This draft IN was published for comment to

be submitted no later than 31 October 2015.

5 Aug Brazil Protocol to the Treaty for the Avoidance of

Double Taxation, signed but not yet ratified

The Protocol to the DTA was signed in

Pretoria on 31 July 2015.

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SARS Watch - 21 July to 20 August 2015 cont

SARS publications

7 Aug Zimbabwe Treaty for the Avoidance of Double

Taxation, signed but not yet ratified

The DTA was signed in Bulawayo on 4

August 2015.

11 Aug Uruguay Tax Information Exchange Agreements,

signed but not yet ratified

The TIEA was signed on 7 August 2015 in

Pretoria.

14 Aug Second Draft Guide on Employment Tax Incentives The draft Guide was published for a second

round of comments to be submitted no later

than 16 October 2015.

18 Aug Draft Interpretation Note on PBOs This Draft IN was published for comment to

be submitted no later than 18 September

2015.

19 Aug Guide on valuation of assets for Capital Gains Tax

purposes (issue 3)

This Guide provides general guidance on

valuations.

19 Aug Zimbabwe Customs Mutual Assistance Agreements

ratified in South Africa

The Customs MAA was ratified in South

Africa.

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Documents

Synopsis August 2015 - PwC1 Synopsis Tax today August 2015 A monthly journal published by PwC South Africa providing informed commentary on current developments in the tax arena, both