The resolution of tax disputes in South Africa has changed fundamentally over the last few years and there is now much to consider as a taxpayer, or when doing business, in the country.
Not long ago, if a taxpayer received a query or assessment from the South African Revenue Services (SARS), it would approach its lawyer or accountant and ask for assistance. The taxpayer’s lawyer or accountant would generally submit a brief response on behalf of the taxpayer, maybe attend a meeting or two with SARS, and often the matter was simply and easily resolved.
Now SARS is a properly staffed and effective business focused on ensuring that it meets its annual budget. SARS, like any business, is under budgetary pressure, particularly in these recessionary times.
In addition, tax law is complex and ever-changing. This combined dynamic gives rise to a significant number of tax disputes which are no longer capable of simple resolution through a series of correspondence and perhaps a few meetings with SARS.
Instead the tax dispute resolution process is just that – a legal process similar to many other dispute resolution processes.
The tax dispute resolution process involves various legal skills.
First, it is necessary to obtain legally privileged advice from tax lawyers with a proper understanding of the relevant tax laws.
It is also necessary to obtain input from lawyers with an understanding of the litigation process and strategy as well as the procedures involved. The lawyers should have the ability to mediate and negotiate appropriate settlements for the taxpayer.
Know your rights
The first important point in this process is that the taxpayer needs to understand its legal rights.
In terms of the Income Tax Act, Act 58 of 1962, SARS has wide but not unfettered rights to ask questions of and require information from a taxpayer.
These powers are amplified in the Tax Administration Bill which was tabled in parliament in June. Taxpayers therefore need to understand what information they are required to provide to SARS, what constitutes legally privileged information which is not required to be given to SARS, and how to answer the queries raised by SARS in a manner which does not prejudice their case.
Above all a taxpayer should understand that the first query or audit from SARS could be the start of a long process that ends in court.
The second key point to understand is that in various respects the process is just like any dispute resolution process.
Similar to any commercial dispute, although every taxpayer wishes to resolve its tax dispute quickly and cost effectively, this is not always possible.
From the first interaction with SARS the taxpayer should therefore be aware of this dual strategy, and of the tension between wishing to resolve a matter quickly and also wishing to protect its position should the matter ultimately end up in court.
In order to resolve a matter quickly it is often necessary to make concessions, both of fact and law. If the matter is not resolved expeditiously and by way of compromise, these concessions may come back to bite the taxpayer, even if done on a without prejudice basis.
Third, the taxpayer should understand the choice of forum in respect of its dispute with SARS.
In this regard, the taxpayer is essentially faced with a choice whether to proceed by way of alternative dispute resolution or tax court.
The alternative dispute resolution process has proved to be effective for smaller matters, but it is important to note that this is essentially a mediation process. The tax court is the more usual channel for tax disputes involving significant amounts of money.
Formal provision is also made for dispute settlement by way of negotiation with SARS. This often takes place as a parallel process, that is, the taxpayer and SARS will be taking all the necessary steps required to approach the tax court or the alternative dispute resolution mechanism while at the same time also negotiating in order to attempt to reach settlement. As mentioned above, this is a delicate balance requiring an understanding of whether the settlement negotiations may prejudice the taxpayer should the matter ultimately proceed to court.
In reality very few matters actually reach the courts and most are settled along the way. This is partly due to the lengthy delays, often of up to several years, that can elapse between the date of assessment and a court hearing.
It is also important that the taxpayer understands its rights in respect of payment of the disputed amount as well as interest and potential penalties. Unlike many other dispute resolution processes these amounts are payable up front and not upon resolution of the dispute.
Onus on the taxpayer
In summary, a tax dispute is similar to any other commercial dispute. There are typically differences between two parties in respect of issues of both fact and law.
Similar to commercial disputes, tax disputes can be resolved in court or settled by negotiation between the parties. Some of the differences relate to the procedures and processes, which differ from those in respect of a commercial dispute.
Also, the provisions of the Income Tax Act and the Tax Administration Bill favour SARS in terms of its ability to obtain information, collect tax and impose penalties and interest prior to any decision on the merits of the case; the potential of criminal sanctions in various circumstances; and the fact that the onus of proving one’s case rests on the taxpayer.
Peter Dachs is co-head of the tax department at Edward Nathan Sonnenbergs
150 West Street
Tel: +27 11 269 7600
Fax: +27 11 269 7899