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Fairness and integrity is requiredIn the face of the global recession, it is imperative that the South African tax system has integrity and that revenues are protected in order to support jobs and invest in nation building. Liesl Kruger takes a look at the phenomenon of aggressive tax planning.
From a tax point of view, aggressive tax planning or tax avoidance undermines the integrity of the tax system and community confidence in the fairness of the system. It is therefore an issue for the entire community, not only the revenue authorities.
Aggressive tax planning could be interpreted to refer to those schemes of arrangement that undermine the integrity of the tax system and community confidence in the fairness and equity of that system.
Generally, arrangements to which the general anti-tax avoidance rule may apply are treated as aggressive tax planning.
The South African Revenue Service (SARS) may also focus on arrangements that, in its view, produce an outcome that is contrary to the intended policy of the law. Some arrangements also seek to exploit perceived loopholes in the law.
SARS‘ approach involves the creation of an intelligence system that assists it in identifying, analysing, assessing and communicating its views about aggressive tax planning.
The gathering of early intelligence is a key to being able to address aggressive tax planning in real time. The authorities are often criticised as being too slow to respond to what has been happening in the past and particularly in relation to certain “structured finance arrangements”.
SARS has taken the criticism on board and its goal is to identify and deal with aggressive arrangements as currently
as possible.
This stance saw the introduction of the concept of “reportable arrangements” to the Income Tax Act No. 58 of 1962 (“the Act”) in sections 80M to 80T. In terms of these provisions, any “promoter” in respect of a “reportable arrangement” must disclose the arrangement to SARS within 60 days after any amount is first received or accrued to any participant to the arrangement, or is first paid or actually incurred by any participant to the arrangement.
“Promoter” is defined as any person who is principally responsible for organising, designing, selling, financing or managing that reportable arrangement.
“Reportable arrangements” are defined in section 80M(1) as an arrangement listed in the legislation, or if any tax benefit is or will be derived or is assumed to be derived by any participant by virtue of that arrangement, and the arrangement:
• provides for interest, finance costs, fees or other charges that are wholly or partly dependent on the assumptions relating to the tax treatment of that arrangement (other than a change in law);
• has any of the characteristics of, or has characteristics that are substantially similar to the indicators of a lack of commercial substance in terms of the general anti-avoidance rule;
• is or will be disclosed by any participant as a financial liability for the purposes of Generally Accepted Accounting Practice, but not for income tax purposes;
• does not result in a reasonable expectation of a pre-tax profit for any participant; or
• results in a reasonable expectation of a pre-tax profit for any participant that is less than the value of those tax benefits to that participant on a present value basis.
“Reportable arrangements” are further defined as any arrangement that would have qualified as a “hybrid equity instrument” or “hybrid debt instrument”, if the prescribed period had been 10 years.
Arrangements that are unlikely to be tax-driven are excluded from the reporting requirement, e.g. vanilla loans, leases, share transactions and collective investment scheme investments.
Once SARS has received and analysed information about arrangements, it aims to respond quickly by focusing on trends, patterns and drivers of arrangements.
A further consideration is the importance of being more proactive in informing the public as quickly as possible about arrangements and issues about which they have concerns, and their view as to how the law operates.
This may be done in a number of ways, but communication is generally by way of an Interpretation Note, where draft Interpretation Notes are often circulated for comment prior to finalisation thereof.
In the case of arrangements or transactions where SARS has a higher degree of concern, it communicates its views by way of Media Release. Often, the tax amendments proposed in this manner are effective immediately.
The recent introduction of the Advance Tax Ruling (ATR) process is also worth mentioning. In terms of the ATR process, taxpayers are able to approach SARS prior to the implementation of a transaction in order to obtain certainty as to the tax consequences of such a transaction. (It is important to note that the transaction has to be a genuine anticipated transaction, not a hypothetical question.)
While the ATR process aims to provide taxpayers with certainty regarding the tax consequences of a proposed arrangement, it will only do so if the arrangement is actually implemented in accordance with the terms of the ruling.
SARS will, after consideration of the proposed transaction and the tax analysis prepared by the taxpayer, issue a Binding Ruling, which is binding on SARS only.
Although all final rulings are published on the SARS website, rulings obtained by others are not binding on SARS vis-à-vis anyone but the original applicant. Taxpayers can therefore not rely on rulings obtained by others.
The integrity of the tax system also depends on confidentiality of taxpayer information. The willingness of taxpayers to disclose confidential information to SARS is largely attributable to assurances that their privacy interests will be safeguarded.
This is provided for in section 4 of the Act, which provides that every person employed or engaged by SARS in carrying out the provisions of the Act will preserve and aid in preserving secrecy with regard to all matters that may come to his/her knowledge in the performance of his/her duties in connection with those provisions, and will not communicate any such matter to any person whatsoever other than the taxpayer concerned or his/her lawful representative.
In addition, the section provides that a SARS official may not permit any person to have access to any records in the possession or custody of SARS except in the performance of his/her duties.
These provisions aim to balance SARS’ particular need for the information involved with the taxpayer’s right to privacy. It is important that SARS does not allow oversights to occur in relation to this provision, since this will undoubtedly erode taxpayers’ privacy rights and result in taxpayers losing confidence in SARS, thereby defeating the purpose of the provision and jeopardise the integrity of the tax system as a whole.
In a further attempt to regulate and ensure the integrity of the tax system, SARS recently introduced draft legislation in relation to the conduct of so-called “tax practitioners”, which aim to regulate those who provide tax advice in order to ensure that certain minimum standards are met.
Where a tax practitioner is a member of a professional body (e.g. the South African Institute of Chartered Accountants or the Law Society), SARS or a taxpayer may report unprofessional conduct of that practitioner to the profession to which he/she belongs.
Existing codes of conduct of these bodies are, however, typically not tax-specific and professional bodies may encounter difficulties when prosecuting misconduct with specific reference to tax.
The regulation of tax practitioners therefore aims to ensure that taxpayers will have the assurance of minimum standards for tax practitioners and the opportunity to challenge unprofessional conduct. The legislation, however, has not been finalised.
In conclusion, it appears that SARS is moving towards instilling increased confidence in the South African tax system and the administration thereof.
Liesl Kruger is the tax executive at Edward Nathan Sonnenbergs
