If SARS Wants to Turn Back The Clock, It Must Live With The Consequences
25 May 2010
Posted by: TaxFind™
If SARS Wants to Turn Back The Clock, It Must Live With The Consequences
The Commissioner made a retroactive tariff amendment;now the Appeal Court has made SARS live with the consequences.
A tenet of a fair legal system is certainty, and one of the ways in which this can be achieved is to avoid, wherever possible, the promulgation of legislation that is applied retroactively. After all,certainty can only really be obtained if one knows that the rules that are in force at a particular time can be relied on to govern an action to be taken at that time.This means that for legislation to be fair,it should only be applicable as from the time it is promulgated, The avoidance of retrospective application is particularly critical when it comes to tax. Imagine if,for instance, the requirement to keep a logbook to substantiate business travel was made retroactive for the past five years—taxpayers who had used the deemed kilometres method would be placed in a situation where it would be impossible to comply, resulting in a prejudicial (and not to mention expensive) outcome.
But not all areas of tax are as cut and dried, and the determination of customs duty tariffs as governed by the Customs and Excise Act 91 of1964 is one such area.Because of the wide range of possible imported products as outlined in Schedule 1of this Act, coupled with differentiation in tariffs that depends on the use to which the particular product is applied, it can sometimes happen that both taxpayers and SARS get it wrong.Add into the mix the conflicting objectives of the parties concerned—taxpayers want to pay the minimum amount of tax legally possible, whereas SARS’ mandate is to collect as much tax as is considered legally due—it ’s surprising that one doesn’t see many more court cases like the one that is the subject of this article.
The facts of this case are fairly straight forward.The taxpayer, 3M South Africa (Pty) Ltd ("3M”), had been importing, as from June 1990 a particular type of mat that contained ceramic fibre mineral wool used in the manufacture of catalytic converters to control exhaust emissions on vehicles.Although 3M was not involved in the manufacture of such converters, the material was to be used for a particular batch of converters that was intended to be exported.Accordingly, the Commissioner classified the importation thereof on 11 June 1990 under tariff code 6806.90.90, which resulted in the imported material being exempt from import duty.
On 9 April 1991 the Commissioner reclassified this particular type of imported material under tariff code 6806.10.As a result, any future importation of such material would now attract duty of 20% of the value thereof.
However, since Part 3 of Schedule 4 to the Customs and Excise Act provides for rebates on customs duties in cases where imported goods are to be used to manufacture goods for export within 12 months, 3M applied to SARS for registration of a "rebate store” for the purposes of claiming such duty rebates. SARS granted such registration on 4 July 1992.
Because the use of such "rebate stores” can be abused in order to obtain rebates to which taxpayers are not legally entitled, the requirements for record-keeping are not only strict, but also rigorously policed by SARS.As a result of one such inspection at 3M’spremises during January 2003, the Commissioner—seemingly unconvinced that 3M had provided sufficient proof that the material had been used in accordance with the rebate requirements—issued a demand for around R27 million in unpaid duties.
In response to this letter of demand, 3M applied to SARS for a new tariff determination, which was issued on 22 April 2003, this time reclassifying the material under code 6806.10 but at a duty rate of 15%.This 2003 determination was reaffirmed on 25 September 2005 in response to further representations by 3M. As a result of ongoing correspondence between 3M and SARS, an amended letter of demand was issued, this time for R16.4 million.Still not satisfied with the turn of events, 3M remained in dispute with SARS, with the two parties subsequently agreeing, in January 2006, to submit the matter to the World Customs Organisation (WCO).The WCO’s advisory "ruling” resulted in the Commissioner once again reclassifying the material on 21 November 2006—this time back to code 6806.90.90, being the tariff exemption code that 3M had contended for from the outset.
On 10 August 2007 the Commissioner advised 3M of its rights, in terms of Proviso (b) of Section 47(9)(d) of the Act, to claim a refund of duties paid during the two years immediately prior to this latest determination, i.e.covering the period from 22 November 2004—21 November 2006. However, the earlier demand for unpaid duty because of what SARS regarded as the insufficient proof concerning the rebate store was reiterated, with SARS now issuing a further revised demand(net of refunds due) of R11.9 million.3M lodged an objection to this claim, in turn issuing a counter claim against SARS for the refund of R8.8 million in respect of the period 1 March 2002 to 20 November 2004.In addition, 3M claimed a refund of R4.5 million in duties paid for the period 21November 2004 to 21 November 2006 (this latter claim was not contested by SARS).
When the case went to the High Court, the judge upheld SARS’ contention that 3M should not been titled to the R8.8 million claimed,since the period to which such claim related falls outside of the two-year "window” provided for in Proviso (b) of Section 47(9)(d) of the Act.According to SARS, this two-year period has reference to the date of the 2006 determination,therefore covering 21 November2004 to 21 November 2006.
However, 3M contended that because the original tariff classification was issued on 9 April1991, the two-year "window”commended from 9 April 1989.Accordingly, two matters were placed before the Appeal Court.The first matter, which deals with the R 8.8 million refund claimed in respect of the period 1 March 2002 to 20 November 2004, was determined in favour of SARS.The judge argued that 3M had ample time to appeal against the initial incorrect determination, and thereby limit its loss.
Furthermore, the judge stated that Proviso (b) of Section 47(9)(d) of the Act, which provides for a two-year window immediately prior to the issue of the tariff determination for which refund scan be claimed, as well as the provision whereby such claims must be submitted within 12 months of such determination, is to specifically limit claims to a reasonable time period and prevent a situation whereby such retroactive claims can extend to indefinite periods.
However, the August 2007 claim by SARS for the alleged unpaid duty, amounting to R11.8 million, was rejected by the Appeal Court. Firstly, the judge held that the High Court which had issued the earlier ruling had been in error,since it had supported the premise that the fate of the first claim (3M’s claim for the refund of duties) had bearing on the second claim (SARS’ claim for unpaid duties), and that Section 76B of the Act applied to the claim made by SARS.The judge made it clear that Section 76B applies only to refund claims and not to unpaid duties.
Counsel for the Commissioner raised the objection that in terms of the Promotion of Administrative Justice Act 3 of 2000, the August 2007 letter of demand by SARS for the R11.8 million was merely a reiteration of previous demands made, and that should 3M wish to object in terms of administrative justice, such objection should be lodged within 180 days.
However,the judge overruled this objections on the grounds that 3M was not seeking administrative relief;rather, it was actively resisting what it saw as an act of attempted coercion on the part of SARS to get 3M to comply with its demands for allegedly unpaid duty.
With regard to the merits of SARS’ claim itself, the contention of SARS was that legislation, as already stated above, is not normally enacted with retroactive effect. In terms of a principle established by in Bell v Voorsittervan die Rasklassifikasieraad & andere [1968 (2) SA 678 (A)], any"retrospective decision” (being, in this case, the issue of the revised tariff determination) should not impact any previous action or transaction that has already been finalised, or is subject to pending litigation, unless there is a clear intention to the contrary.SARS therefore contended that 3M remained liable for the unpaid duty that arose during the period in which the incorrect determination was in force.
The judge rejected this argument on two grounds.Firstly, it was stated that any retro activity, as argued by SARS, should quite correctly not apply to transactions that have been finalised.However,the demand by SARS could not be regarded as a finalised transaction,since such demand was being disputed by 3M over a long period of time.
Secondly, the judge stated that"in seeking payment of arrear import duty from the appellant, the Commissioner is effectively relying on and seeking to enforce his own mistakes, starting with the incorrect 1991 determination, followed by the incorrect 2003 determination,followed by his subsequent incorrect fixing of the effective date as being April 2003, instead of April 1991.The fact of the matter is that none of these incorrect determinations should have been made.To allow the Commissioner now, in pursuing the demand for payment, to rely on such mistakes would not only be grossly unreasonable, but would offend against the principle of legality itself”.
Accordingly, the finding of the court was that 3M is not liable for the payment of unpaid duty as alleged by SARS, or any penalties arising from such demand.In addition, an order for the payment of costs was issued against SARS.
Source: By Steven Jones (Tax breaks)