The Right To LPP For Tax Advice
31 January 2013
Posted by: Pieter Faber and Kyle Mandy
The Right To LPP For Tax Advice
Much has recently been made of a taxpayer’s right to legal professional privilege (LPP) for tax advice provided by tax practitioners who are not lawyers. The concept and scope of LPP has been debated at length by jurists, not only in South Africa, but all over the world, with the exact origins of this rule being subject to debate. Notwithstanding these continuing debates, LPP’s role as an important part of the SA jurisprudence cannot be denied, neither in the form of litigation privilege1 nor legal advice privilege2. The debate by tax advisers from various professions risks losing sight of the main reason for the existence of this rule, namely to protect the rights of taxpayers. After all, LPP is a right of the client and not a right of the legal adviser. Furthermore, it loses sight of the bigger picture that tax has evolved as a professional occupation in its own right and is no longer the ugly stepchild of the legal, accounting or any other profession.
Thus when analysing the principles of LPP or discussing its scope and purpose as it pertains to taxpayers, due cognisance must be taken of the fact that it is the taxpayer’s right to LPP and the taxpayer who suffers the prejudice where this right is not respected. LPP is not a right of the taxpayer’s advisers3 who only become obligated to claim LPP on behalf of the taxpayer4 whose right they should seek to protect.
LPP PURPOSE DRIVEN?
In the pre-constitutional era, the SA courts have concluded that LPP, in its various forms, is a fundamental legal right to ensure the proper functioning of the legal system5. This right is embodied in a principle that the taxpayer’s lack of legal knowledge is what compels him to consult with an adviser and that this communication should be considered the taxpayer’s own, thus its disclosure being akin to self-incrimination6 Furthermore, taxpayers by nature are unequal in wealth and knowledge and the law should not treat one more harshly than the other due to this difference. Hence the need for professional advisers who are required to know everything the taxpayer knows to present the best case with all the relevant facts without the taxpayer fearing reprisal for such disclosure7. This in essence is the purpose of LPP. Where LPP applies, it is because this public interest outweighs the competing public interest in having all relevant information available to facilitate a proceeding in court, or an investigative process.
To this extent, the SA courts have seemingly continually applied the purpose of LPP in developing the rule in SA having found that it extends to in-house legal advisers8 and to legal advisers employed at accounting firms9, thus not following a more stringent approach as in European countries10. In the latter cases where battle lines have been drawn by various professional occupations, taxpayers may be questioning in whose interest are the amicus curae parties in those cases acting: that of taxpayers or their own selfish interests of expanding or defending their turf? The arguments for and against extending LPP to all tax advisers run the real risk of degenerating into a turf war between the legal and accounting professions. We must not lose sight of the fact that the true beneficiary is the taxpayer.
If LPP is thus a fundamental right to ensure proper functioning of the legal system and thus a constitutional issue, it is inconceivable that the Constitutional Court, which has yet to pronounce on this matter, will limit the right of the taxpayer based on the profession of the person from whom the professional advice is obtained rather than measuring it against the purpose of such advice. Arguably, LPP should already be available to advice from non-lawyer tax practitioners without the need for intervention by parliament.
Facing the courts is a decision which would also have to accede to the reality that, within the legal realm of tax, not only is most tax advice given by non-lawyer tax practitioners, but also that litigation privilege is a factor that is relevant. The Income Tax Act11 has always allowed taxpayers to be represented in the tax court by non-lawyer tax practitioners and this now also applies to the Tax Administration Act12. This is important as the tax court is not a mere tribunal, such as the Tax Board, but the court of first instance and the court of record in tax appeals.
We must not lose sight of the fact that the true beneficiary is the taxpayer.
To suggest that confidential correspondence between a taxpayer and a tax practitioner representing the taxpayer in proceedings in the tax court should not be subject to the same legal privilege that would be enjoyed between a taxpayer and a lawyer in identical circumstances would raise serious constitutional questions.
This debate is not unique to SA and various countries are grappling or have grappled with it in some form or another.
In the united States, legal privilege is extended to communications between a taxpayer and a federally authorised tax practitioner for tax advice to the extent the communication would be considered a privileged communication between a taxpayer and an attorney. However, the statutory privilege is limited to non-criminal tax matters and does not apply to communications in connection with the promotion of tax shelters.
In the united Kingdom, the revenue authority is statutorily restricted from obtaining communications between a tax adviser and taxpayer; the purpose of which is the giving of tax advice. The restriction applies only to obtaining such information from the tax adviser and not from the taxpayer. The question of whether LPP should be extended to accountants in terms of the common law is currently under consideration by the Supreme Court in a landmark case that may set a benchmark for other countries.
In New Zealand, a statutory privilege applies to tax advice documents in terms of the Tax Administration Act. In terms of these provisions, a person who is called upon to disclose information is not required to disclose a book or document that is a tax advice document.
Australia does not currently have a statutory privilege for tax advice provided by non-lawyers. However, the Australian Tax Office has a formal policy in place to the effect that certain documents relating to advice provided by professional accounting advisers should be confidential. Australia is also in the process of considering a statutory privilege for tax advisers and a discussion document was issued in April 2011 in this regard. In 2007, the Australian Law Review Commission recommended that a statutory privilege should be extended to tax advice.
Facing both the legislature and possibly the courts is a balancing act between the opposing interests of tax authorities to have full access to information which may be useful in collecting taxes and those of taxpayers to be able to obtain confidential legal advice and representation. understandably, there are arguments against why legal privilege does not or should not exist for all tax practitioners. Firstly, it arguably increases the scope of information to be covered by LPP which creates an impediment to the tax authorities’ right to information. This obvious impediment is the trade-off between the interests of the tax authority and the taxpayer. A further concern is that legal practitioners have a duty to the court that overrides the duties to a client. Essentially, this duty is one to uphold the law and not to subvert it. Thus the question arises as to whether this principle should not apply to all who may claim LPP on behalf of their clients. However, this argument is significantly weakened where the tax adviser is required to be a member of a professional body and is subject to codes of ethics and conduct and disciplinary procedures. The right of the taxpayer to claim LPP on communications with non-lawyer tax practitioners in appropriate circumstances may be a difficult balancing act, but the exclusion of such rights seems to prejudice taxpayers more than it does the tax authority by infringing on the constitutional rights of the taxpayer and creating an uneven playing field between lawyers and other suitably qualified tax practitioners. At the end of the day, this matter should be addressed in the interests of the taxpayer and the public at large and not in the narrow interests of those who claim to represent them in all things tax.
Source: By Pieter Faber Tax Technical Senior Manager: PwC and Kyle Mandy Head: Tax Technical Director: PwC (TaxTalk)