Tax and Penalties: The Perspective of a Tax Practitioner
26 March 2013
Posted by: Author: Pieter van der Zwan
Source: Pieter van der Zwan
The Tax Administration Act 28 of 2011 (hereaﬅer referred to as the ‘TAA’) provides for a number of circumstances in which a taxpayer can manage its exposure to understatement penalties by obtaining written tax opinions from tax practitioners. This article investigates the circumstances in which understatement penalties can be reduced by obtaining a tax opinion and also aims to provide views on the responsibility that the preparation of these tax opinions places upon the tax practitioner.
Reduction in penalties based on tax opinions
Understatement penalties are imposed in terms of section 223 of the TAA when the ﬁscus has been prejudiced in respect of a tax period as a result of default in rendering a return, an omission from a return or an incorrect statement in a return (here-aﬅer collectively referred to as ‘understatement events’). It is submitted that an incorrect statement in a return will include a tax position taken that SARS does not agree with.
The rate of the understatement penalty depends on the circumstances in which the understatement event occurred (i.e. normal circumstances, by a repeat oﬀender, in obstructive circumstances or cases where the taxpayer voluntarily disclosed the understatement) as well as the nature of the behaviour resulting in the understatement. When determining an understatement penalty, the burden of proving the facts in terms of which the understatement penalty is imposed is placed upon SARS (refer section 102(2) of the TAA). The behaviours listed in section 223(1) include at least two items where a taxpayer should, by obtaining a tax opinion, be able to reduce its exposure to penalties being imposed for that speciﬁc behaviour.
The ﬁrst behaviour is the "substantial understatement”, which will exist where "the prejudice to SARS or the ﬁscus exceeds the greater of ﬁve per cent of the amount of ‘tax’ properly chargeable or refundable under a tax Act for the relevant tax period, or R1 000 000” and the taxpayer’s behaviour does not fall into any of the other behaviours listed in section 223(1)(ii) to (v). In this regard, section 223(3) of the TAA states that SARS must remit the understatement penalty if it is satisﬁed that the taxpayer:
"(a) made full disclosure of the arrangement, as deﬁned in section 34, that gave rise to the prejudice to SARS or the ﬁscus by no later than the date that the relevant return was due; and
(b) was in possession of an opinion by a registered tax practitioner, as deﬁned in section 239, that—
(i) was issued by no later than the date that the relevant return was due;
(ii) took account of the speciﬁc facts and circumstances of the arrangement; and
(iii) conﬁrmed that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.”
The second instance in which a tax opinion should provide a taxpayer with relief from understatement penalties is where an understatement penalty is imposed in respect of an understatement arising in circumstances where there were "[n]o reasonable grounds for ‘tax position’ taken” (refer to section 223(1)(iii)). Although the TAA does not explicitly state that this behaviour should not occur if a tax opinion is obtained, it is submitted that a tax opinion should provide a taxpayer with reasonable grounds for a tax position taken and consequently make it extremely diﬃcult for SARS to argue that the taxpayer did not have reasonable grounds for its position taken. As no speciﬁc documentation or requirements for advice on which reasonable grounds for a tax position is based are prescribed in respect of this behaviour, other measures, such as internally prepared memorandums and informal tax advice (for example, email correspondence) may also prove to be suﬃcient to mitigate penalties imposed for this behaviour.
Given the increased recognition of tax opinions in terms of the TAA it is of critical importance that the preparers of these tax opinions must be regulated and held accountable for the views expressed.
Regulation of tax practitioners with regard to the preparation of opinions
The Commissioner of SARS and the Minister of Finance have indicated their discontent with non-compliance by tax practitioners on a number of occasions in recent years. This has culminated in the increased regulation of tax practitioners in terms of the TAA.
Section 234 of the TAA requires every natural person who provides advice with respect to the application of a tax Act to another person or who completes or assists in completing a document to be submitted to SARS by another person, to be registered with SARS as a tax practitioner.
This requirement to register with SARS as a tax practitioner has been around for quite a while. This section has however been amended to now also require such a person to register with or fall under the jurisdiction of a ‘recognised controlling body’ by the later of 1 July 2013 or 21 business days aﬅer the date on which that person for the ﬁrst time provides the advice or completes or assists in completing the return. Non-compliance with this requirement constitutes a criminal oﬀence which can result in ﬁnes and/or imprisonment (see section 234(c)).
Section 241(2) provides the process to regulate tax practitioners with some teeth by allowing a senior SARS oﬃcial to lodge a complaint with a recognised controlling body if a registered tax practitioner has, in the opinion of the oﬃcial, acted in the following manners:
"(a) without exercising due diligence prepared or assisted in the preparation, approval or submission of any return, aﬃdavit or other document relating to matters aﬀecting the application of a tax Act; ...
(c) given an opinion contrary to clear law, recklessly or through gross incompetence, with regard to any matter relating to a tax Act;
(d) been grossly negligent with regard to any work performed as a registered tax practitioner;
(e) knowingly given false or misleading information in connection with matters aﬀecting the application of a tax Act or participated in such activity...”
The duty of investigating the complaint and taking appropriate disciplinary steps is to a large degree shiﬅed to the recognised controlling body. This is achieved by the requirements to be recognised as a controlling body. Section 240A(2)(a)(iv) speciﬁcally states that SARS will consider whether the body maintains relevant and eﬀective disciplinary codes and procedures as one of the criteria for recognition of the controlling body. Controlling bodies that do not take complaints by SARS seriously may in the long run risk losing their ‘recognised controlling body’ status, which would be disastrous for the body’s reputation as well as its members who would need to ﬁnd a new home as tax practitioners.
In the context of providing tax opinions to clients, a tax practitioner would have to ensure that:
•due diligence is exercised when preparing a tax opinion that deals with the application of a tax Act;
•an opinion is not given contrary to clear law, recklessly or through gross incompetence; or
•the preparation of that opinion does not result in him or her knowingly participating in activities that give false or misleading information in connection with matters aﬀecting the application of a tax Act.
Failure to do so may result in a complaint being lodged with the tax practitioner’s controlling body and possible disciplinary steps (including losing his/her membership). Unfortunately for tax practitioners and controlling bodies, no further guidance is available on the situations listed in section 241(2) that can give rise to a complaint against the tax practitioner. It is submitted that the task of providing guidance rests with SARS but also with controlling bodies that can play a signiﬁcant role by providing guidelines to their members to avoid the actions that can result in a complaint.
Requirements for tax opinions in terms of the TAA
The TAA does not contain a deﬁnition, section or part of the act dealing with the meaning of and requirements for a tax opinion. Based on the ordinary dictionary meaning of the word ‘opinion’, this term could include "an evaluation or judgment given by an expert” or "advice given on a case submitted for a view on the legal points involved”. As the TAA does not require the opinion to be in any speciﬁc format, it is submitted that an opinion can range from a formal written opinion, to an informal email containing views on a matter or even a discussion (though this may result in diﬃculties evidencing the opinion expressed). For purposes of using an opinion for the purposes of reducing understatement penalties, it is suggested that the relevant correspondence clearly indicate that the document or correspondence is intended to be an opinion to avoid any confusion.
Based on the earlier analysis of sections 223 and 241, a number of requirements for a tax opinion that is of value to a client can be identiﬁed:
•Firstly, for purposes of section 223(3), the opinion must be prepared by a registered tax practitioner. Therefore the opinion needs to clearly identify the identity of the registered tax practitioner who prepared it as well as evidence of that person’s registration as tax practitioner.
•Secondly, the opinion contemplated in section 223(3) must indicate that it took account of the speciﬁc facts and circumstances of the arrangement. A detailed section setting out the understanding and facts upon which the opinion is based is therefore required.
•Thirdly, an opinion that addresses the behaviour in section 223(1)(i) must provide reasonable grounds for a tax position. In its Short Guide to the TAA, SARS indicates that a taxpayer’s interpretation of the application of the law is reasonably arguable if, having regard to the relevant authorities, for example an income tax law, a court decision or a general ruling, it would be concluded that what is being argued by the taxpayer is at least as likely as not, correct. It is therefore submitted that a tax opinion needs to clearly identify the authority for the position taken as well as its application to the facts and circumstances of the matter that the opinion deals with.
•Fourthly, the opinion contemplated in section 223(3) must conﬁrm that the taxpayer’s position is more likely than not (hereaﬅer referred to as ‘MLTN’) to be upheld if the matter proceeds to court. To meet this requirement, a tax practitioner would need to ﬁnd the balance between being able to make such a statement, while at the same time not stepping into the trap of acting without due diligence and providing an opinion that is contrary to clear law, reckless or grossly negligent. For accounting purposes the MLTN requirement is oﬅen interpreted as a likelihood of more than ﬁﬅy percent. It is however extremely diﬃcult to measure this likelihood objectively. In theory an objective test to assess the technical merits of a position would be required to determine whether a tax opinion meets this requirement. Deﬁning a MLTN test or an instrument to objectively assess whether this requirement should be met, is one of the aspects that SARS and controlling bodies need to attempt to address.
•Lastly, a preparer of a tax opinion should ensure that he or she has taken the necessary steps to ensure the opinion was prepared with due diligence. The preparer must further ensure that the views expressed in an opinion are not contrary to clear law or expressed in a reckless or grossly negligent manner. It is submitted that procedures to review an opinion, implementing a process to ensure that all relevant sources had been considered as well as evidence of further research on contentious issues may address this risk. Once again, this is an area where guidance from SARS and controlling bodies would be welcomed.
The potential importance of obtaining a tax opinion for a position taken has increased signiﬁcantly with the introduction of the TAA. It is suggested in this article that tax practitioners need to be aware of a number of requirements contained in the TAA to be able to provide clients with opinions that can be of value to manage their exposure to understatement penalties. A well-written opinion may be a tool that a client is willing to pay a substantial fee for. The article, however, furthermore indicates that it must however be kept in the back of a tax practitioner’s mind that providing an opinion with a favourable view for a client at all cost, even when that view cannot be substantiated, in order to earn this fee, can put the tax practitioner’s practicing status at risk. It is therefore concluded from the discussion in this article that writing a tax opinion requires a ﬁne balancing act that a tax practitioner must perform between being able to give something of value to his or her client, while not overstepping the line created by the provisions of the TAA regulating tax practitioners.