The Rocky Road of Corporate Income Tax Compliance
10 October 2013
Posted by: Author: Lesley Isherwood
Author: Lesley Isherwood (KPMG)
According to the 2013/2014 budget announced in February, National Treasury estimates that it will collect R169 830 000 000 in corporate income tax during the current fiscal year. However, collecting these taxes will be far from straightforward, at least from the perspective of the taxpayers expected to be filling the corporate income tax coffers. The first stumbling block that taxpayers will face is establishing the tax provisions with which they are expected to comply. This is no small feat when the sheer scale of the annual legislative amendments is taken into consideration – the vast majority of which is targeted at corporate taxpayers. Add into the mix the complexity of many of the amendments which, even when well drafted, create uncertainty as to the intended impact of the legislation. Further complicating the process are the poorly drafted amendments which require redrafting in subsequent years, often with effective dates backdated to the date of the original amendment. Finally, taxpayers must contend with the time delay between tax proposals being announced in the February budget speech and the promulgation of the legislation towards the end of the calendar year.
Interpreting the provisions of the Income Tax Act is becoming increasingly difficult for taxpayers. Whilst tax law is predominantly driven by the provisions of the various taxing statutes, the courts have, over the years, developed a unique South African jurisprudence through considering the meaning of commonly used words and phrases and through considering the ambit and meaning of various provisions on the statute books. The frequency with which Income Tax provisions now change, coupled with the time which passes before a tax matter is decided on by the courts, often renders the court’s decision of little interpretive value to taxpayers. By the time the court has pronounced on the meaning or application of a particular provision, that provision could have been amended once if not more times. In addition, the drafters of the new provisions often look to foreign jurisdictions for guidance when legislating certain types of transactions and may use the legislation from the foreign jurisdiction as a blueprint for our local provisions. However, these jurisdictions inevitably have developed their own jurisprudence, with words and phrases taking on a different meaning to those given historically by our courts. Interpreting those words and phrases in accordance with South African jurisprudence can therefore be complicated and confusing.
Once the taxpayer has established the basic income tax framework within which to operate, the taxpayer is faced with applying income tax provisions, which do not always talk to the commercial reality of the taxpayer’s business. By way of example, existing corporate restructuring provisions such as the amalgamation provisions have little in common with the provisions of the Companies Act with the same name. In addition, the 2012 provisions regulating the taxation of preference shares as well as the proposed provisions in relation to debt instruments do not necessarily accord with the requirements of finance institutions with regards to security, and the broad based share schemes provisions are of little use to companies looking to implement broad-based schemes.
Assuming that the corporate taxpayer has made sense of the plethora of taxing provisions, the taxpayer will ultimately be required to disclose its tax treatment to the South African Revenue Service (SARS) in its annual income tax return. Bring on the new IT14 tax return for companies with its seemingly never-ending levels of disclosure, not all of which is readily available to the person tasked with compiling the tax return. In order to ensure that the required level of detail is available to the personnel completing the returns, some companies have to modify their financial reporting systems or invest in new systems. The new returns are therefore imposing not only an additional compliance burden on companies but also additional information technology costs. Apart from new income tax returns, there are a number of other administrative frustrations being experienced by corporate taxpayers, including the completion of IT14SD forms and being subject to multiple audits.
Unfortunately for some companies, the submission of the income tax return is not the end of the challenge. Whilst regulations to the Income Tax Act currently require SARS to provide reasons for assessments issued, the reasons provided by SARS are often not sufficient to enable the taxpayer to adequately understand the basis on which SARS has assessed the taxpayer and therefore hinders the taxpayer’s ability to object to the assessment. When taxpayers do lodge objections, SARS does not always abide by the 60-day period stipulated in the rules for responding to the taxpayer. Similarly, SARS may disregard the periods stipulated in the rules for responding to appeals by the taxpayer and accompanying requests for Alternative Dispute Resolution. The rules themselves provide no sanction for the delays occasioned by SARS. Taxpayers affected by delays on the part of SARS are left looking to the SARS internal processes to try get SARS to action the objection or appeal or to incur the costs of a High Court application to compel SARS to act.
A further area of concern for taxpayers arises in relation to the new penalty regime introduced by the Tax Administration Act that came into operation on 1 October 2012. The new penalty regime can be more penalising on taxpayers who understate the amount of tax payable to SARS than under the previous regime. The ability of SARS to remit the penalties is extremely limited. SARS may only remit so-called substantial understatement penalties (the least punitive category of understatement penalty) and requires the taxpayer to have obtained a tax opinion from a registered tax practitioner on the transaction giving rise to the substantial understatement.
As the Tax Administration Act currently reads, the tax opinion must have been obtained prior to submitting the relevant tax return. The transitional provisions of the Tax Administration Act provide that additional tax or penalties which, but for the repeal of the penalty/additional tax provisions in the taxing acts, would have been capable of being imposed and which have not been imposed by the commencement date of the Tax Administration Act, may be imposed as if the taxing act penalty provisions had not been repealed. SARS has interpreted this transitional provision as granting SARS the discretion to levy penalties on returns submitted prior to 1 October 2012, yet assessed after 1 October 2012, in terms of either the repealed taxing act penalty provisions or under the Tax Administration Act regime. Based on this interpretation, SARS is imposing the more onerous Tax Administration Act provisions. As tax practitioners were only required to register as tax practitioners in terms of the particular requirements of the Tax Administration Act with effect from 1 July 2013, taxpayers who submitted their returns prior to 1 October 2012 are effectively unable to comply with the requirements for the remittance of the penalties.
Fortunately, some relief is offered to taxpayers in the proposed amendments. Taxpayers who submitted their tax returns prior to 1 October 2012 will now be permitted to obtain a tax opinion for purposes of remitting understatement penalties. In addition, understatements occasioned by bona fide or inadvertent errors will no longer attract understatement penalties. The proposed amendments will however require that the tax opinion be obtained from an independent tax practitioner. In-house tax departments will therefore be required to turn to external consultants for these opinions. This will no doubt increase the cost of compliance for corporate taxpayers.
Finally, we understand that revenue collections are significantly short of target. Pressure to collect has led to much greater aggression on the part of SARS. SARS is making use of the Tax Administration Act provisions, which enables it to appoint third parties, such as banks, as collection agents. The appointment of the banks as third party agents effectively enables SARS to seize funds deposited with the banks by taxpayers, in settlement of tax debts. Coupled with this, it would appear that the application for a tax refund seems to trigger an automatic audit, delaying the refund process.
The tax environment for corporate taxpayers is therefore far from ideal. One does, however, hope that the Davis Commission will place the spotlight on some of the challenges being faced by this taxpayer group and that the path to tax compliance will be smoother and more clearly marked in future.
This article was first published in TaxTalk magazine (September/October edition)