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SARS’ Information-gathering powers, the amended definition of “relevant material”

26 January 2015   (0 Comments)
Posted by: Author: Johan van der Walt
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Author: Johan van der Walt (KPMG)

Johan van der Walt provides an in-depth analysis of the ways in which the amended definition of "relevant” material has impacted upon SARS’ power to gather taxpayer information.

"But if thought corrupts language, language can also corrupt thought.” George Orwell, 1984*

The Draft Tax Administration Laws Amendment Bill, 2014 (TALAB) introduced a far-reaching amendment to the definition of "relevant material” (as found in section 1 of the Tax Administration Act, 2011 (the TAA)).

Prior to the amendment the definition read: "relevant material means any information, document or thing that is foreseeably relevant for the administration of a tax Act as referred to in section 3.” 

Now it reads: "relevant material means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3.” (emphasis added)

This amendment should be read in conjunction with the expanded definition of "return” (section 1 of the TAA) which now incorporates "…relevant material requested by SARS”. 

Failure to submit a "return” to SARS is a criminal office under section 234(1)(c) of the TAA. Effectively, failure by a taxpayer to provide SARS with "relevant material” as requested by SARS has been criminalised.

The above might also, in future, impact a taxpayer’s ability to obtain a tax clearance certificate. In the Memorandum on the Objects of the Tax Administration Laws Amendment Bill, 2014 (the Memorandum) it is stated (at paragraph 2.64.1) that "the requirement of no outstanding requests for information is removed as a requirement for TCS [i.e. Tax Compliance Status], but further review on the inclusion of such non-compliance will be conducted during the 2015 legislative cycle”.  

But why?

When the TAA became law on 1 October 2012, there was already a sense that SARS had become exasperated due to taxpayers contesting SARS’s information-gathering powers.

In the Short Guide to the TAA SARS stated that the TAA extended its information-gathering powers "…to address the problem that too many requests for information by SARS resulted in protracted debates as to SARS’s entitlement to information.”

Apparently the original TAA did not go far enough - hence the above-mentioned amendments. 

The Memorandum explains (at paragraph 2.37) that the proposed amendment to the definition of "relevant material” was aimed at clarifying "… that the statutory duty to determine the relevance of any information, document or thing for purposes of e.g. a verification or audit, is that of SARS and the term foreseeable relevance does not imply that taxpayers may unilaterally decide relevance and refuse to provide access thereto, which is what is happening in practice.”

Clearly the intention is to introduce a purely subjective determination (by SARS) of what constitutes "relevant material”. Whether this solves SARS’s problem is debatable. 

What does "foreseeably relevant” mean?

According to the Memorandum (at paragraph 2.37.2.1), the test of what is foreseeably relevant for domestic tax application would have a low threshold.

The application of what qualifies as being ‘‘foreseeably relevant’’ is to be determined (by SARS) applying the following criteria:

  • whether (at the time of the request) there is a reasonable possibility that the material is relevant to the purpose sought;
  • whether the required material, once provided, actually proves to be relevant is immaterial;
  • an information request may not be declined in cases where a definite determination of relevance of the material to an ongoing audit or investigation can only be made subsequent to receipt of the material;
  • there need not be a clear and certain connection between the material and the purpose, but a rational possibility that the material would be relevant to the purpose; and
  • the approach is to order production first and allow a definite determination to occur later.

Clearly in the information-gathering space this means: "Provide now, argue later.” 

What are the taxpayer’s remedies?

The Memorandum states (at paragraph 2.37.2.3) that taxpayers have the protection that taxpayer information held by SARS is secret and may only be disclosed under narrowly defined circumstances.

In response to the comment (with regard to the amendment of the "relevant material” definition), namely that SARS should give reasons why the requested material is considered relevant, SARS points to:

  • "… the sheer impracticality of auditing in this manner”; and 
  • the fact that such an approach had been rejected in international case law (for example in Australia and New Zealand Banking Group Limited v Konza ([2012] FCA 196.)

According to the Memorandum, the fact that SARS will henceforth determine what constitutes "relevant material”, does not, however, leave the taxpayer without remedies. 

During the audit process the taxpayer could, for example:

  • Request SARS to withdraw / amend its decision to request the disputed material (under sec 9 of the TAA);
  • Pursue SARS’s internal administrative complaints resolution process;
  • Approach the Tax Ombud; 
  • Approach the Public Protector.

Taxpayers should accept that "… information is the lifeblood of a revenue authority’s taxpayer audit activity” 

The Memorandum implores taxpayers (at paragraph 2.37.2.5) to understand that information is "… the lifeblood of a revenue authority’s taxpayer audit activity.”

It states:

  • The whole rationale of taxation would break down and the burden of taxation would fall solely on the diligent and honest taxpayers if a revenue authority had no effective powers to obtain confidential information about taxpayers who may be negligent or dishonest;
  • Inadequate investigation of tax evaders, or taxpayers who through aggressive tax planning only purport to comply with tax laws, is unfair to taxpayers who complied with the law;
  • If such problems were allowed to persist, they would undermine public confidence in the tax system, and would reduce voluntary compliance by the majority of taxpayers, such compliance being an integral feature of an effective tax system.

But, where exactly is SARS heading with its information-gathering exercises? 

The pivotal role that information plays in SARS’s compliance strategy is evident from the following passages contained in SARS’s latest Strategic Plan ("2014/15 – 2018/19 Strategic Plan, South African Revenue Service”, at p 21):

"The automation of our systems has enabled us to receive, review and process large volumes of taxpayer and trader data and/or information. We have an opportunity to improve our analytical capability to manage compliance risks more intelligently by predicting for example taxpayers/ traders’ propensity to file their returns on time or to declare and pay what they owe fully. This will give us the ability to intervene much earlier if required and with the right kind of compliance intervention.

We receive, process and hold large quantities of taxpayer and trader data in our data warehouse from multiple sources. This presents us with an opportunity to improve our analytical capability to manage compliance risks more intelligently and use our resources more efficiently.

By increasing and integrating data from multiple sources, we will be able to gain a complete economic understanding of taxpayers and traders across all tax types and in all areas of economic activity … Over the next five years we will ensure that the design and development of our new systems and processes take into account our intentions to have a complete and dynamic economic view of taxpayers and traders at all times, and not just when they submit a return or clear an import transaction.”

Are there any counter-weights?

Do the amendments to the definitions of "relevant material” and "return” mean that SARS’s information-gathering process has become a one-way street? Certainly not.

Taxpayers have, and should actively use, the following safe-guards, among others:

SARS remains a creature of statute

In AM Moolla Group Ltd v Commissioner, SARS & others [2005] JOL 15456 (T) Roux J held: 

"Being a creature of statute the first respondent [SARS] must perform his task as laid down in the Act and not by will.”

Despite the straining at the "creature of statute” straightjacket, it still applies.

Procedurally fair administration under PAJA 

Section 3 of the Promotion of Administrative Justice Act, 2000 ("PAJA”) provides:

3. Procedurally fair administrative action affecting any person.—

(1) Administrative action which materially and adversely affects the rights or legitimate expectations of any person must be procedurally fair.

(2) (a) A fair administrative procedure depends on the circumstances of each case.

(b) In order to give effect to the right to procedurally fair administrative action, an administrator,

subject to subsection (4) must give a person referred to in subsection (1) —

(i)        adequate notice of the nature and purpose of the proposed administrative action;

(ii)       a reasonable opportunity to make representations;

(iii)      a clear statement of the administrative action;

(iv)      adequate notice of any right of review or internal appeal, where applicable; and

(v)       adequate notice of the right to request reasons in terms of section 5.

The Short Guide to the TAA (at p 10) states that "It is, therefore, not necessary for the Act itself [the TAA] to spell out all the relevant aspects of administrative justice. This is implicit given the overriding application of PAJA, under which the unreasonable exercise of power or performance of a function is a ground for review.” (emphasis added)

The above means that the rules relating to administrative fairness and specifically the principles of the PAJA have effectively been "embedded” in the TAA.

Applicable principles of statutory interpretation

Section 39(2) of the Constitution provides that "when interpreting any legislation, and when developing the common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights”.  

This has been interpreted by several Constitutional Court decisions to mean that a "purposive” approach must be followed when interpreting legislation. (Refer e.g. Prof. George Goldswain, Hanged by a comma, Strict and literal to purposive, (2014) 28 Tax Planning 25.)  

When it comes to the interpretation of fiscal provisions (including the ambit of SARS’s information-gathering powers under the TAA), taxpayers should bear in mind the following case law: 

In ITC 1384 (1983) 46 SATC 95, Steyn J held that the provisions of a fiscal statute "…have to be construed subject to the presumption of a fair, just and reasonable lawgiver’s intention…

In First National Bank of SA Ltd t/a Westbank v Commissioner, SARS & Another: First National Bank of SA Ltd t/a Wesbank v Minister of Finance [2001] JOL 9760 (CC), the Constitutional Court held that  "…even fiscal statutory provisions, no matter how indispensable they may be for the economic well-being of the country - a legitimate governmental objective of undisputed high priority – are not immune to the discipline of the Constitution and must conform to its normative standards” (emphasis added).

In Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] JOL 28621 (SCA), the Supreme Court of Appeal held that when interpreting legislation, the apparent purpose of the provisions as well as the context in which it occurs will be important guides: "An interpretation will not be given that leads to impractical, unbusinesslike or oppressive consequences or that will stultify the broader operation of the legislation or contract under consideration.

From the above, it is clear that the TAA provisions relating to SARS’s information-gathering powers (including the amended definitions of "relevant material” and "return”) should be interpreted on the assumption that the lawmaker’s intention is "fair, just and reasonable” (taking into account the particular circumstances) and that an interpretation that imposes "impractical, unbusinesslike and oppressive consequences” would not be given.

No place for ulterior purpose during information-gathering 

In GGB & Another v MEC for Economic Development [2013] ZASCA 67 Navsa JA held as follows:

"In present-day jurisprudence, acting with an ulterior motive or purpose, is subsumed under the principle of legality. Section 6(2)(e)(ii) of PAJA makes administrative action taken for an ulterior purpose or motive subject to review.”

The judgment of the Canadian Federal Court of Appeal's (FCA) in MNR v RBC Life Insurance Co, [2013] FCA 50 is a case in point where the Canadian Revenue Authority (CRA) was criticised for using its information-gathering powers for an ulterior purpose. Reference was made to Minister of National Revenue v Greater Montréal Real Estate Board, [2006] FC 1069, 303 FTR 29 which held: 

"The language of the Act is clear. The information and documents requested must be for the purpose of verifying whether the persons being investigated have complied with some duties or obligations set out in the Act. The courts have held that the information must be 'relevant' to the inquiry."

The RBC Life case is important in the context of SARS’s information-gathering powers under the TAA.

The question of ulterior purpose could arise, for example, should SARS request voluminous information/documentation very close to a prescription date – simultaneously setting an unreasonably tight deadline for submission by the taxpayer. Often SARS would insist on a prescription extension where the taxpayer cannot meet the deadline. Perhaps the taxpayer should consider (and contest) whether the requested information was truly required for audit purposes (especially where detailed information and documentation is already with SARS). If the information request is rather to coerce the taxpayer to submit to an extension of prescription, such information request could be open to attack insofar as there might be an ulterior purpose? 

"Relevance”: objective vs subjective test?

Whereas the determination of relevance used to be an objective test, the amended definition of "relevant material” seeks to make the test a purely subjective one (refer to for example, Peter Dachs and Bernard du Plessis, SARS gets tough on transfer pricing practices, Business Law & Tax Review, supplement to Business Day, November 2014, at point 6).

As is clear from the Memorandum (at paragraph 2.37.2), SARS will no longer tolerate that a taxpayer may "…unilaterally decide relevance”.

Henceforth, relevance is SARS’s decision only ("in the opinion of SARS”).

Of course, in forming the opinion that something falls within the ambit of "relevant material” SARS is probably making some "decision”?

The question arises whether, or not, SARS’ decision would be subject to contestation under section 104(2(c) of the TAA, which provides for objection and appeal in relation to "any other decision that may be objected to or appealed against under a tax Act”.

Commentators have therefore stated that "…the provision still requires a decision from SARS, and this decision [that something constitutes ‘relevant material’] can be challenged and taken on review” (refer above, SARS gets tough on transfer pricing practices, Business Law & Tax Review). 

How to apply the above in practice?

Each case will depend on its specific facts.

There is no magic bullet to deal with over-zealous, over-broad and unreasonable information requests. The question remains, however, how does the taxpayer use and apply the above in dealing with a SARS information request? 

On the SARS website SARS itself explains its six-phase "Taxpayer Audit Process” (only the parts relevant to this article are quoted below):

"In addition to cases being selected for audit on the basis of risk, taxpayers may also be selected for audit on a random or cyclical basis. At the start of each tax year an LBC National Audit Plan (NAP) is prepared based on compliance landscape and previous audit intervention required. The risks identified for audit by risk profilers are normally vetted by the LBC National Risk Committee, which comprises specialists across various tax and business disciplines. Once a case has been included in the audit plan a lead auditor is allocated to the case and the following 6-phase audit process is followed

1. Planning

This involves the auditor carrying out certain preliminary checks, often in conjunction with the Risk Profiler. This is performed to ensure that the auditor is fully appraised of the risks identified by the Risk Profiler as well as allowing the auditor an opportunity to identify any additional risks. A plan for the relevant audit will be prepared regarding the execution of the audit including resourcing requirements.  Where the audit will take the form of a field audit a pre audit planning meeting, facilitated by the relevant Taxpayer Interface Specialist, will be held with the taxpayer to explain the intended focus areas of the audit including the years being audited, agree the timing of the audit, the intended information gathering process and outline any facilities and assistance that the audit team may require whilst present at the taxpayer’s premises. (emphasis added)  

2. Gather information

During the information gathering process information is collected to review and make a determination of the relevant identified risk. This is a key phase of the audit where a cooperative approach by taxpayers will assist in managing the audit timeframe. It is also during this phase that any adjustments to the audit scope are likely to occur.  To the extent that they do, these will be explained to the taxpayer.”

 [Note: It would be beneficial for taxpayers to also familiarise themselves with the subsequent audit phases: 3) Determine our technical position; 4) Advise the taxpayer of the outcome; 5) Issue an assessment as required; and 6) Deal with objections and appeals as necessary. Said phases are however not directly relevant to this article.]

SARS’s description above makes it clear that, at the stage when SARS has completed its risk-profiling of the target taxpayer, and once it decides to embark on an audit, it would already have great clarity and certainty regarding the exact tax risks it intends to pursue (the so-called "focus areas of the audit”.)  (Refer "Planning” above).

Subsequent to the "Planning”, the gathering of information phase will follow. 

SARS indicates that "during the information gathering process information is collected to review and make a determination of the relevant identified risk” (See under "Gather information” above.) 

On its own version SARS’s efforts at information-gathering are therefore aimed at gathering "…all of the information required in respect of the identified risks”. 

Accordingly, any information to be collected should have a direct nexus to the tax risk detected during risk-profiling, which tax risk should then have been captured in the "audit plan” as an "intended focus area”.

Presumably, the above-mentioned detail should then also be the information that SARS should set out in its "notice” informing the taxpayer that a "field audit” would be undertaken in terms of section 48(1) of the TAA.

It follows that SARS should have no difficulty to comply with section 48(2)(b) of the TAA which requires SARS to indicate in the notice "the initial basis and scope of the audit…”.

In light of the above there should be no fuzziness (both for SARS and the taxpayer), once the field audit commences. Both parties should have a firm grasp on:

  • The tax risks that SARS intends scrutinizing; and 
  • The exact information and / or documentation (in other words, "relevant material”) required by SARS in relation to those tax risks.

The above is important insofar as subsections 49(1)(b) and (c) of the TAA oblige the taxpayer to "answering questions relating to the audit…” and "submitting relevant material as required”. Unless the taxpayer knows what the "scope and basis” of the field audit are as well as its "intended focus areas”, it would be difficult (if not impossible for the taxpayer) to comply with said obligations under section 49 of the TAA. 

It stands to reason that, following the preparatory risk-profiling work undertaken by SARS there should be upfront clarity regarding the exact tax risks that form the subject matter of any SARS audit, as well as the exact information and/or documentation (in other words, the "relevant material”) that SARS would need to address the risk-profiled tax risks.

Any taxpayer being audited should therefore insist that any SARS request for "relevant material” complies with the above and that such an information request is, furthermore, "…referred to with reasonable specificity” (see section 46(6) of the TAA).

In addition, SARS’s total information-gathering exercise and audit process should comply with the doctrines of creature of statute; procedurally fair administration, legality (no ulterior purpose), specificity, and etcetera. Taxpayers should be vigilant to protect their rights on this score.     

Conclusion

The ambit of SARS’s information-gathering powers under Part B of Chapter 5 (and specifically in terms of section 46) of the TAA is crucial to SARS (who sees information as its "lifeblood”) as well as to taxpayers who are rightly opposed to "information fishing” and "trawling for information by SARS” (refer David Clegg, Information fishing, in (2014) 28 Tax Planning 103.)

Overseas revenue authorities and taxpayers have gone down this rocky road. Locally the debates have only started. In time, case law should bring some clarity. In the meantime taxpayers should fasten their seatbelts. 

To close, another quote from George Orwell’s 1984:

"It is a beautiful thing, the destruction of words.”

This article first appeared on the January/February edition on Tax Talk.




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