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When only a pound of flesh is enough

15 April 2015   (0 Comments)
Posted by: Author: Pieter Faber
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Author: Pieter Faber (SAIT Technical)

A discussion on the appropriate sanctions for tax offences, both monetary and confinement related

The recent case of Director of Public Prosecutions, Western Cape v Parker (103/14) [2014] ZASCA 223 (12 December 2014)reminded me of the works of William Shakespeare where the play, the Merchant of Venice, seemed an appropriate parody.

To set the scene for this thought provoking dialogue, we may need to refresh everyone’s memories of the play. In short we have dear Antonio who is indebted by contractual bond to Shylock and on suffering loss of his cargo, Shylock claims the debt under the bond. Payment under the bond was no mere matter of money either, as a pound of flesh closest to the heart was the payment sought in front of the Duke. Shylock is repeatedly requested for mercy and is even offered three times the debt in money by Bassanio, who is Antonio’s friend, but such payment is rejected as being insufficient and not following the letter of the law. Portia, who acting under deceit as Baltazar the doctor of laws, is the heroine of the play. She uses the letter of the law in the bond and prevents Shylock from taking the pound of flesh by demanding that he may only take it without taking a drop of blood, which per the letter of the law, was not his in the wording of the bond. This action by its very nature was impossible and Shylock, realising as much, seeks to take the alternate money offer to his peril. The rest as they say is history that ended badly for Shylock.

In the Parker case, we seem to have a similar scenario, with SARS demanding ostensibly, on the letter of the law that a VAT vendor who had failed to pay over VAT recovered, be prosecuted. However, not only for his misgivings under the provisions of the VAT Act, but also be prosecuted and sentenced to jail for the common law crime of theft. The reason given by the National Prosecuting Authority for this extreme petition was that the penal provisions under the VAT Act were not severe enough and they therefore were demanding "the pound of flesh closest to the heart” as the only manner of appeasing its claim against the vendor. The court invariably rejects SARS’ contentions, as on the letter of the law, they are not entitled thereto but merely that which is provided for in the VAT Act. Similarly, the court also [at 11-13], as Portia did to Shylock, explains to SARS why enforcing the letter of the law, as it claims it to be, is not practically possible.

Discussions on the appropriate sanctions for tax offences, both monetary and confinement, are a subject of much debate, but a good point to start such debate would always be the principles we seek from the Constitution as our guiding light to a better society. We have been made fully aware of the draconian powers of the fiscus as set out in the judgement of Metcash Trading Limited v Commissioner for the South African Revenue Service and Another (CCT3/00) [2000] ZACC 21; 2002 (4) SA 317; 2002 (5) BCLR 454 (24 November 2000)[at 23] where even the court a quo made the comment that the powers were "dramatic and extensive”[at 27].  As a country with a jaded legislative past, as reflected in the preamble of our Constitution, we are also fully aware that the law is not always just, even though its strict enforcement may mislead many to think that justice is in fact being done.

Hence the founding fathers of our Constitution have thought it well, and wisely so, that all laws in our country should be measured against the principle of justice and fairness as enshrined therein. The legislature has seemingly taken these principles of justice to heart, so when the Tax Administration Act (No. 28 of 2011) was enacted as part of a legislative consolidation, the explanatory memorandum that accompanied it had this to say [at 2.1.][ own emphasis]:

"International experience has demonstrated that if taxpayers perceive and experience the tax system as fair and equitable, they will be more inclined to fully and voluntarily comply with it.

And 

"In drafting the TAB, due regard was given to the following principles of international best practice in tax administration:

(a)   Equity and fairness to ensure that the tax system is fair and also perceived to be fair, which in turn should enhance compliance….”

A similar principled approached is followed in the Davis Tax Committee’s First interim report on BEPS [at 28] and tax system design which states [own emphasis]:

"…Equity requires justice and equal treatment of domestic and foreign companies….”

In the judgement of the court in the Parker case [at 9] the court confirms that the relationship between SARS and the VAT vendor is that of debtor and creditor and not that of an agent or debt collecting agent. This begs the question whether in such relationship and in seeking the principles of justice and fairness, non-payment without the intent of criminality, should face such serious a sanction as confinement?

In Malachi v Cape Dance Academy International (Pty) Ltd and Others (CCT 05/10) [2010] ZACC 13; 2010 (6) SA 1 (CC) ; 2010 (11) BCLR 1116 (CC) (24 August 2010) the Constitutional Court had the following to say about detention for civil debt [at 40-41][ own emphasis]:

Freedom is an important right. The detention of any person without just cause is a severe and egregious limitation of that right. It is difficult to imagine the circumstances in which a law that allows detention without just cause could ever be justifiable.

Other comparable jurisdictions have done away with arrest and detention that aims to prevent flight or to recover civil debts. I therefore conclude that the limitation is not reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom.

This then brings us back to the matter of tax and sanction for non-compliance. Where the matter is recovering a civil debt, should this constitute a criminal offence subject to a sanction of confinement? In both the Parker case as well as the case of AJC Olivier v Die Staat (A153/2005)(22 September 2006) the sanction of imprisonment was dealt with on the basis as to how objectionable the actions of the vendor were, including whether there was intent to deceive etc. and as per the statements in the Olivier case [at 25], whether the sanction would serve as deterrent for similar actions in future. The constitutional court in S v Williams and Others 1995 (7) BCLR 861 (CC) [at 64] has previously confirmed the traditional objectives of punishment as being prevention, retribution, deterrence and rehabilitation.

Whether the "crime” fits the punishment is a question which has been posed before by our society. Ironically, the court [at 65] cites an old criminal case from 1972 as principle [ own emphasis]:

"Punishment should fit the criminal as well as the crime, be fair to the accused and to society, and be blended with a measure of mercy . . . the element of mercy, a hallmark of civilized and enlightened administration, should not be overlooked, lest the Court be in danger of reducing itself to the plane of the criminal . . .”

The same court, however, states [at 66] [own emphasis]:

"While those principles have remained eternal truths with regard to the purposes of punishment, the justice and penal systems have been evolving towards a more enlightened and humane implementation of those principles. In keeping with international trends, there has been a gradual shift of emphasis away from the idea of sentencing being predominantly the arena where society wreaks its vengeance on wrongdoers. Sentences have been passed with rehabilitation in mind.”

Do the current tax law offences envisage the principles of mercy and rehabilitation or is it even more inequitable? When seeking the current principles applied in tax acts for punitive measures, what does come to mind is the fact that where a thief commits common law theft, the money stolen is recovered and imprisonment applied. However, when the same thief steals from SARS, he has to repay the capital, twice capital amount as penalty, punitive interest thereon back dated and possibly serve imprisonment. Similarly where a creditor seeks payment, he can recover the capital sum and possibly interest. When SARS as creditor seeks payment, it can recover the capital sum, late payment penalty, non-compliance penalties (i.e. additional tax) and retrospective punitive interest. In both instances SARS seeks not only its money but a pound of flesh as well,over and above what society in general would seek from such person in the normal matter of course. This does not in my mind seek to instil a system of equity and fairness, not to mention rehabilitation and mercy as the punishment in many instances does not seem to fit the crime. 

Of further concern is the fact that unlike in the above mentioned cases of Parker or Olivier, criminal offences in terms of the tax Acts do not require some form of intent to deceive or defraud the fiscus, it merely requires non-compliance. This in itself is problematic where imprisonment is a consequence of non-compliance for something that society does not perceive as having an element of criminality, especially within a debtor creditor relationship. 

For example, though caveated with the opening line of "wilfully or without just cause”, section 234 of the Tax Administration Act (No. 28 of 2011) makes it a criminal offence, subject to sanction of even imprisonment of two years, where a person fails or neglects to update your personal particulars with SARS. This seems a matter of mere monetary penalty rather than criminality, even if you seek to avoid SARS or merely just don’t care.

SARS would be quick to remind us that for many of these "minor” criminal offences they have never imprisoned or penalised anybody, however, herein lies the problem. In the Parker case the court makes the following statement (emphasis mine):

"The answer to these difficulties suggested by counsel, namely that the Director of Public Prosecutions would never charge the vendor under the circumstances contemplated in the example, provides no answer at all to the question whether a crime has been committed. The law cannot depend on whether or not the DPP decides to enforce it.”

It would seem that the legislature has in its efforts to give SARS its pound of flesh, not only made a law which seems more punitive than just, rehabilitative or representative of mercy and in fact it may in practice be arbitrary as well. The fact that many taxpayers have not updated their details wilfully is such offence which the taxpayer ostensibly has reconciled himself with, or more plainly, the concept of dolus eventualis may apply to many a taxpayer. In short as set out in Magatho v S (732/12 [2013] ZASCA 34 28 March 2014 [at 9] this form of intent is when:

"A person acts with intention in the form of dolus eventualis if the commission of the unlawful act or the causing of the unlawful act result is not his main aim but he subjectively foresees the possibility that in striving towards his main aim the unlawful act may be committed or the unlawful result may ensue and he reconciles himself to the possibility.”

Though many a taxpayer may have been guilty of this crime, few if any, have been charged with such offence notwithstanding that the law cannot depend on whether SARS decides to enforce it or not. It is clear that even SARS in its lack of enforcement (though not due to a lack of ability in my opinion) acknowledges the over zealousness of these punitive measures for the various tax offences. 

No easy answer is to be had for the question as to appropriate punishment for tax offences, however from the principles laid down in our young democracy as to why and how we should punish, it seems rather a case where the legislature should review the criminal offences in the tax Acts.  In fact, the lesson from the Parker case may be that criminal offences and imprisonment sanctions, even for tax matters, should properly lie in the Criminal Procedure Act and not in the tax Acts, which should just rather regulate debtor and creditor matters with civil monetary penalties.

As set out in the Olivier judgement, the law should punish with consideration of the facts and with due consideration that such punishment should also deter others from committing such offences in future. In addressing the purposes of punishment, rehabilitation and mercy should also be reflected in the relevant tax laws punitive measures. As was the case for Shylock, the letter of the law may not always give the desired result that we strive for in fulfilling the social pact, in accordance with our constitutional principles, between the state and its subjects. Parties on both sides may need a rethink of their respective fiscal obligations and entitlements and how they are enforced or met. 

All laws, including those that the fiscus enforce, should be just and not seek a "pound of flesh closest to the heart” where three times the amount (or even less) is sufficient recompense.  

This article first appeared on the March/April 2015 edition on Tax Talk.


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