Remedies for unfavourable rulings
15 June 2015
Posted by: Authors: Nina Keyser and Joon Chong
Authors: Nina Keyser and Joon Chong (Webber Wentzel)
Taxpayers have various alternatives to minimise the risk of tax disputes on proposed transactions. A tax opinion from a registered tax practitioner confirming the position taken by the taxpayer on full disclosure of the proposed transaction should result in remittance of any understatement penalties imposed for a substantial understatement in the event of a future audit. There is, however, no remittance for interest and percentage based penalties.
Taxpayers may also approach SARS for binding private rulings (BPR) or binding class rulings (BCR) in relation to proposed transactions. Such rulings are binding on SARS once they are issued and therefore minimise the risk of future tax litigation
Rulings provide the most certainty to taxpayers on the tax consequences of proposed transactions. From our experience, SARS may take a fair amount of time to issue the ruling. Depending on the complexity of the transaction, SARS may also request meetings with taxpayers and their legal advisers to gain a better understanding of the transaction and to discuss the tax implications. Taxpayers who have appointed legal advisers that are able to discuss nuances of the tax issues conceptually and practically with SARS will more likely achieve a favourable result.
Despite best efforts, taxpayers will receive negative rulings from time to time. In a recent case heard at the Western Cape High Court, the SA Red Cross Air Mercy Service Trust (AMS) had received a negative ruling. AMS provides an aero-medical service throughout South Africa consisting of the flying doctor and rural health outreach service, air ambulance service and rescue service.
AMS had first requested SARS to reconsider its ruling. SARS had refused to do so. Following this, AMS had applied for a declaratory order that:
- section 8(5) of the Value-Added Tax Act, No. 89 of 1991 (VAT Act) applied to deemed services and actual services; and
- the services rendered by it to the Department of Health should be zero-rated in terms of section 11(2)(n) of the VAT Act.
After considering arguments from both sides, the court held that the purpose of the deeming provision is to deem payments received by a designated entity (such as AMS) from a public authority to be consideration in respect of "services" as opposed to goods. This meaning is clear when the ordinary meaning of the words in section 8(5) and section 11(2)(n) are examined in the context of the VAT Act. No additional purposive approach is needed as there are no ambiguous or unclear words in these sections. AMS receives payments in the furtherance of its enterprise activities and such payments are subject to VAT at the zero-rate in terms of section 11(2)(n).
Following this case, it is useful to consider the remedies available to taxpayers that have received unfavourable BPR and BCR.
Consider the validity of the ruling
Section 84 of the Tax Administration Act, No. 28 of 2011 (TAA) determines that BPR and BCR are rendered void ab initio in certain circumstances. In other words, such rulings are deemed never to have come into force. Section 84 provides as follows:
(1) A ‘binding private ruling’ or ‘binding class ruling’ is void ab initio if -
(a) the ‘proposed transaction’ as described in the ruling is materially different from the ‘transaction’ actually carried out;
(b) there is fraud, misrepresentation or non-disclosure of a material fact; or
(c) an assumption made or condition imposed by SARS is not satisfied or carried out.
(2) For purposes of this section, a fact described in subsection (1) is considered material if it would have resulted in a different ruling had SARS been aware of it when the original ruling was made.
Taxpayers and their legal advisers should consider whether the description of the transaction in a ruling accurately captures the envisaged transaction. Importantly, the ruling should not contain material errors, whether conceptual or factual, as to the nature of the proposed transaction.
Request for the ruling to be withdrawn
A ruling is a decision made by a SARS official as envisaged in section 9 of the TAA. A taxpayer receiving an unfavourable ruling can request SARS to withdraw the ruling in terms of section 9(2) of the TAA.
A ruling which is void ab initio does not strictly need to be withdrawn as it has never come into force in the first place. For certainty, we recommend that a request is made to SARS for the ruling to be withdrawn in terms of section 9 of the TAA.
Request for the ruling to be reconsidered
The taxpayer's legal adviser can make this request in the form of a written representation to the relevant senior SARS official at the Legal and Policy Unit.
Apply to court for the ruling to be taken on review
The taxpayer's legal adviser can apply to the High Court for a review of the ruling in terms of the Promotion of Administrative Justice Act, No. 3 of 2000 (PAJA). It will be necessary for the court to adjudicate on the merits of the matter when deciding whether the ruling was reasonable.
Apply to court for a declaratory order
The taxpayer's legal adviser can apply to the High Court for a declaratory order on the interpretation and application of relevant sections in a tax statute.
Disregard the ruling
SARS is bound to follow a ruling, but a taxpayer is not bound to follow it if the taxpayer disagrees with its contents. The taxpayer should then, however, be prepared to be assessed in accordance with the negative ruling and to face potential penalties and interest. It will then be up the taxpayer to object to the assessment and to appeal against any disallowance of the objection to the Tax Court.
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This article first appeared on webberwentzel.com