Can SARS limit legal professional privilege?
24 March 2016
Posted by: Authors: Natalie Napier and Phillip Lourens
Napier and Phillip Lourens (Hogan Lovells)
rules have come into effect for how legal professional privilege is regulated,
we look at what effects they may have in practise.
have been made to the Tax Administration Act (the TAA) by the insertion of a
new section 42A with effect from 8 January 2016. Section 42A
prescribes the procedures and requirements that must be followed by the
taxpayer in order to claim legal professional privilege in respect of relevant
material required by SARS, during an inquiry or during the conduct of a search
and seizure by SARS.
is not yet clear, is exactly how the amendments will be interpreted and
applied, and ultimately, what effect they will have on taxpayers claiming legal professional privilege.
The resolution of disputes relating to legal
privilege between taxpayers and revenue authorities is not unique to South
Africa. For example, in the United Kingdom, there are procedures in place to
resolve such disputes. Effectively, a tribunal will resolve disputes relating to information or documents requested to be
produced by the taxpayer and in respect of which the taxpayer claims legal
privilege which Her Majesty’s Revenue and Customs does not accept.
In terms of section 42A, a taxpayer who claims
legal professional privilege when SARS requests material from them will have to
provide the description and purpose of each document where privilege is claimed
as well as stating which privilege is claimed. Details include, among others,
the author of the document, the person for whom the author was acting, as well
as confirmation that privilege is being claimed.details. The information must
be submitted to SARS at the place, in the format and within the time specified
If SARS disputes the validity of the claim, a
third party appointed in accordance with the TAA will be given the material and
make a determination on whether privilege applies or not.
The taxpayer will not have any input into the
appointment of the third party. If no determination is made or a party is not
satisfied with the determination made, the matter can be taken to the High
Court within a prescribed period of time.
appointed third party –
- will not act on behalf of SARS or the taxpayer;
- must personally take responsibility for the
safekeeping of the material; and
- must give grounds for any determination.
wording and practical application of section 42A is not clear in a number
of instances and may give rise to contradictory interpretations. Whether it
will work in practice remains to be seen.
In what circumstances will section 42A apply?
the introductory words to section 42A(1), it is not certain when exactly
section 42A will apply.
interpreted broadly, it is possible section 42A applies when there is any
request (in terms of sections 46 to 49 of the TAA) for relevant material by
SARS and in the specific instances of an inquiry (section 53 of the TAA) and a
search and seizure conducted by SARS (section 61(3) of the TAA). Taxpayers may
wish to argue that the section only applies in the instances of an inquiry or a
search and seizure by SARS.
light of the opening words to the sub-section ("For purposes of Parts B, C
and D…"), it is likely that SARS will opt for the wider interpretation
although it is by no means clear that the wording of the section contains the
enabling wording. Taxpayers should assume that SARS will aim to challenge legal
professional privilege claimed by taxpayers in all three instances referred to
above and not only in the case of an inquiry or search and seizure.
being the case, it will be important for taxpayers to be aware of the
circumstances when legal professional privilege may be claimed. In summary, legally
privileged advice can take the form of:
- written or oral
communications between a legal advisor and a client made for the purpose of obtaining
or giving legal advice; or
or oral communications between legal advisor and a client, or between either of
them and a third party, in contemplation of litigation.
Communications are more likely to be regarded as
covered by legal professional privilege when received from external advisors. When
dealing with internal legal advisors, it is necessary that the legal advisor
must have been acting in his or her professional capacity as legal advisor. It
is important that the communication is made in confidence and that the
appropriate legal professional privilege is claimed by the client. Legal
professional privilege can be waived, expressly or by implication, and does not
apply when the advice is sought for a criminal or fraudulent purpose.
In the South African
context, the Western Cape High Court considered in March 2014 in A Company and Two Others v The Commissioner
for the South African Revenue Service a claim to legal professional
privilege relating to a tax invoice rendered by a firm of attorneys to their
client in a dispute with SARS. Privilege was claimed on the basis that the
nature of the advice sought by the taxpayer was discernible from the detailed
narrations of the attorneys' attendances on the invoices.
The court quoted the
Constitutional Court decision of Thint (Pty) Ltd v National Director of Public Prosecutions and Others,
Zuma and Another v National Director of Public Prosecutions and Others stating that:
"[t]he right to legal professional privilege
is a general rule of our common law which states that communications between a
legal advisor and his or her client are protected from disclosure, provided
that certain requirements are met. The requirements are (i) the legal advisor must have been acting in a
professional capacity at the time; (ii) the advisor must have been consulted in
confidence; (iii) the communication must have been made for the purpose of
obtaining legal advice; (iv) the advice must not facilitate the commission of a
crime or fraud; and (v) the privilege must be claimed."
Ultimately, based on the
facts of the case, the court held that certain of the invoices did contain
privileged information that could be claimed as such by the taxpayer.
What are the time periods within which information must be provided?
may cause concern to taxpayers as no fixed time or format is prescribed for the
submission of the required information. SARS is given a wide discretion and
there do not appear to be any built in safeguards against the possibility of
SARS demanding from taxpayers that documents be submitted within limited time
periods. Aggrieved taxpayers may be required to rely on their constitutional right
to just administrative action in this regard.
Section 42A envisages that a further
application can be made to the High Court once the third party has adjudicated
the claim for legal professional privilege – or confirmed that he or she is
unable to do so.
Where the potential tax liability of the
taxpayer justifies approaching the High Court, it is unlikely that a taxpayer
with the financial means to do so will relinquish this opportunity to drag out
Some taxpayers may make use of this
opportunity to slow down the process, as the welcome date of prescription in
terms of section 99 of the TAA may be looming in the background. In this
regard, it is worth noting that section 99 has also undergone some changes
With effect from 8 January 2016, the
Commissioner may in certain specified circumstances extend prescription by
issuing a notice to a taxpayer within no less than 30 days from the date on
which the disputed tax liability will prescribe. One of the specified
circumstances is where there is an unresolved "information entitlement
dispute". The term "information entitlement dispute" is not
defined in the TAA, but we believe that the term is wide enough to cover a
dispute between SARS and a taxpayer under section 42A of the TAA.
What will occur if there is no determination and the dispute is not
referred to the High Court within the set time periods?
42A(3)(e) prescribes a fixed time period within which a dispute regarding legal
privilege may be referred to the High Court in the event that either SARS or
the taxpayer disputes the third party's determination, or where no
determination was made. The question that arises is what would happen if no
determination was made within the prescribed 21 business day period and neither
party refers the matter to the High Court within the prescribed 30 days (not
42A(3)(d) specifically states that the third party must retain the relevant
material until the parties have
resolved the dispute or it is resolved by an order of court. If the dispute
cannot be referred to the High Court in terms of section 42A(3)(e), it would be
absurd if it means that the third party must retain the relevant material
forever – which would effectively mean that the taxpayer has succeeded in not
providing the relevant material to SARS. It is possible that the Commissioner may
then look to make use of section 99(3) to extend prescription and would need to
approach the High Court for condonation of SARS' non-compliance with the time
periods for the referral of the dispute to the High Court.
Taxpayers can expect that SARS will be more
pro-active in challenging taxpayer claims for legal professional privilege, but
it remains to be seen how the new legislative provisions will assist SARS.
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This article first appeared on the March/April 2016 edition on Tax Talk.