Can SARS limit legal professional privilege?
24 March 2016
Posted by: Authors: Natalie Napier and Phillip Lourens
Authors: Natalie Napier and Phillip Lourens (Hogan Lovells)
New rules have come into effect for how legal professional privilege is regulated, we look at what effects they may have in practise.
Amendments 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.
What 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 by SARS.
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.
The 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.
The 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?
From the introductory words to section 42A(1), it is not certain when exactly section 42A will apply.
If 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.
In 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.
This 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
- written 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?
Section 42A(2) 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 the process.
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 recently.
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?
Section 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 business days).
Section 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.