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No place to hide: SARS’ big data

06 June 2016   (0 Comments)
Posted by: Author: Tarryn Atkinson
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Author: Tarryn Atkinson (First Rand Bank)

Thanks to changes in technology and legislation, SARS access to information is ever increasing.

Gone are the days when taxpayers could conceal income and assets from the taxman. The advent of the Tax Administration Act (the Act), coupled with a number of international tax initiatives has handed SARS an expansive set of powers to gather information.

The volume and detail of the information that is available to SARS through various provisions under the Act is extensive. SARS is able to gather information directly from taxpayers, third parties and will soon be exchanging data with foreign revenue authorities.

The most visible form of information gathering is the audit process. Historically SARS would knock on the door, and the taxpayer would be required to provide the auditors with the information they request. Section 45 of the Act now sets out clearly what form the audit will take. Notice must be given to the taxpayer allowing ten business days, a scope must be set out and the provision allows for a mutually convenient date and time to be agreed between the taxpayer and SARS. 

The challenge taxpayers now face is that "audit” is not defined. While this is important to the concept of an audit, it is also critical when looking at the Voluntary Disclosure provisions. The traditional "field” audit doesn’t always look like it used to. SARS now requests downloads of general ledgers, soft copies of invoices, spreadsheets and databases and analyses these from their offices. So, if SARS is not physically coming to the taxpayer’s premises, when does the audit actually start and is it in fact an audit?

If a taxpayer submits their annual personal tax return and 45 seconds later receives an assessment reflecting the dreaded "Selected for audit - Y” followed by a request to submit supporting documents, is this an audit? No notice was provided, no scope given, so what is this process?

In terms of information gathering, it doesn’t actually matter. The provisions of the Act allow for SARS to request information even when not under audit. The "selected for audit” term is in fact a misnomer, this process is simply a request for further information under section 27 of the Act pursuant to the submission of a tax return. Many corporate taxpayers will also have felt the burden of this section with the immediate issue of the onerous IT14SD (supplementary declaration) once the corporate tax return is submitted. 

Section 46 of the Act is a further example of the information gathering powers that can be used even when an audit is not underway. This provision allows SARS to request "relevant material” from the taxpayer or a third party. SARS must simply identify the taxpayer clearly and indicate "with reasonable specificity” the information required. The party in receipt of the notice is then obliged to provide said information. Many taxpayers, and particularly third parties, questioned and resisted these requests on the basis of the term "relevant”. Third parties are often caught between their relationship to the taxpayer as either banker, insurer or service provider and their obligation to comply with the Act. As a result, they seek assurance that they are not providing more than is necessary in order to protect the relationship and therefore question and interrogate such requests.

This cautious approach by third parties and tax practitioners alike led to an amendment to the Act in 2015. The amendment seeks to negate these queries by defining "relevant material” as any document or thing that "in the opinion of SARS" is foreseeably relevant for tax administration. For example: A request for information to a vehicle financing company regarding a taxpayer’s vehicle financing arrangement asks for the colour of the vehicle. It is difficult to understand the relevance of the colour of the car in determining whether the taxpayer owes SARS money or has committed a tax offence. It is as relevant as asking for the taxpayer’s shoe size or eye colour. 

Requests for information addressed to third parties are a favoured method to gather information without notifying or alerting the taxpayer of any pending audit or investigation. Banks receive requests for bank statements, information on particular transactions, etc. Investment companies and asset managers receive requests for information on maturity dates of investments. Tenants receive requests for information regarding the due dates of rental payments to their landlords. These types of requests are usually followed by an instruction under section 179 of the Act to deduct/withhold/redirect payment to SARS instead of the taxpayer (commonly known as agent appointments).

One of the more contentious amendments in the 2015 Tax Administration Laws Amendment Act relates to the unilateral extension of prescription by SARS. SARS is now empowered to unilaterally extend prescription in cases where the taxpayer has not timeously provided information as requested. Industry bodies were united in their objection to the draft during the legislative comment process and as a result the final amendment now requires SARS to give notice to the taxpayer and provides that the extension must be proportionate to the delay caused by the taxpayer. It is critical that taxpayers and tax practitioners familiarise themselves with this new provision to avoid falling foul of the requirements.

There are however more effective ways of gathering information about taxpayers. Section 26 of the Act and the updated public notice promulgated on 6 January 2016 obliges certain industries to report taxpayer information electronically to SARS. Prime examples of this are the financial institutions, however medical aids, retirement funds, certain financial service providers, attorneys and estate agents are also included in this public notice and required to report to SARS certain incomes (such as interest), contributions and a myriad of other transactions. 

Assessments may also contain a cryptic sentence that states that the information provided by the taxpayer in the tax return does not match the information SARS has in its possession. What information, the taxpayer asks? The SARS system is cross referencing the interest received amount that the taxpayer captured in the tax return with all the IT3(b) interest certificates that the banks and other service providers have already electronically submitted to SARS. Or cross checking the capital gain declared by the taxpayer against the IT3(c) certificates received from the financial service providers for those shares and unit trusts that were disposed of.

The four major banks in South Africa report on approximately 100 million bank accounts every six months. There is no matter too trivial to be reported. Every bank account, whether interest earning or not, must be reported. 

SARS is therefore sitting on an abundance of financial data but it is still not enough. Global tax scandals such as those that have engulfed Apple, Starbucks, HSBC and Amazon have woken the world’s revenue authorities up to the realisation that they are losing money. Taxpayers have assets and income all over the world and in the case of the aforementioned scandals, structure their affairs to take the best advantage of low tax rates, exemptions and the much maligned tax havens. These are often not declared, despite the widespread application of residence based taxation. 

Although many of the South African double tax agreements contain information sharing provisions and specific exchange of information agreements have been signed between numerous countries, a global solution was sought which provided for multi-national automatic exchange of data, and which also covered non-treaty countries (including tax havens). Amendments to the Act over the last two years have been made to give effect to international reporting between countries via their respective revenue authorities and South Africa has been a part of this process. 

An Intergovernmental Agreement between South Africa and the United States was South Africa’s first foray into large scale and automatic reporting on foreign residents and brings FATCA (Foreign Account Tax Compliance Act) into the South African tax landscape. Financial service providers are now obliged under the enabling provisions of the Act to report financial data on any person that is determined to be a US person, based on a set of prescribed indicia and with certain minimum financial thresholds. It is a reciprocal agreement and SARS is able to request the IRS to provide similar information on South African residents with accounts in the US.

Not to be left behind, other revenue authorities started similar processes and a global solution was proposed by the OECD. It is known as the common reporting standard (CRS) on the Automatic Exchange of Information (AEOI). The multilateral convention of mutual administrative assistance was drafted and signed by numerous countries including South Africa. CRS reporting will require all South African financial service providers to report financial data on all foreign account holders to SARS. Similar data collection will be undertaken by authorities in other countries (currently, 74 countries have signed up).  There are no minimum thresholds under CRS. SARS will then exchange this information with each respective country provided they are a signatory to the Convention and will receive data on South African residents, in return, from other participating countries.  This process will begin in 2017 for many countries (including South Africa) and 2018 for others (such as Switzerland), once the last bastion of secrecy.

Ultimately, the sheer volume of data that SARS will have access to in the future, both local and international, is difficult to comprehend. Therefore, taxpayers and tax practitioners must be aware that the net is closing rapidly and act accordingly.  

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This article first appeared on the May/June 2016 edition on Tax Talk.


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