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The New Advance Tax Ruling Procedure - A welcome Tax Administration Tool

01 February 2006   (0 Comments)
Posted by: Author: Mark Korten
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The New Advance Tax Ruling Procedure - A welcome Tax Administration  Tool 

In 2006 a new advance tax ruling system will become operational that could make life much easier  for  tax  practitioners.It is envisaged that this system will promote clarity, consistency and certainty regarding SARS’s interpretation and application of the Income Tax Act and that the applicant taxpayer or class of taxpayers will enjoy its binding effect against SARS in most circumstances. 

This procedure forms part of the Second Revenue Laws Amendment Act, 2004 that introduced Sections 76B through to Section 76S  to  the  Income Ta x  Act   ( the Act ) .These new laws have been welcomed as an important tax administration tool for any tax practitioner, particularly where the fiscal merits of a commercial transaction require that the parties seek advance certainty as to how SARS will apply the tax law.Prior to the introduction of this tax ruling process, transacting parties, no matter how large and important the transaction, were seldom able to obtain an opinion from SARS as to its tax treatment and certainly did not have the legal benefit of its binding effect .

Three different types of rulings

Initially, provision is made for three types of binding advance rulings.A binding general ruling is one initiated by SARS on topics of general interest and would be similar to the Interpretation Notes being issued at present.These rulings will be binding upon the Commissioner and both SARS and taxpayers would be entitled to sight them as precedent in proceedings before the Commissioner or  the Courts.SARS  is entitled, however, to withdraw or modify these rulings, which generally cannot take effect prior to the publication of a notice of such action.

A binding private ruling is a ruling issued by SARS in response to an application by a taxpayer, which would set forth the SARS opinion regarding the interpretation or application of the tax laws in respect of a proposed transaction or arrangement. A binding private ruling would be binding upon SARS only with respect to the applicant and the proposed transaction identified in the ruling and accordingly, may not be relied upon or sighted as precedent by any other taxpayer.In contrast, the third type of ruling is a binding class ruling, which is also initiated by taxpayers and sets  for   the Commissioner’s opinion relating to a specific class of taxpayers in response to a proposed transaction.The purpose of this third class of ruling is to relieve each participant   in a particular  transaction from the need to apply for a separate binding private ruling.

Sections 76B through to 76S deal with the application process,the  issue of   fees  payable to SARS for applications, exclusions and refusals, the effect of rulings, its impact on subsequent changes of law, the issue of retrospectivity and the publication of rulings.Tax practitioners should be well versed with the content of these before attempting to make an application to SARS under this system.

Although the tax rulings system is at this stage outlined only in the Act, the  Explanatory Memorandum states that its application will apply not only to taxes governed by the Act, but also various other taxes such as transfer duty and Value Added Tax.The Customs and Excise Act, 1964 is specifically excluded at this stage as it already contains its own ruling provisions.

First of its kind

As this is a first tax administration process of   its  kind  in South Africa, we as   tax  practitioners have no first-hand experience as to the extent to which it will be helpful for clients, nor are we clearly aware of the difficulties or problems that it may bring.As this new procedure is largely based on tax ruling systems used internationally, such as the United Kingdom, Australia and New Zealand, we can only look to the experience of foreign tax practitioners.

We can predict some of the impact  associated with the introduction of this tax administration process. Firstly it should be noted that the advance ruling process is not law, but  merely  the opinion of SARS.Furthermore,although  the publication provisions allow for transparency and a fair idea of SARS policy, it will not constitute legal precedence which can be relied upon in a court of law such as previous case authority. It will also be interesting to see how consistent the SARS rulings will be, which could give rise to the application of legal rules relating to fair administrative action and related constitutional issues.

It is submitted that the existence of this new ruling process may play a role where a taxpayer knowingly applies the tax laws to any  transaction, operation or  scheme contrary to an existing published ruling.If a supporting tax opinion which clearly distinguishes or otherwise gives plausible legal argument as to the incorrectness of an existing ruling is absent, a taxpayer is at greater risk of SARS applying penalties under the Act on the grounds that the taxpayer had the intention to avoid or postpone the payment of tax, on the grounds that the taxpayer should have been aware of a published SARS ruling. Hence, the value of a tax opinion becomes indispensable.

Deficiencies in current legislation

From a practical application standpoint, it is submitted that the current legislation is  deficient   in  two particular   respects.Section 76F provides for an application fee and a cost  recovery  fee payable  to SARS.The  latter  cost recovery  fee, in particular, is unlikely to be determinable by a taxpayer until such time as it is well into the application process.Due to the relative complexity of   the advance  tax  ruling procedure, a taxpayer will invariably require the services of a  skilled  professional   in any event, and coupled with  the uncertain costs  incurred  from SARS obtaining its own counsel on a particular application, this may result in a  relatively  high entry  barrier on the grounds of legal expense.Secondly, no time limits are specified in the  legislation as to how quickly SARS will be obliged to give its opinion.  

Although administrative efficiency at SARS has improved significantly in recent years, there is still plenty  of room for improvement and  it is envisaged that  without statutory deadlines, an advance ruling process may take an inexcusably long period of  time, which defeats the whole purpose of the exercise, namely to have advance clarity as to the SARS  application of tax consequences prior to a transaction  being implemented .

The form and content of applications require strict adherence to Section 76E, provisions, applicants will usually delegate the preparation and submission of an application to a qualified professional.It is submitted that taxpayers would be well advised to use the services of a professional advisor who is not only well versed in tax law, but also has the requisite legal drafting skills which may play a critical role in the successful outcome of an application.Invariably this complement of skills falls within the purvey of an experienced lawyer.

Source: By Mark Korten (TaxTALK)


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