Scanning Tax Documents: Know What The Law Says Before Chucking Those Originals
03 January 2006
Posted by: Author: Wim Mostert
Scanning Tax Documents: Know What The Law Says Before Chucking Those Originals
Document storage is expensive and that is the reason why many organisations wish to scan tax documents, retaining them only in electronic format in their document management systems.The Income Tax Act and Value Added Tax Act require that certain documents should be kept for at least five years.The question is Can organisations destroy originals, once they have been scanned?Three aspects have to be considered here.Firstly, will SARS accept imaged records in lieu of the originals? Secondly, will auditors accept the authenticity of such records and thirdly, what is the legal standing and evidential weight of imaged records in litigation?
SARS and compliance
The Electronic Communications and Transactions (ECT) Act as a general rule permits documents to be retained and produced electronically and amongst others, requires that:
•The manner in which the image is generated and stored be reliable;
•The image be in a format that accurately represents the information generated, sent or received; and
•The method of generating the electronic form of that document have provided a reliable means of assuring the maintenance of the integrity of the information contained in that document.
The ECT Act does not override the provisions of a law specifically prohibiting or otherwise prescribing requirements for electronic retention of documents. For example, the VAT Act permits electronic retention, provided that the physical documents must,retained for a period of one year from the beginning of the tax period to which they relate. After a year, the electronic images must be retained for the remainder of the prescribed five-year retention period. It would appear that the physical source originals of ledgers, cash books, journals and paid cheques must nevertheless be retained for the full five- year period.When it comes to imaging, SARS requires the process to meet the following criteria:
•A proper audit trail must be maintained;
•The necessary equipment to reproduce paper copies of such documents must always be available at the VAT vendor’s premises;
•Paper copies of the scanned documents should be clearly marked as a "copy", due to the fact that a copy of the original documents has been made;
•An effective index of the scanned documents must be kept;
•The database must not permit any alteration or manipulation of the scanned documents;
•The scanned and subsequently printed documents should be of a good quality and allow for easy reading; and
•The original documents must still be retained for a period of 12 months from the beginning of tax period to which they relate.
As yet, no requirements have been published under the Income Tax Act with regard to electronic storage and as it stands now, in terms of this act, records contemplated in 73A may be kept in such form, including electronic form as may be prescribed by SARS. The Tax Guide for Small Businesses merely confirms that vendors can choose a record keeping system that suits their needs,provided that the records clearly establish what the income and expenses of the business are.
Auditors are the next party to be considered when contemplating this issue.The ECT Act states clearly that auditors or others may not discriminate against records merely because they are in electronic form.Auditors may not reject or otherwise question the authenticity of imaged records, unless they have good reason to suspect fraud or impropriety.It is always prudent to inform your auditors of the fact that documents will be imaged in the ordinary course of business and that the originals will be destroyed, subject to the requirements of the VAT Act as discussed above.
Ensuring that imaged records will stand up in court.The ECT Act provides that electronic records must be given due evidential weight.In this matter, the following aspects should be considered:
•The reliability of the manner in which these records were generated, stored or communicated;
•The reliability of the mannerr in which its integrity was maintained;
•The manner in which its originator was identified; and
•Any other relevant factor.Section 15(4) of the ECT Act provides that in any civil, criminal, administrative or disciplinary proceedings under any law, an electronic record that has been made in the ordinary course of business, or a copy or printout of or an extract that has been certified to be correct by an official of the organisation, is admissible in evidence against any person and rebuttable proof of the facts contained in such record, copy, printout or extract.This applies to the rules of a self-regulatory organisation or any other law or the common law.
This can be referred to as the "special” rule for submitting electronic evidence because it creates a "deeming provision” of authenticity.In practice it means that as long as the evidence submitted has been produced in the ordinary course of business and accompanied by the certificate referred to, the court must accept its authenticity unless the party challenging the authenticity can show on a balance of probabilities that the evidence has been tampered with. It is not permissible for someone to merely claim "we don’t accept the evidence as authentic and put the other party to the proof thereof”.This special rule obviates the need for a party to introduce electronic evidence by way of oral evidence.
How it works in practice
The ECT Act provides the principles, but it does not guide us on how to achieve these principles in practice. To be on the safe side, organisations should align their imaging processes with best practice to ensure that the imaged records are reliable whenever their authenticity is challenged. Not only should sound technology be used, but proper audit trails, processes and procedures should also be put in place. A recently adopted South African Bureau of Standards (SABS) standard on document imaging, titled SANS/ISO 15801:2005 Electronic imaging - Information stored electronically Recommendations for trustworthiness and reliability provides guidelines in this regard. All the guidelines contained in this standard are geared to ensure that processes, procedures and technologies used will guarantee authenticity.
There are no hard and fast rules imposed by law when it comes to the scope of an imaging policy. In the end it will always be up to the organisation to determine the scope and extent of the policy. As for international best practice, see the SABS publication: SANS 15801: 2005.Electronic Imaging and information stored electronically - Recommendations for trustworthiness and reliability. According to this standard, the imaging policy should contain sections which:
-specify what information is covered;
-state policy regarding storage media;
-state policy regarding image file formats and version control;
-state policy regarding relevant information management standards;
-define retention and destruction policies;
-define responsibilities for information management functions; and
-define responsibilities for monitoring compliance with this policy.
The policy must contain an organisation’s policy statements and principles around imaging, while the procedures manual sets out the technical and operational processes and procedures.Organisations should not blindly proceed to destroy original documents after imaging.Original documents may have attributes beyond their mere text content that could be important as evidence in litigation.For instance, the reverse side of a document may contain handwritten notes that may be valuable if both sides are not scanned and linked.Fingerprints, stains or smells on documents could have high probative value for forensic investigations linking an individual to the creation, handling or receipt of a particular document.
A document could contain important colour attributes or codes that could be compromised if imaged in grey scale.In this way a yellow administrative form may have a different status to a blue form.This is not to say that the originals must be retained as a matter of course; the fact that a document contained important intrinsic attributes could be recorded in number of an imaged record.
Document imaging policy
A Document Imaging Policy will almost invariably ensure that a party submitting electronic evidence of imaged documents could benefit from the "special” rule afforded by section 15(4) of the ECT Act. This means that you don’t need to call witnesses to give oral evidence as to the reliability of the imaging process.If your imaging process is not documented in a policy and supported by a procedures manual, chances are that you will not qualify for the "special” rule discussed above and therefore the following risks in respect of leading oral evidence may arise:
-Employees or service providers involved with imaging may have to give oral evidence in court (or submit affidavits) each and every time you wish to submit a printout of an image file as evidence. Some of them may have left your organisation or the service provider and it may be difficult or impossible to locate them in time for the trial, application or hearing.This may make the evidence inadmissible or cause it to have little or no evidential value.
-Different units or persons within the same organisation may follow different processes and procedures during imaging.It may be difficult to determine which one resulted in the image file in question.You may therefore have to lead evidence in respect of both processes which doubles the risks referred to above.
Source: By Wim Mostert (TaxTALK)