Is Poor Tax Compliance Akin to Culpable Homicide?

IS POOR TAX COMPLIANCE AKIN TO CULPABLE HOMICIDE?

Author: Suzanne Smit

Our article looks at a recent change to the non-compliance provisions in three tax acts where it is no longer required for SARS to link poor compliance with wilful intent in order to prove a criminal offence –and how this affects taxpayers' rights.

On 31 July 2020, National Treasury and SARS published the 2020 Draft Tax Administration Laws Amendment Bill (Draft TALAB). It proposed, inter alia, to remove the term “wilful” in order to include both intentional and negligent conduct within the ambit of criminal offences.

Wilful intent no longer required
Before exploring the recent tax law changes relating to tax compliance, it is important to lay the landscape of the applicable criminal legal concepts. The penultimate principle of criminal liability is summarised by actus non facit reum nisi mens sit rea, i.e. "an act is not unlawful unless there is a guilty mind". (Own emphasis.)

In order to establish criminal liability the State must therefore prove beyond a reasonable doubt that the accused has committed actus reus, i.e. unlawful voluntary conduct, with criminal capacity and mens rea, i.e. fault in the form of either intention (dolus) or negligence (culpa).

Dolus (intent) per the Merriam Webster dictionary means “the doing of anything that is contrary to good conscience” whereas culpa (negligence) means “the failure to use the care and diligence demanded”. The test for dolus is subjective, i.e. based on the specific circumstances, whereas the test for culpa is objective, i.e. the accused’s conduct is measured against the standard of a reasonable person.

In the South African context, intention includes both deliberate and foreseen conduct.

Dolus eventualis, i.e. legal intention, exists where the accused does not intend for the unlawful act to happen, but can reasonably foresee the possibility that it could happen and then proceeds with the intended conduct regardless. Practically speaking this is the difference between murder and culpable homicide: Murder requires intent (including dolus eventualis) whereas culpable homicide only requires negligence. Both are unlawful and punishable by law, but the punishment will differ proportionally to the specific circumstances.

Removal of “wilfulness” from statutory offences
South African tax Acts stipulate specific offences in respect of which the taxpayer may be liable for a fine or imprisonment. The following provisions were affected by the recent Draft TALAB:

• Paragraph 30 of the Fourth Schedule to the Income Tax Act
• Section 58 of the Value-added Tax Act
• Section 234 of the Tax Administration Act

Each of these provisions required that a taxpayer must commit the relevant act “wilfully and without just cause” before the taxpayer could be found guilty of the applicable offence. The effect of removing “wilfulness” basically negates the requirement for SARS to prove intent before the said taxpayer, i.e. the accused, could be found guilty of the applicable tax offence and it is therefore easier for SARS to impose either the fine or imprisonment.

SARS’ justification
National Treasury and SARS contended in the Draft TALAB that the National Prosecuting Authority (NPA) is of the view that the current wording relating to criminal offences substantially undermines the ability of SARS to ensure compliance based on the objective standard expected of the reasonable person. No official communication from the NPA to National Treasury and SARS was included in support of this contention. Its motivation further contended that due to “wilful” being included in the tax Acts, it may hamper the criminal prosecution of non-compliant taxpayers by the NPA in seeking to prove the elements of the crime.

It was therefore proposed that the requirement of “wilful” conduct be removed with regard to criminal offences to enable the NPA and SARS “to measure a taxpayer against such objective standards where required”. On 8 December 2020 the Tax Administration Laws Amendment Bill was passed by Parliament.

Is the change as adverse to taxpayer rights as some contend?

Specific South African principles relating to criminal offences
Section 1(c) of the Constitution of the Republic of South Africa, 1996, states that the Republic of South Africa is founded on the supremacy of the Constitution and the rule of law. Furthermore, section 35(3) of the Bill of Rights of the Constitution states that "every accused person has a right to a fair trial”. In terms of the common law ius certum principle, i.e. the principle of certainty, the formulated crime should not be vague or unclear, i.e. the taxpayer should not be fearful of breaking the law inadvertently.

In addition, the well-established element of mens rea includes fault by either intent or negligence (own emphasis) in order to constitute criminal conduct. This common law element has been embedded in criminal law internationally over decades and cannot just be blatantly ignored. Furthermore, according to Kemp's Criminal Law, the "essential purpose of criminal law is to provide a mechanism for punishing the offender". (Own emphasis.)

Penalties are already included in the tax Acts especially for the infringement of specific tax requirements or sections as it may be prescribed. Section 210 of the Tax Administration Act, for instance, already provides for administrative non-compliance penalties as a deterrent for certain noncompliance omissions. Punishment, however, carries a heavier weight and it aims to inflict suffering for a crime. There is therefore a considerable difference between penalties and criminal punishment in the form of fines and/or imprisonment.

Administrative non-compliance and understatement penalties are already contained in our tax Acts especially to avoid the demanding resources required for prosecutions, including legal counsel, human resources and the financial means to see it through.

There are therefore conflicting principles and legal principles at play and it remains to be seen whether taxpayers will challenge this proposed change in court to align South African tax laws with common law and provisions contained in the Constitution.

International principles relating to criminal offences and tax
Globally it has become increasingly unpopular to criminalise conduct for minor administrative failures.

On 11 August 2019 the Indian Minister of Finance, Nirmala Sitharaman, tweeted: “I have instructed the revenue secretary to come up with measures to ensure that honest taxpayers are not harassed, and those who commit minor or procedural violations are not subjected to disproportionate or excessive action”.

On 18 March 2019 the International Monetary Fund published a Tax Law Note, “Designing Interest and Tax Penalty Regimes” by Christopher Waerzeggers, Cory Hillier and Irving Aw. It confirmed inter alia that tax crimes usually involve an abuse of the tax system through intentional (own emphasis) and dishonest behaviour with the aim of obtaining a financial benefit. It generally includes tax fraud and tax evasion, which are different to an inadvertent “finger error”. They further reiterate that the certainty of a specific tax crime is necessary to prevent taxpayers viewing the tax system as arbitrary and unfair, which in turn discourages compliance.

The latter aligns with submitted contentions to National Treasury and SARS that the proposed change to remove “wilful” will have unnecessary adverse consequences for taxpayers.

What does this practically mean for taxpayers?
After all is said and done, it comes down to taxpayers ensuring that they acquaint themselves with South African tax laws and their basic compliance requirements. Unfortunately, “human error” and other negligent errors could result in costly court battles and possible criminal sanctions.

Corporate taxpayers should review their tax policies and standard operating procedures to ensure that proper risk controls are in place to prevent possible personal prosecution of their accountable directors. In addition to King IV’s corporate governance principle of “apply and explain”, a further burden is placed on corporate taxpayers to ensure tax compliance and being able to substantiate their tax position with the relevant supporting documents and information. This also applies to individual taxpayers.

Generally the devil is in the detail and, as a starting point, taxpayers should submit tax returns timeously, but also with the correct information. Appointing public officers, updating bank account details or the change of address are not regarded by SARS as minor administrative compliance issues – they regard it as critical to be able to contact a taxpayer and/or serve legal documents where necessary. It is crucial to keep all of the above updated, as well as any other information which SARS requires. More now than ever it is best to obtain sound tax advice prior to submitting tax returns, responding to requests for information or audits.

Is it controversial that “wilful” will be removed from the relevant tax Acts? Yes, it is, but until this is challenged in court (and reversed), this will be the playing field for taxpayers and SARS. It is therefore best to be extra careful to ensure you do not find yourself in the same position as someone who is accused of culpable homicide.

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This article first appeared on Jan/Feb 2021 edition of Taxtalk