Print Page
News & Press: TaxTalk

Exchange Of Information In Terms Of Domestic Law And Double Taxation Agreements

Thursday, 30 June 2011   (0 Comments)
Posted by: Author: Kerry Watkin
Share |
Exchange Of Information In Terms Of Domestic Law And Double Taxation Agreements
Effective exchange of information is a tool to enable countries to apply and enforce their tax laws outside of their jurisdiction.In a global economy, despite taxpayers operating freely across international borders, tax authorities must respect the laws of other countries in carrying out their functions and powers.Exchange of information articles in double taxation agreements (DTA) offer tax authorities a legal framework for co-operating across borders without violating the sovereignty of other countries or the rights of taxpayers.

However, the ambit of these provisions is not without limitation.Before any revenue authority requests information in terms of a DTA, it is expected that the authority use the regular sources of information available to it under domestic law to obtain the information.For the South African Revenue Service (SARS), this means that it must comply with its own domestic laws pertaining to proper administrative action before it is in a position to disclose anything to foreign jurisdictions in terms of international treaties and international law.
In terms of South African domestic law, any information and documentation obtained by SARS must be held in terms of the secrecy provisions of section 4 of the Income Tax Act, No. 58 of 1962 (the Act).SARS is placed in the possession of privileged information, and unless a provision clearly exists to the contrary, SARS may not share that information with any outside parties, including the government and foreign jurisdictions.This protection afforded to taxpayers is lifted under specific conditions,for instance, where a DTA governs the relationship between South Africa and another country (the contracting state).The main requirements which must be satisfied before any information may be exchanged in accordance with the relevant article in a DTA, is where it is shown:

•The information is necessary by there questing contracting state.
•The requesting contracting state is unable to procure such information by means of inquiries of its own within its own territory.

The salient principles applicable to SARS, pursuant to a request from a contracting state’s revenue authority in terms of an exchange of information article in the governing DTA, can be summarised as follows:
•SARS cannot simply request or divulge information through a rubber stamping process where a request from another country’s revenue authority is received.
•SARS continues to be bound by the provisions of section 4 of the Act which afford the taxpayer a privilege and legitimate expectation that SARS will not simply divulge information,unless SARS can demonstrate clearly that an exception applies–which exception does not open the door to information without relevancy restrictions.An exception would be a case where a clear suspicion of fraud exists, the information is necessary, and all domestic avenues in the requesting contracting state have been exhausted.
•Any request will have to be considered as to its merits by someone qualified to do so – not some junior official–including the requesting tax official, who should also be someone of appropriate seniority authorised as an official on behalf of ‘a competent authority’ who has been specifically appointed to handle requests or responses in terms of mutual assistance and exchange of information in terms of relationships with foreign states governed by DTAs.
•The question whether the information requested is relevant to a properly authorised investigation must be posed.Here the determination of a properly  authorised tax investigation by the requesting tax official is relevant.
•The request should not be so vague or broad in its scope that the recipient is unable to make any meaningful judgment regarding the relevancy and validity of the request.

In light of the above, should SARS receive any request for information from another country’s revenue authority in respect of a South African taxpayer, the request must be properly authorised and emanate from the contracting state’s competent authority who has been properly authorised to carry out such duties.Consequently, SARS (as well as the taxpayer) would be entitled to the following:
•Detailed information about the competent authority. 
•The level of seniority of the revenue authority requesting the information (and whether the official has been properly appointed to handle same). 
•Details about the relevancy, necessity, the validity of the information, and that all domestic measures in the contracting state were exhausted in an attempt to obtain the information requested.The transparency provisions of the Constitution will then also apply thereby entitling the taxpayer to know more about the reasons behind the information request.

Once these domestic hurdles have been overcome, it is important to consider the relevant article in the governing DTA.According to the Organisation for Economic Co-operation and Development (OECD) commentary, the exchange of information that is foreseeably relevant widens the scope of information that must be provided, but at the same time confirms that contracting states may not request information that is unlikely to be relevant to the tax affairs of a taxpayer. In order words, tax authorities may not use the exchange of information provisions to embark on ‘fishing’ expeditions.SARS must therefore ensure that any request remains within the parameters of its domestic law, and thereafter international law. 
Information is necessary if it is relevant in law to taxation by the contracting state requesting it, namely,relevant to carrying out the provisions of the DTA or, to the extent that an exchange beyond taxes and/or person covered by the DTA has been agreed to; relevant to carrying out the provisions of its domestic law and provided that contracting state is unable to procure such information by means of its own inquiries within its own territory. 
All domestic sources of information must, therefore, have been exhaustively tapped before a request for information may be made. If one of the two conditions cannot be met, there is no obligation on SARS in terms of the DTA to furnish information.The requested state is authorised to check  whether or not the conditions have been met and, if not, to refuse to supply information. 

The Exchange of Information Article does not oblige that state to accept, without verification,the requesting state’s assertion that the information is necessary. If there are doubts, the requested state may require the other state to set forth the facts and the legal position that, in the latter state’s opinion,show that the information is necessary.
However, the Exchange of Information article does not bar a requested state from supplying such information in cases where the DTA does not place it under an obligation to do so.Whether it is authorised to supply information in such cases is a matter to be decided exclusively by reference to its domestic law.Accordingly, it is also a matter to be decided by reference to domestic law whether the requested state may refrain from checking the necessity of the information requested.It may forego such a check if its domestic law allows it to supply such information even where there is no international obligation for it to do so, but subject to the conditions laid down by it for furnishing such information.

In a South African context, the taxpayer is entitled to ensure that the request from a foreign competent authority is properly authorised, and emanates from a person of appropriate seniority,with details about the relevancy, necessity and validity of the information, and that domestic information avenues have been exhausted in the foreign requesting country.The transparency provisions of the Constitution also apply, entitling the taxpayer to reasons for the information request.

Taxpayers must be alive to the various rights and remedies available to ensure the empowering provisions relating to information exchange are not abused.This in practice will often be very difficult, especially where SARS is already in possession of information, documentation and things from previous unrelated enquiries, which it may simply hand over to requesting foreign jurisdictions.However, as explained above, there certainly are measures that can be employed to protect a taxpayer’s interests and to ensure the revenue authorities’ conduct is fair and reasonable and in compliance with the law both domestic and foreign.
Source: By Kerry Watkin  (TaxTALK)



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

  • Tax Practitioner Registration Requirements & FAQ's
  • Rate Our Service

    Membership Management Software Powered by YourMembership  ::  Legal