Value-Added Tax Act

In addition to tax liabilities (tax capital amounts), taxpayers are also subject to an array of penalties and interests in respect of late payments, understatements, specific punitive penalties, and compliance-related penalties in terms of various tax Acts, such as the Income Tax Act, and the Value-Added Tax Act. This is often the case when there are uncertain tax positions, where taxpayers had to take a view on specific interpretations on a tax Act, or where assessments have not been finalised and there is a potential threat of penalties.

These uncertainties are often an impediment to the conclusion of transactions and deals, and one often finds in agreements that an amount has to be kept in trust (or escrow) to accommodate any potential or unforeseen tax liabilities which may arise as a result of the transaction. These amounts that have to be withheld (or “parked”) until such a time that a dispute or matter has been finalised, come at a significant interest cost and parties to the agreement do not always favour this as a standard term in agreements.

Internationally, there has been an increase in the number of instances where persons can insure their tax positions as they relate to tax capital, interests, and penalties. In other words, no amounts have to be kept back in trust/escrow, and parties are free to conclude and finalise transactions with full cash flows. Rather, instead of having the escrow amount, taxpayers insure their position by payment of a monthly premium in respects of their exposure to an insurance business. The cumulative premiums in this regard is, firstly, significantly less than the amount that has to be withheld and, secondly, does not mean an immediate cash flow in respect of such amounts. Your tax obligations are therefore fully insured, in a similar fashion to how you would insure your motor vehicle.

The South African insurance industry has not fully caught up with these international trends and there are very few (if any) comprehensive insurance products available to insure tax positions, in respect to unsure tax positions. On face-value, such insurance products appear to cater to “aggressive” or “abusive” schemes, and for taxpayers who want an “out” in respect of abuse of the tax system. However, this is not the case at all – such insurance products accommodate for ease of transaction flow, saving on transaction costs, keeping companies liquid, removing uncertainty from transactions, and facilitating deal flows without fear of adverse tax consequences.

One would hope that the South African insurance market is cognisant of international trends and that they consider making such products available locally, since the risks relating to the product can be proactively managed by both the insurers and the insured party, with the assistance of suitably qualified tax professionals.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

In terms of section 4 of the South African Revenue Service (SARS) Act,[1] one of the objectives of SARS is to secure the efficient, effective and widest possible enforcement of tax and related acts. One of the methods employed by SARS in this mandate is through the publication of official documents on the application, or SARS’s interpretation, of the acts which they administer – namely Interpretation Notes, which are generally available to taxpayers.

In a unanimous judgment on 25 April 2018, in the matter of Marshall and Others v Commissioner, South African Revenue Service,[2] the role of Interpretation Notes in the interpretation of statutes was considered. The judgment is of particular importance, since it has been generally accepted that Interpretation Notes provide context to legislation and “constitute persuasive explanations in relation to the interpretation and application of the statutory provision in question”,[3] but the weight that should be attached to Interpretation Notes during statutory interpretation, was unclear.

The case involved the interpretation of two sections of the Value-Added Tax Act,[4] dealing with the VAT treatment of payments received by the South African Red Cross Air Mercy Service Trust for services rendered to provincial health departments. The applicant was of the view that the SCA placed undue reliance on SARS’ Interpretation Note 39 in formulating its interpretation of the relevant sections, since it gives “rise to unequal treatment of the litigating parties and fly in the face of the right to a fair hearing.”

The Constitutional Court found that, in the context of statutory interpretation, an approach whereby reliance is placed on an interpretation which accords with a consistent application by those responsible for the administration of the legislation requires re-examination, especially in a constitutional democracy.

In arriving at a conclusion, Justice Froneman indicated the following:

Why should a unilateral practice of one part of the executive arm of government play a role in the determination of the reasonable meaning to be given to a statutory provision? It might conceivably be justified where the practice is evidence of an impartial application of a custom recognised by all concerned, but not where the practice is unilaterally established by one of the litigating parties. In those circumstances it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided.

This makes it clear that courts should make an objective and independent interpretation of legislation and that Interpretation Notes (and arguably other interpretative materials), should be irrelevant to such an interpretation. Since SARS is often a party to tax litigation, Interpretation Notes containing their interpretation of legislation, cannot be considered independent. Despite the appeal being dismissed based on the finding that the SCA indeed interpreted the legislation independently and objectively, the judgment provides clear indication of the role of Interpretation Notes in fiscal interpretation. In short, it carries no value.

[1] 34 of 1997.

[2] [2018] ZACC 11.

[3] Dambuza JA in Commissioner, South African Revenue Service v Marshall NO [2016] ZASCA 158; 2017 (1) SA 114 (SCA) (SCA judgment).

[4] 89 of 1991 (the VAT Act).

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Insuring your tax obligations

The interpretative value of SARS interpretation notes