Ernie Lai King, Director and Head of Deneys Reitz Tax Services, reports for TAXtalk South Africa that an already-strained relationship between large businesses and their advisers, and SARS, has not been helped recently.

Introduction

A recent article authored by senior officials at National Treasury and the South African Revenue Service (“SARS”) records that tax advisers who service large business have mounted an unqualified offensive against the legislative introduction of annual tax amendments. The Fisc regards the perceived complaints of retrospective legislation and instability in our tax law as ironic, as it is their view that the instability has been driven by the same tax consultants who often take tax planning too far, causing the Fisc to respond with anti-avoidance measures.

The Fisc argues that tax concessions introduced are invariably utilised by tax advisers to enjoy unanticipated benefits in structuring their clients’ affairs. Tax advisers reply that they plan within the written word of the law.

Uneasy Relationship

The relationship between big business & their advisers, and SARS has historically been an uneasy one, and understandably so. Since the first day that the first coin passed from the taxpayer to the tax collector, this has been the case. Income tax law is an artificial law and not a universal law, like “Thou shall not kill” and our courts have recognised in a long line of decided cases that a business is completely within its rights to organise its affairs within the law, to minimise its taxes legally.

Media Announcement Causes Uncertainty

One of the primary requirements of the tax system for business in South Africa is certainty. One of the principal weapons available to SARS in its anti-avoidance legislation is uncertainty and there seems to be an increasingly disturbing trend by SARS to accuse tax advisers outright of dishonesty and fraud. On 20 March 2008 a media statement was issued by National Treasury using emotional language on a level that I have not previously seen. It refers to “the parties…playing a game of audit lottery backed by a purchased legal opinion”. This is an astounding accusation against the legal profession.

The statement dealt with a particular section of the corporate roll-over rules, namely section 45, which provides for inter-group transactions. The media statement targeted what SARS believes are “masquerades”, “commercial facades”, “illegitimate transactions”, “simulations”, “wishful thinking by tax advisers in the pursuit of lucrative fees”, “border-line evasive elements”, “artificial steps cloaked behind BEE or other commercially legitimate transactions”. It appears that such an emotional and acrimonious response refers to sham or dishonest finance schemes, which our courts refer to as “in fraudem legis”. Or does it?

The media announcement states that such “masquerades” are first and foremost a direct violation of the General Anti-Avoidance Rules (“GAAR”). Why should SARS look to GAAR if the financing transaction is a sham transaction, as GAAR can only apply to genuine transactions? Our courts will simply strike down a sham without resorting to any anti-avoidance rules. So is the media statement referring to genuine legitimate transactions structured within the framework of the law? The simple answer is that we do not know.

Future Anti-Avoidance Legislation - Retroactive Effect?

The statement announces that anti-avoidance legislation will be introduced in the future and will be effective from the date of the media statement, being 20 March 2008. This is akin to warning taxpayers that with effect from some unknown date in the future, the speed limits on the highways will change from 120 km per hour to some lower, still to be announced speed limit. When it is eventually introduced, say in 8 months' time, you may find that travelling at the then legal 120 km per hour was in fact illegal.

...Still Waiting

Perhaps the Fisc has realised during the six months of silence that drafting retroactive tax avoidance provisions that will pass Constitutional muster is not as easy as threatening to do so. And perhaps a more realistic approach will be adopted. But, in the meantime, the uncertainty caused by such media statements goes without saying.

Article by Ernie Lai King, Director and Head of Deneys Reitz Tax Services, which provides expert services on all commercial tax aspects and is a division of Deneys Reitz Inc. Deneys Reitz is a leading South African law firm, providing specialist services in the full spectrum of legal disciplines. Established in the early 1920s, the company is one of the largest independent commercial law firms in the country, with offices in Johannesburg, Durban and Cape Town. http://www.deneysreitz.co.za/index.php

Article Added Saturday, 29 November 2008 | 2005 Hits

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