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SEPTEMBER 2014 – ISSUE 180

CONTENTS

COMPANIES 2337. Repurchase of preference

shares 2338. Court may declare a director

delinquent

TAX ADMINISTRATION 2342. The liability of shareholders for the tax debts of a company 2343. The legal status of assessments/

Choice of courts 2344. Jurisdiction of Courts in regard

to Assessments

EMPLOYEES’TAX 2339. Travel allowances and

reimbursements

VALUE-ADDED TAX 2345. Addresses on tax invoices

INTERNATIONAL TAX 2340. Base erosion and profit shifting

(BEPS) 2341. Exchange of information

SARS NEWS 2346. Interpretation notes, media

releases and other documents

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COMPANIES

2337. Repurchase of preference shares

(Editorial note: Published SARS rulings are necessarily redacted summaries of the facts and circumstances. Consequently, they (and articles discussing them) should be treated with care and not simply relied on as they appear.)

The South African Revenue Service (SARS) recently released an interesting binding class ruling (BCR 44) dealing with the tax consequences of the repurchase of certain non-redeemable, non-participating preference shares. The applicant was a public company listed on the Johannesburg Stock Exchange (JSE). The applicant issued preference shares to certain persons (the class members). The shares:

• Were issued at a par value;

• Were not redeemable;

• Were non-participating; and

• Conferred the right on members to a return of capital on the winding up of the applicant equal to the issue price of the shares.

The applicant decided to repurchase the shares at their current market value (as traded on the JSE). The purchase price would be less than the issue price. SARS made various rulings in respect of the transaction. Hybrid equity instruments Firstly, it was ruled that the preference shares did not constitute 'equity shares' as defined in section 1 of the Income Tax Act No. 58 of 1962 (the Act). For a share to be an equity share the holder must have the right to either:

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• Participate in the profits of the company (by way of dividend) in an unlimited manner; or

• Participate in the capital of the company (by way of return of capital e.g. at winding up) in an unlimited manner.

That is, the share must carry the right to fully participate in either dividends or capital. If the share is restricted in respect of only one right, it can still be an equity share. Technically then, a preference share can be an equity share if it is a participating preference share – that is, if the holder either participates in the profits (by way of dividends) in an unlimited manner, or participates in the capital (at liquidation) in an unlimited manner. In the current instance it appears that the shares were non-participating and on winding up the right to capital was limited to the issue price. They therefore could not constitute 'equity shares'. Secondly, it was ruled that the preference shares would not constitute 'hybrid equity instruments' for purposes of section 8E of the Act merely because of the repurchase provision. In terms of paragraph (a) of the definition of 'hybrid equity instrument' in section 8E(1) of the Act, a 'hybrid equity instrument' includes any share, other than an equity share, if within a period of three years from the date of issue:

• The issuer of that share is obliged to redeem that share in whole or in part; or

• That share may at the option of the holder be redeemed in whole or in part.

The concern seems to be that, where the repurchase took place within three years of the date of issue, the repurchase could be seen as a right or obligation

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in respect of the redemption of the shares. However, SARS made it clear that such a repurchase alone would not be sufficient. Thirdly, SARS ruled that any power of the applicant to repurchase the preference shares in terms of the Takeover Regulation Panel requirements or section 164 of the Companies Act No. 71 of 2008 (the Companies Act) (concerning the appraisal rights of dissenting shareholders) will not be seen as an 'obligation' to repurchase or redeem the preference shares for purposes of section 8E. Capital gains tax SARS ruled that the repurchase (and subsequent cancellation) of the preference shares would not constitute a disposal of an asset by the applicant for capital gains tax purposes. It seems clear, however, that there would be a disposal by the class members, and that a potential capital loss could arise to the extent that the payment in respect of the repurchase does not constitute a dividend but a return of capital. Securities transfer tax SARS ruled that the repurchase would constitute a 'transfer' for purposes of the Securities Transfer Tax Act No. 25 of 2007 (Securities Transfer Tax Act) and that securities transfer tax would be payable by the applicant on the repurchase price. Dividends tax SARS also ruled that, to the extent that the repurchase constituted a dividend (as opposed to a return of capital that reduces the applicant’s contributed tax capital), dividends tax may have to be accounted for. Cliffe Dekker Hofmeyr Companies Act: Section 164 and Part C of Chapter 8

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ITA: Sections 1 and 8E Securities Transfer Tax Act:

2338. Court may declare a director delinquent

Section 162 of the Companies Act No. 71 of 2008 (the Companies Act) introduced a new mechanism which allows a broad range of interested and related persons, including qualifying organs of state, the opportunity to apply to court for an order declaring a director of a company delinquent or placing him under an order of probation. Notwithstanding the negative social ramifications such an order has, there are also severe adverse consequences to a director’s present and future ability to act as a director for any company and may be applied for by any organ of state, including the South African Revenue Service (SARS) under certain circumstances. It is important for directors to familiarise themselves with the relevant provisions and be acutely aware of when such an order can be granted in light of their potential exposure and liability, which seems a lot easier than one may think, especially in respect of an application by SARS. Section 162(4) states as follows:

“Any organ of state responsible for the administration of any legislation may apply to a court for an order declaring a person delinquent if- a. The person is a director of a company or, within 24 months immediately

preceding the application, was a director of a company; and b. Any of the circumstances contemplated in subsection (5)(d) to (f) apply

with respect to any legislation administered by that organ of state.”

“Legislation” is widely defined and for purposes of this section includes any national or provincial legislation relating to the promotion, formation or management of a juristic person; regulating an industry or sector of an industry;

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or imposing obligations on, prohibiting any conduct by, or otherwise regulating the activities of a juristic person. Having regard to the above it is contended that SARS falls within the definition of ‘organ of state responsible for the administration of any legislation’ as SARS is responsible for the administration of, inter alia, the Tax Administration Act, Act No. 28 of 2011 (the TAA) and the Income Tax Act No. 58 of 1962 (the Act) which imposes several obligations on juristic persons including, but not limited to, the submission of tax returns. A qualifying organ of state is, however, limited in its ability to apply to court to declare a director delinquent to the extent that it is only able to apply under certain specific grounds of delinquency and cannot lodge an application for an order of probation. A qualifying organ of state, can thus only apply for a ‘delinquency order’ where:

• The director has repeatedly been subject to a compliance notice or similar enforcement mechanism, for substantially similar conduct, in terms of any legislation [section 162(5)(d) of the Companies Act]; o It is contended that the wording of the Act is wide enough that it

encompasses requests to submit an outstanding personal tax return or letters of demand from SARS to submit supporting documents.

• The director has at least twice been personally convicted of an offence or subjected to an administrative fine or penalty in terms of any applicable legislation [section 162(5)(e)]; or o An administrative non-compliance penalty levied against the

taxpayer in terms of sections 210 and 211 of the TAA as a result of a failure to submit a personal tax return within the proclaimed timeframes would arguably apply in this instance.

• The director was responsible for the management of such juristic person at the time of the contravention resulting in a conviction, administrative

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fine or penalty, and, having regard to the nature of the contraventions and the circumstances of the director’s alleged misconduct the court is satisfied that the declaration of delinquency is justified [section 162(5)(f) of the Companies Act].

Thus, to the extent that SARS does fall within the meaning of ‘organ of state’, it can only apply for a delinquency order in the above three situations. Nevertheless, the grounds for delinquency are extremely wide and the use of the word ‘must’ in section 162(5) results in the situation that a court is not afforded a discretion to grant an order of delinquency in respect of the first two grounds but is obligated to do so. The effect of an order of delinquency is very serious and essentially results in that person being disqualified from being a director of a company, which impacts on the very livelihood of an individual. The order may under certain circumstances be unconditional and continue for the lifetime of a delinquent director or it may be conditional and continue for a minimum of seven years or longer, as determined by the court. There is at the very least some relief in the Companies Act for directors which enables them the opportunity to apply to court to suspend the order of delinquency. In terms of section 162(11)(a) of the Companies Act, a delinquent director can apply to court three years after the order of delinquency, to suspend such an order and substitute it for an order of probation. In terms of section 162(11)(b) of the Companies Act, a qualifying director may thereafter apply for an order of delinquency to be set aside two years after it was suspended and substituted by an order of probation. While the relief contained in this section is welcomed, it must be noted that a court will not set aside such an order unless the delinquent director has satisfied any conditions attaching to the original order, and furthermore the court must be

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satisfied that the applicant has demonstrated satisfactory progress towards rehabilitation and that there is a reasonable prospect that he will be able to serve successfully as a director of a company in the future. One must be mindful of the fact that the effect of this section is that once an order of delinquency has been granted, such an order can only be set aside after a cumulative five years. It is contended that a decision by an organ of state to apply for a court order declaring a director delinquent constitutes an administrative act as envisaged in section 33 of the Constitution of the Republic of South Africa, 1996 (the Constitution) and that the provisions of the Promotion of Administrative Justice Act No. 3 of 2000 (PAJA), apply thereto. Thus, while there are no express provisions contained in the Companies Act directing that a qualifying organ of state (SARS) must provide adequate notice and reasons to the relevant director, it is contended that such a procedure would ensure that just administrative action is meted out. This would enable the relevant director to make sufficient representations to SARS in line with the audi alteram partem rule accepted into our law and furthermore, would be a useful mechanism in averting the extreme consequences of such an order where the wide statutory requirements have technically been met, but mitigating circumstances cannot be taken into account as a result of the non-discretion afforded to the court. The effect of such an order, while seemingly very harsh, is nevertheless a high possibility where a director has more than once not complied with an administrative compliance notice issued to either himself personally or in his representative capacity of a company in such circumstances the director must, on application by SARS, be declared a delinquent director. It seems iniquitous and slightly draconian that a director can be suspended from acting as such for a period of at least five years for failing to submit a personal or VAT return for two consecutive months.

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While fortunately there has not in practice been extensive application of section 162 of the Companies Act by SARS, it nevertheless remains a very real mechanism which could enable SARS to further sanction a director in control of an organisation which has not complied with certain sections of the TAA or the Act. In addition, while it seems a lesser punishment than pursuance of a criminal prosecution and conviction, it nevertheless has very serious consequences and the wide drafting of the provisions results in the fact that it would not be difficult for SARS to argue for the granting of such an order in certain instances. Directors should therefore ensure that they are observing the highest standard in respect of their ordinary fiduciary duties. Moreover they should realise that they bear an extremely high burden of compliance with the administrative provisions of any of the tax Acts. In order to avert such an order, all directors must therefore ensure that not only are their own tax affairs in order, but the companies on whose boards they serve are also in order. In particular, directors need to put in place measures and policies to ensure that no administrative penalties are levied or compliance notices issued by SARS on a repetitive basis which could lead to such a court order. ENSafrica Companies Act: Section 162 The Constitution: Section 33 PAJA: Section 1 definition ‘administration action’ and section 6 TAA: Sections 210 and 211

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EMPLOYEES’TAX

2339. Travel allowances and reimbursements Most employers are aware that a travel allowance may be granted to an employee where it is anticipated that the employee will be required to undertake business travel by virtue of the duties of his/her employment and that a travel allowance should not be merely used as a mechanism to reduce an employee’s employees’ tax (PAYE) liability. However, the South African Revenue Service (SARS) has in some instances issued employees’ tax assessments in respect of travel allowances granted to employees on the basis that, in order to qualify for a travel allowance, an employee must in fact have travelled on business. SARS is further of the view that where employees who received travel allowances were also able to claim a reimbursement for business mileage (typically on a rate per kilometre basis) and he/she did not do so, it may be concluded that an employee did not in fact travel on business. In these circumstances, it is then reasoned that the employee’s travel allowance does not fall within the ambit of section 8(1) of the Income Tax Act No. 58 of 1962 (the Act) and that consequently the full amount of the travel allowance should have been subject to PAYE. There are two aspects to the above argument. Firstly, is it a requirement when granting a travel allowance to an employee that the employer must ensure that that employee does in fact travel for business purposes? The second aspect is whether it is reasonable to conclude that an employee who received a travel allowance but did not submit a claim for business mileage, did not travel for business purposes and that such employee’s travel allowance accordingly does not fall within the ambit of section 8(1).

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Currently, 80% of a travel allowance is subject to PAYE. However, in earlier tax years which may still be under review by SARS, this percentage was as low as 50% or 60%. Should it be found that the allowance did in fact not qualify as a travel allowance as envisaged in the Act, the potential exposure to the underpayment of PAYE could be significant. Requirement to travel for business purposes Section 8(1)(a)(i) provides for an inclusion in the taxable income of the recipient of any amount which has been paid or granted as an allowance or advance by his/her principal, excluding any portion actually expended by that recipient, inter alia, on travelling on business. Section 8(1)(a)(i) therefore deals with an individual taxpayer‘s final tax liability in respect of an allowance or advance granted by a principal (employer). Section 8(1)(b) provides that any allowance or advance “in respect of transport expenses” shall, to the extent to which such allowance or advance has been expended by the recipient on private travelling (including travelling between his place of residence and his place of employment or business or any other travelling done for his private or domestic purposes), be deemed not to have been actually expended on travelling on business. Section 8(1)(a)(i) does, in our view, not require that an employee must have travelled for business purposes or account to his or her employer for actual business travel undertaken in order for the allowance granted to him to qualify as a travel allowance. There is furthermore no requirement imposed by legislation on an employer who grants an employee a travel allowance to monitor the use of this allowance by the employee. This is confirmed in SARS Interpretation Note No.14 (Issue 3) which states that an allowance is an amount of money granted by an employer to an employee in circumstances where the employer anticipates that the employee will incur

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business-related expenditure but where the employee is not obliged to prove or account for the business expenditure to the employer. We maintain that a travel allowance may be given to an employee on a prospective basis having regard to the reasonably anticipated business travel requirements of the employee’s position, without the employer being required to confirm whether or not the employee actually travels for business. Reimbursive fuel claims Where an employer’s travel allowance policy also allows those employees who receive travel allowances to submit reimbursive fuel claims at a rate per kilometre for business travel, submission of these claims by the employee is typically optional. The fact that an employee may not have claimed a per kilometre reimbursement in respect of his or her business travel does not imply either that such an employee was not required by the nature of his duties of employment to travel on business, or that he/she did not in fact travel on business. In practice, it is often the case that employees who travel for business purposes choose not to submit a claim for a fuel reimbursement in addition to their fixed monthly travel allowance because it is not worth their time and effort to do so. Also, the requirement to keep a log book was only introduced in the 2010 tax year. Prior to this, most employees used the gazetted tables to calculate their allowable travel allowance deductions in their annual tax returns. It was therefore not necessary to keep a record of actual business travel. It therefore cannot be said that employees who received travel allowances but who chose not to submit reimbursive fuel claims, did not in fact travel for business purposes.

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In addition, whether or not a reimbursive fuel claim was submitted by an employee should, in our view, not be regarded as a criterion to be applied with hindsight as to whether the employee qualified for a travel allowance. Provided that the employer duly applied its mind whether to grant a particular employee a travel allowance based on the business travel requirements of his/her job and not, for example, as an automatic benefit by virtue of his/her position within the organisation, a travel allowance granted on this basis should be regarded as an allowance in respect of transport expenses as envisaged in section 8(1)(b). ENSafrica ITA: Section 8(1)(a) and 8(1)(b) SARS Interpretation Note No. 14 INTERNATIONAL TAX 2340. Base erosion and profit shifting (BEPS) As a result of the global financial crisis, the necessity for growth has become paramount and fiscal consolidation non-negotiable. Private sector growth is fundamental for economic recovery and to reduce deficits. There is a general belief, even in developing countries, that governments are losing substantial tax revenues as a result of aggressive tax schemes which result in the eroding of the tax base or the shifting of profits into more favourable tax jurisdictions.

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It seems that the effective tax rates of multi-national companies are much lower than the statutory tax rates and it appears that the gap is growing, largely as a result of aggressive tax planning and particularly in developing countries where tax revenue is critical for long-term development. As far back as 1961 President Kennedy said that: “Recently more and more enterprises organised abroad by American firms have arranged their corporate structures aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees and similar practices […] in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad.” The former United Nations Secretary-General, Kofi Annan, has blamed transfer pricing for causing an out flow of taxes from Africa. The name of the game has changed! Although tax avoidance is not illegal it is seen as unethical. Transparency is the new buzz word and various stakeholders are involved with very different interests. Non-governmental organisations drive corporate social responsibility while civil society demands a fair and balanced tax system, both sometimes blaming the arm’s length principle as the cause for all these problems. Taxpayers require stable and commercially acceptable tax legislation to avoid double taxation and to manage their effective tax rates as they still have an obligation to shareholders to maximise their profits by managing all expenses, including their tax expense. In light of these factors, the Organisation for Economic Co-operation and Development (OECD) is looking to address these issues concerning base erosion and profit shifting (BEPS), and implement country-by-country reporting that will require taxpayers to set out exhaustive details on how income taxes and business activities are allocated. The focus of the OECD is no longer only the avoidance of double taxation but it also wants to prevent double non-taxation.

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The key objectives of the Action plan on Based Erosion and Profit Sharing are:

• Enhancing transparency to governments.

• Using economic substance to determine taxation.

• Broadening the taxable base.

• Eliminating tax leakages through anti-avoidance measures and co-operation between tax jurisdictions.

• Drafting a new multi-lateral instrument to give effect to all these changes.

Looking at the discussion document already released by the OECD, it is clear that transfer pricing is one of the key areas that will be used to address the BEPS issue. The transfer pricing of intangibles (Action 8 of the BEPS action plan) will no longer only depend on legal ownership but where other parties within the group perform, function, use or contribute and costs related to the enhancement, development, maintenance and protection of the intangible, the returns on the intangible must also accrue to these other parties through arm’s length compensation which reflects the contribution of each party. One needs to determine which transfer pricing structures will be acceptable under the BEPS action plan and which will no longer be acceptable. A profit centre which actively participates in the enhancement, development, maintenance and protection of the intellectual property may still be acceptable while a profit centre with limited functions, risks and assets and very little significant people functions may no longer be acceptable. The white paper on transfer pricing documentation (Action 13 of the BEPS action plan) sets out a possible coordinated approach to transfer pricing documentation through the use of a master file and a local file. The content of the transfer pricing documentation should offer a more balanced trade-off

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between greater transparency and more streamlined country transfer pricing documentation requirements. Transfer pricing documentation rules should be modified to make transfer pricing compliance simpler, while providing tax authorities with more useful information to consider during transfer pricing audits. To comply with the BEPS action plan Action 13, the transfer pricing documentation rules, will include a requirement that multi-national enterprises provide all relevant governments with needed information on their global allocation of income, economic activity and taxes paid amongst countries according to a common template, that is country-by-country reporting. The BEPS action plan sets out 15 actions aimed to address tax planning strategies that exploit gaps and mismatches in tax rules or shift profits to locations where there is little or no activity. These actions will result in fundamental changes to the international standards. Multi-national groups need to urgently evaluate whether they are ready to comply with any BEPS triggered regulations such as those on intangibles and transfer pricing documentation. Multi-national groups need to decide whether they will just do nothing, choose a cause of action only once BEPS activities materialise in local legislation or immediately undertake a comprehensive BEPS proof assessment to:

• Identify risk areas taking into account the 15 areas identified under BEPS; and

• Minimise tax and transfer pricing risks.

A multi-national group needs to determine whether:

• It is dependent on digital products and royalties from intangibles.

• It uses techniques to save tax leakages.

• It uses certain financial instruments or entities that qualify as hybrids.

• A large portion of the group’s income is subject to CFC legislation.

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• It is dependent on inter-company transactions.

• It has a tax and transfer pricing management framework.

• Its transfer pricing documentation is acceptable for all the jurisdictions in which the group operates.

ENSafrica OECD Action plan on Base Erosion and Profit Shifting

2341. Exchange of information

On 21 February 2014, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, (‘the Convention’) as amended by the provisions of the Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters which entered into force on 1 June 2011, was published in the Government Gazette No. 37332. The Convention was approved by Parliament in terms of section 231 of the Constitution and the Convention took effect on 1 March 2014 in South Africa. 64 Countries have signed either the original Convention or the amended Convention and ultimately the Convention will apply in all 64 member states once domestic procedures have been completed in the various signatory states to adopt the Convention. The purpose of the Convention is to increase the co-operation amongst tax authorities around the world and to combat tax avoidance and tax evasion on an international level. South Africa has elected that the Convention will apply to the following taxes: • income tax • withholding tax on royalties

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• tax on foreign entertainers and sportspersons • turnover tax on microbusinesses • dividends tax • withholding tax on interest, effective from 1 March 2015 • capital gains tax • estate duty • donations tax • transfer duty • value-added tax • excise tax • securities transfer tax

Chapter 3 of the Convention sets out the forms of assistance which states are expected to provide to each other. Section 1 of Chapter 3 regulates the exchange of information between states which have adopted the Convention. Article 4 deals with general provisions and article 5 deals with the exchange of information on request. Article 6 of the Convention sets out the manner in which information should be exchanged automatically and this is intended to meet the standard set by the Global Forum on Transparency and Exchange of Information for Tax Purposes (‘Global Forum’). In addition, the treaty provides for the spontaneous exchange of information and simultaneous tax examinations whereby a taxpayer residing in states which have adopted the Convention may simultaneously conduct an examination of the taxpayer’s affairs. Article 11 of the Convention regulates the recovery of tax claims by one state on behalf of another. Certain of the double taxation agreements concluded by South Africa with other states have specific provisions allowing for South Africa to request assistance from its treaty partners to assist in the collection of South African tax and allows at the same time for other countries to seek

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assistance from the South African Revenue Service (‘SARS’) to collect taxes owing to the other state. In the case of HMRC and another v Ben Nevis (Holdings) Ltd [2013] EWCA Civ 578, the English Court of Appeal held that HMRC was empowered to assist SARS in the collection of tax allegedly due by Ben Nevis. More recently, in the case of M Krok v Commissioner: South African Revenue Service [2014] 76 SATC 119 the High Court held that SARS was entitled to assist the Australian Tax Office (‘ATO’) in recovering taxes allegedly due by Mr Krok to the ATO. Under article 11 of the Convention, South Africa could seek assistance from other signatories to the Convention to assist in the recovery of taxes due to SARS, out of assets owned by a South African taxpayer in a state which is a signatory to the Convention. Similarly, other countries can request that SARS assist in the collection of taxes due to other countries out of assets located in South Africa. The Convention sets out the manner in which signatory states are required to assist each other in the collection and recovery of taxes owing to another state. The Convention also regulates the service of documents which may emanate from an applicant state which relate to a tax covered by the Convention, such that South Africa would be required to assist the other state in the service of those documents. As indicated above, the Convention entered into force in South Africa on 1 March 2014 and will apply to all those states which have adopted the Convention and have complied with domestic legislative requirements to adopt the Convention. The purpose of the Convention is to counter global tax avoidance and evasion and to allow for revenue authorities to co-operate and assist each other in the

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collection and recovery of tax and also in the obtaining of information with a view to correctly assessing their residents to tax. The coming into force of the Convention must be viewed in the light of the work of the Global Forum and the intention to ensure that tax information will be exchanged automatically. On 12 October 2013, it was announced that South Africa would join the pilot scheme for the automatic exchange of tax information launched by the United Kingdom, along with France, Germany, Italy and Spain. This move flows from a decision taken by the G20 countries to enhance transparency and exchange of tax information to benefit both developed and developing countries. On 13 February 2014, a common reporting standard for the automatic exchange of information between tax authorities was unveiled. The standard requires jurisdictions to obtain information from their domestic financial institutions and to exchange that information automatically with other tax jurisdictions on an annual basis. SARS has entered into negotiations with the United States Department of the Treasury to conclude an Inter-Governmental Agreement (‘IGA’) with respect to the United States of America’s Foreign Account Tax Compliance Act (‘FATCA’). The IGA has been signed at governmental level shortly but must be adopted by Parliament. Once the IGA has been signed the United States Treasury will regard South African financial institutions as being generally compliant with FATCA. South Africa’s financial institutions will be required to report certain specific information to SARS which will then exchange that information with the United States under the legal framework provided by the double taxation agreement in place between South African and United States. The first reporting period is 1 July 2014 to 28 February 2015 and the required information will have to be submitted to SARS by June 2015.

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Financial institutions will be required to submit information to SARS annually for every tax year ending February of each year. SARS has proposed a business requirements specification (‘BRS’) to deal with the automatic periodical reporting of specified information by financial institutions. SARS published a Public Notice in terms of section 26 of the Tax Administration Act No.28 of 2011 (the TAA) requiring a return as specified in the BRS to be filed and requiring the record keeping of the necessary information(see Government Notice 509 gazetted on 27 June 2014). It must be noted that South Africa will be entitled to exchange information with any other party that has adopted the Convention referred to above even where no double taxation agreement exists with that country. SARS will therefore require information from financial institutions for purposes of exchange of tax information under the IGA and the Convention based on the Organisation for Economic Co-operation and Development (OECD) common reporting standard on financial accounts and to obtain information that will be used by SARS under domestic statutes to tax source based income derived by non-residents. Taking account of developments in the international arena, those taxpayers whose tax affairs are not in order should seek to regularise their position under the Voluntary Disclosure Programme available under the TAA, failing which such persons will in all likelihood be identified by SARS as a result of the international initiatives under way to enhance tax compliance. ENSaFRICA TAA: Section 26 Constitution: Section 231 Convention on Mutual Administrative Assistance in Tax Matters

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TAX ADMINISTRATION

2342. The liability of shareholders for the tax debts of a company

It has long been a principle of company law that the debts of a company are not the debts of its shareholders. It may be a surprise to some that this principle does not apply to certain tax debts thanks to section 181 of the Tax Administration Act No. 28 of 2011 (the TAA). This section allows shareholders to be held jointly or individually liable for the tax debts of their company. At first glance it seems unfair to punish those who do not manage the day-to-day running of a company. The fiscus has indicated that its intention is not to punish shareholders, but to discourage them from asset or dividend stripping the company. This article will consider the application of section 181, namely in what circumstances will a shareholder be held liable for the debts of a company? This section only applies when a company is wound up, other than by means of an involuntary liquidation Section 181 is triggered by a voluntary winding-up and not a compulsory winding-up of a company. The Companies Act No. 71 of 2008 (the Companies Act) deals with the voluntary winding-up of solvent companies while the voluntary winding-up of insolvent companies continues to be regulated under the Companies Act No. 61 of 1973. Both acts provide that the voluntary winding-up of a company begins when a (special) resolution of the company is filed with the Companies and Intellectual Property Commission. This section only applies to a company that has not satisfied an outstanding tax debt

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The company must have been wound-up without having satisfied its outstanding tax debt. A tax debt is defined as an amount of tax due or payable in terms of a tax Act. This would include tax due under any tax Act, with the exception of the Customs and Excise Act No. 91 of 1964 (the Customs and Excise Act) which is specifically excluded. In Davis v CSARS [2010]72 SATC 253 it was successfully argued by SARS that a refund of employees’ tax paid to the applicant in error was also a tax debt. In terms of the “pay-now-argue-later” rule, a disputed tax debt is payable even though it will only be ‘due’ when a court finally determines the dispute in favour of SARS. A tax debt may also be due, but not payable, in circumstances where an understatement penalty is applied to a shortfall in tax. This penalty must be paid in addition to the tax payable for the relevant tax period. The tax debt must also have existed at the time of the receipt of the assets or would have existed had the company complied with its obligations under a tax Act. The term ‘outstanding tax debt’ is used in those sections of the TAA that assign recovery powers to SARS. It is therefore also a prerequisite for this section that the tax debt must not have been paid within the prescribed period, as notified by SARS, or as specified in a tax Act. The section only applies to persons who receive the assets of the company within one year prior to its winding-up The term ‘asset’ includes: movable or immovable, corporeal or incorporeal property and a right or interest of whatever nature to or in that property. The ‘company’ must be a company as defined in the Income Tax Act No. 58 of 1962 (the Act). This definition includes: South African companies, South African public entities, foreign companies, co-operatives, South African charities, foreign collective investment schemes in securities, collective investment schemes in property and close corporations. Persons must have received the assets in their capacity as shareholders

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Shareholders are persons who hold a beneficial interest in a company. Trollip J considering what a ‘beneficial interest’ was in Income Tax Case 1192 [1965] 35 SATC 213 noted at 217 that, “the rights of full ownership of any property are split into those of enjoying its use, fruits, or income (usually referred to as ‘the beneficial interest’) and that of its bare dominium…” This suggests that preference shareholders would be regarded as shareholders as they would enjoy the use, fruits or income from the share, but registered shareholders who act in a nominee capacity would not be shareholders for the purposes of this section, because they do not receive an asset in their capacity as shareholders, but on behalf of, shareholders. The definition of ‘shareholder’ has been widened in later amendments to the section to ensure that it does not exclude shareholders who hold beneficial interests in a company otherwise than through shares. The liability of shareholders is, however, secondary to the liability of the company, which means that SARS must first try to recover the tax debt against the company and only if this is unsuccessful can it proceed against the shareholders. The shareholders who are liable for the tax debts of a company under section 181 may avail themselves of any rights against SARS that would have been available to the company. Section 181 does not apply to a listed company within the meaning of the Income Tax Act or to a shareholder of a listed company This section would not apply to a company or a shareholder of a company whose shares or depository receipts are listed on the Johannesburg Stock Exchange or on a stock exchange outside of South Africa that has been recognised by Minister of Finance, for example the Mauritius Stock Exchange, London Stock Exchange and New York Stock Exchange. Section 181 therefore requires a voluntary liquidation of an unlisted company with an outstanding tax debt and applies to shareholders who have received any

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company assets within one year prior to its winding up. It is clear that there are numerous restrictions that narrow the application of this section to a ‘targeted group’ of shareholders. Taxpayers must still be aware of circumstances that may be perceived as asset or dividend stripping by SARS, (for example a ‘friendly’ liquidation of an unlisted company), and consider before the special resolution is filed, whether the company has any outstanding tax debts. ENSafrica

Companies Act No .61 of 1973 Companies Act No. 71 of 2008 TAA: Section 181

2343. Legal status of assessments / Choice of courts The Tax Court is a specialist court specifically equipped to adjudicate on tax-related matters pertaining to the lawfulness and correctness of disputed assessments. Sections 104 to 107 of the Tax Administration Act, No 28 of 2011(the TAA) (previously section 81 to 88 of the Income Tax Act No. 58 of 1962 (the Act)) together with the rules of the Tax Court, prescribe the procedures to be followed where a tax assessment is disputed and essentially entrusts the Tax Court with the power to determine the merits of a tax assessment. In the matter of Medox Limited v The Commissioner for the South African Revenue Service [2014] ZAGPPHC 98, the North Gauteng High Court was faced with the question of whether the High Court has the necessary jurisdiction to rule on the legal status of income tax assessments. By way of background, the South African Revenue Service (SARS) raised assessments against the applicant in respect of its 1998 to 2002 and 2004 to

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2009 years of assessment, before raising an assessment for the 1997 year of assessment. According to the applicant, certain assessed losses arising from previous years were therefore not properly brought forward and taken into account in determining the applicant's tax liability. In 2009, the applicant realised that its 1997 (and 2003) returns had not been assessed (and that the losses from previous years were not brought forward) and decided to re-submit the 1997 (and 2003) returns, but it did so only in 2011. However, SARS was not willing to entertain the taxpayer's dissatisfaction. The applicant subsequently approached the North Gauteng High Court for an order declaring all income tax assessments issued after 1997 null and void. The applicant contended that SARS had acted ultra vires when issuing the assessments because it failed to take into account the assessed losses as provided for in section 20 of the Act.

SARS opposed the application on the basis that the High Court does not have jurisdiction to entertain the application as the dispute between the applicant and SARS concerned the merits of the income tax assessments. SARS submitted that:

• the applicant never submitted its 1997 return;

• the applicant never objected in terms of the Act against the 1998 assessment for not reflecting the assessed losses;

• the 3 year period, as contemplated in section 79 of the Act had therefore lapsed;

• the assessments in question had therefore become conclusive;

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• the applicant was not entitled to approach the High Court for an order declaring the assessments void without exhausting the internal remedies or the remedies provided for in the Act;

• the Act makes it clear that the lawfulness and the correctness of an assessment must be dealt with by the Tax Court;

• in dealing with the application, the High Court will inevitably have to deal with the merits of the assessment; and

• the relief sought by the applicant is a final order as opposed to an interlocutory order.

The applicant submitted that:

• the Tax Court is a creature of statute and does not have inherent jurisdiction – it has only limited powers as derived from the Act;

• the Act does not confer upon the Tax Court the power to make declaratory orders on the status of income tax assessments; and

• the applicant had no internal remedies available to it because the three year period for objecting had lapsed and the only remedy would be to obtain an order on the validity of the administrative action, either by way of a review or a declaratory order.

Having regard to the submissions made by the parties, the court referred to the provisions of section 81 of the Act and the rules of the Tax Court: "a taxpayer who is aggrieved by an assessment may object to such an assessment in the manner and under the terms and within the period prescribed by the Act and the rules promulgated in terms of section 107A". The court further referred to the decision in Van Zyl NO v Master and Another [1991] 49 SATC 165 where Eksteen J confirmed that the only way in which assessments can be questioned is in the manner provided for in the Act. The Act specifically prescribes the procedure and entrusts the determination of the

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amount of tax to SARS (by way of objection), and on appeal, to the Tax Court. Eksteen J further confirmed that only the Tax Court can determine whether assessments were correctly made and that there was no intention to usurp that function of the Tax Court. In the case of Metcash Trading Ltd v Commissioner SARS [2001] 63 SATC 13 the court held that the Tax Court is a specialist court specifically tooled to deal with disputed tax cases and further found that the High Court has jurisdiction to adjudicate upon tax matters only in circumstances where the relief sought is of an interlocutory nature. Based on the authorities mentioned above, the court held as follows:

• The lawfulness and correctness of disputed assessments must be dealt with by the Tax Court.

• The role of the High Court is to provide a judge as a member of the specialised Tax Court to hear appeals and not matters of first instance.

• The applicant failed to exhaust its internal remedies when it still had the time to do so and now wanted to circumvent the provisions of the Act by seeking a declaratory order in the High Court.

• The application for an order declaring assessments null and void cannot be entertained without assessing the merits of the case.

The merits of the assessments fall within the competency of the Tax Court; and once an assessment has been made, the parties thereto are confined to the jurisdiction of the Tax Court and must exercise all their rights in the Tax Court - only once they have failed can the matter be referred to the Supreme Court of Appeal or the Constitutional Court.

In light of the above, the court held that the High Court does not have the necessary jurisdiction to grant the order sought.

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What is clear from the judgment is that courts discourage applications that come down to 'forum shopping' by the parties as it could not have been the legislature's intention to create competing and concurrent forums for the resolution of tax disputes. Cliffe Dekker Hofmeyr ITA: Sections 20, 79, 81 and 107A TAA: Sections 104 to 107 (Editorial Note: Section 117 of the TAA was amended in 2012 to enable the tax court to hear applications on interlocutory and procedural matters.) 2344. Administrative fairness in disputes An interesting judgment was handed down in the Supreme Court of Appeal (SCA) on 12 June 2014 in the matter of Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd [2014] ZASCA 91. The taxpayer operated a car dealership in Pretoria. The South African Revenue Service (SARS) conducted an audit on the taxpayer in respect of its 2000 to 2004 years of assessments, and as a result raised various additional assessments in respect of, inter alia, income and value-added tax (VAT). SARS also imposed punitive additional tax of 200%. The taxpayer objected to the additional assessments, but SARS disallowed the objection and the taxpayer appealed to the Tax Court. The Tax Court found in favour of SARS in respect of some of the issues in dispute, but found in favour of the taxpayer in respect of others. The Tax Court also confirmed the imposition of the additional tax. SARS then appealed to the SCA, and the taxpayer similarly cross-appealed. Whereas the substantive issues in dispute between the parties were numerous, the significance of the judgment relates to the approach that SARS adopted in

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respect of the audit and in raising the assessments, and the SCA’s criticism thereof. The audit involved a comparison of the taxpayer’s accounting records and other information available to SARS. The SCA noted that SARS did not try to familiarise itself with the taxpayer’s accounting system, even though it was clear that it was a customised system. For example, some transactions that were reflected as 'sales' on the system were internal transactions relating to movements of stock between branches or movements from sale stock to demonstration stock. SARS completely ignored this fact, even though it was clear that the transactions were internal. The approach adopted by SARS was that, where there was any discrepancy that it did not understand, SARS raised additional assessments and left it to the taxpayer to prove in the Tax Court that SARS was wrong. The SCA reprimanded SARS by indicating that: "[SARS’s] approach was fallacious. The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis upon which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong ... In addition, as a matter of routine, all the additional assessments raised by [SARS] were subject to penalties at the maximum rate of 200 per cent, absent any explanation as to why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax."

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It appears that SARS mainly relied on section 82 of the Income Tax Act, No 58 of 1962 (the Act) and section 37 of the VAT Act No 89 of 1991 (the VAT Act now section 102 of the Tax Administration Act No 28 of 2011(the TAA)) in that, where tax disputes are concerned, the taxpayer carries the burden of proof. The SCA acknowledged that the taxpayer carries the burden of proof, but remarked:

"That, however, is not to suggest that SARS was free to simply adopt a supine attitude. It was bound before the appeal to set out the grounds for the disputed assessments and the taxpayer was obliged to respond with the grounds of appeal and these delineate the disputes between the parties."

The taxpayer, to discharge the onus, called witnesses. The court recognised that the taxpayer’s evidence under oath and that of its witnesses cannot be disregarded simply as being self-serving and therefore unreliable, but emphasised that it must be given full consideration along with all other evidence, and the credibility of the witnesses must be tested just as it is in any other matter before a court. SARS insisted that the evidence of the witnesses was insufficient and that the taxpayer was obliged to provide documentary evidence to discharge the onus. However, even before the matter came before the Tax Court, SARS insisted that insufficient proof had been provided by the taxpayer. The taxpayer provided SARS with relevant records, and even put all its ledger accounts in a van and had it delivered to SARS’s offices. SARS refused to inspect the documents. On several further occasions the taxpayer tendered the documents to SARS. In the Tax Court counsel for SARS questioned the taxpayer’s witnesses and asked them to provide source documents proving that SARS was wrong, without indicating which specific documents it required.

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In this regard the SCA made it clear that:

"That approach was untenable, for, it left the taxpayer none the wiser as to what was truly in issue and what needed to be produced in order for it to discharge the burden of proof that rested upon it. The taxpayer thus adopted the general approach that as [SARS] had misunderstood the accounts and ignored the provisions in particular of the VAT Act, it sufficed for it to demonstrate that through the evidence of [witnesses]. That was a perfectly proper approach … The taxpayer was not alerted to any other issue and was certainly not called upon to produce every underlying voucher or invoice or to reconstruct its accounts from scratch for the Tax Court. In these circumstances the submissions … that the original vouchers had not been produced or that [the witness’s] explanations were to be ignored because they were based on hearsay, cannot be sustained. … Where, for example, the SARS auditor has based an assessment upon the taxpayer’s accounts and records, but has misconstrued them, then it is sufficient for the taxpayer to explain the nature of the misconception, point out the flaws in the analysis and explain how those records and accounts should be properly understood. That can be done by a witness … If there are underlying facts in support of that explanation that SARS wishes to place in dispute, then it should indicate clearly what those facts are so that the taxpayer is alerted to the need to call direct evidence on those matters. Any other approach would make litigation in the Tax Court unmanageable, as the taxpayer would be left in the dark as to the level of detail required of it in the presentation of its case. It must be stressed that SARS is under an obligation throughout the assessment process leading up to the appeal and the appeal itself to indicate clearly what matters and which documents are in dispute so that the taxpayer knows what is needed to present its case."

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It is clear that the SCA placed much emphasis on the fact that, for the sake of fairness and proper court procedure, SARS must clearly state the grounds on which it bases its assessments and make it clear to the taxpayer what it disputes so that the taxpayer can know what is required from it to discharge the onus of proof. Currently, it is required that SARS first produces a statement of grounds of assessment to which the taxpayer must reply by producing a statement of grounds of appeal. The statement of grounds of assessment allows a taxpayer to understand what SARS’s case is and to prepare an answer thereto. Together these pleadings delineate the issues in dispute between the parties. While it is accepted that the taxpayer will have the right to request reasons for any assessments made by SARS, it is submitted that SARS is not required to automatically furnish such reasons, and for purposes of proceedings in the Tax Court, SARS should be obliged to first make out a proper case for having assessed the taxpayer. This case provides authority for the view that the dispute resolution rules fall foul of the principles of administrative fairness and are not in the interest of proper court procedure. Cliffe Dekker Hofmeyr ITA: Section 82 TAA: Section 102 VAT: Section 37 VALUE-ADDED TAX

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2345. Tax invoices: the address confusion VAT vendors who make taxable supplies of goods or services are obliged to issue tax invoices to the recipients of such supplies within 21 days of having made such a supply. A valid tax invoice is of utmost importance because without such a document a vendor, being the recipient of a supply, is not entitled to claim any input tax deductions in respect of goods or services acquired in the course or furtherance of making taxable supplies. The requirements for a valid tax invoice are contained in the Value-Added Tax Act No.89 of 1991 (the VAT Act); one of these requirements being that a tax invoice for supplies in excess of R5 000 must reflect the name, address and VAT registration number of both the supplier and the recipient of the supply. A tax invoice for supplies less than R5 000 need only contain such details of the supplier. There has recently been a great deal of confusion regarding the address that should appear on a tax invoice, i.e. whether it is the physical address, the postal address or any other address. The confusion seems to originate from the SARS VAT 404 Guide for Vendors (March 2013) (the SARS Guide) which indicated that the address contemplated in the VAT Act is the ‘physical business address’’ from where the business of a vendor is conducted, and not the post office box number of the business or the residential address of the business owner. No substantiation is provided as to the basis for limiting the acceptable address to the physical address. The result of this uncertainty and inconsistency is that vendors, being the recipients of taxable supplies, found that SARS auditors sought to disallow their input tax claims on the basis that they possess invalid tax invoices. Recipients, in fear of having their input tax deductions disallowed, refused to make

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payment of tax invoices unless suppliers changed the addresses on their tax invoices to reflect the physical addresses. The VAT Act simply requires that the ‘address’ of the supplier and that of the recipient (for tax invoices in excess of R5 000) be reflected on the tax invoice. The term ‘address’ is not defined in the VAT Act and regard must therefore be had to the ordinary meaning of the word. ‘Address’ is defined in the Oxford English Dictionary as the place where a person lives or an organisation is situated; particulars of this, especially for postal purposes. Based on the ordinary meaning of the word, it seems that a person’s address may therefore be the place at which they wish to receive their post, rather than being strictly limited to a person’s physical address. There is therefore no legal justification for the view taken by SARS in the SARS Guide. Fortunately, sanity prevailed and the SARS issued Binding General Ruling (VAT) No. 21 (BGR 21) on 11 March 2014 to clarify the issue. BGR 21 sets out the options available to vendors regarding the address that must be reflected on a tax invoice or a credit or debit note issued to either a vendor recipient or a non-resident recipient. In terms of BGR 21, the address of the recipient and the supplier that must be reflected on a tax invoice, credit or debit note is either the physical address from where the enterprise is being conducted; the postal address of the enterprise; or both the physical and the postal address of the enterprise. Similarly, a tax invoice, credit or debit note issued for a zero-rated supply of goods or services made to a non-resident can reflect either the physical address of the non-resident in the foreign country; the postal address of the non-resident; or both the physical and the postal address of the non-resident.

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The SARS Guide was updated on 5 May 2014 and also now stipulates, in line with BGR 21, that either the physical address or the postal address or both will be accepted as the ‘address’ that must be reflected on a tax invoice issued to recipients of supplies. ENS Africa VAT Act: Section 20 SARS VAT 404 Guide for Vendors

SARS Binding General Ruling No 21

SARS NEWS

2346. Interpretation notes, media releases and other documents

Readers are reminded that the latest developments at SARS can be accessed on their website http://www.sars.gov.za. Editor: Mr P Nel Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof JJ Roeleveld, Prof PG Surtees, Mr Z Mabhoza, Ms MC Foster

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The Integritax Newsletter is published as a service to members and associates of The South African Institute of Chartered Accountants (SAICA) and includes items selected from the newsletters of firms in public practice and commerce and industry, as well as other contributors. The information contained herein is for general guidance only and should not be used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of SAICA. All rights reserved. No part of this Newsletter covered by copyright may be reproduced or copied in any form or by any means (including graphic, electronic or mechanical, photocopying, recording, recorded, taping or retrieval information systems) without written permission of the copyright holders.