In the case Attorney-General of Canada v RJ Reynolds Tobacco Holdings Inc and Others heard in the US Supreme Court of Appeals for Second Circuit, 12 October 2001, 268 F 3d 103, the 'revenue-rule' principle was confirmed. The 'revenue-rule' stems from the international law principle of sovereignty which advocates that a government has the ultimate judicial authority over the subjects in its land and that foreign states should be in no position to obstruct the country from enforcing its domestic laws. Similarly, the 'revenue-rule' principle suggests that the judicial authority of one country will not enforce the revenue laws of a foreign country.
In COT v MacFarland, 27 SATC 15, it was held that under the common law, South African authorities or the judiciary will not enforce any claim by a foreign state for taxes due and payable.
However, the effect of modern times and the rapid globalisation of the world has forced governments to rethink their strategies with regard to reciprocal collection of taxes, in order to ensure that any loss to their fiscus is minimised. This new thinking is reflected in the preamble to the OECD Convention on Mutual Administrative Assistance in Tax Matters, which states:
"the development of international movement of persons, capital, goods and services – although highly beneficial in itself – has increased the possibilities of tax avoidance and evasion and therefore requires increasing co – operation among tax authorities"
There has been a growing need in international co-operation between states to combat tax avoidance and tax evasion.
Mutual assistance in the recovery of collection of taxes has therefore seen extensive development internationally, which has been reflected in the current position of South Africa. The OECD Model Tax Convention (MTC) has, since 2003, provided for 'assistance in the collection of taxes' in Article 27. This amended article encourages countries to agree on either a comprehensive assistance article or a narrower one. An agreement of this nature between states is aimed at ensuring that any instances of a 'revenue-claim' would be sufficiently covered and provided for.
From an analysis of the Double Taxation Agreements entered into by South Africa with foreign countries it becomes apparent that African countries lead the way in concluding agreements containing 'assistance in collection of taxes' articles. Interestingly, almost all of our near neighbours have entered into such arrangements with South Africa, including Botswana, Namibia, Swaziland, Lesotho and Mozambique. There have also been further arrangements concluded in Africa with Uganda, Tanzania, Ghana and Algeria. In terms of the rest of the world notable inclusions are Australia, the Netherlands and recently the United Kingdom. On the other hand a notable exclusion is the United States.
However, although recent developments have been a very positive step towards ensuring greater international co–operation in collection of taxes, several shortcomings have become apparent. Firstly, articles contained in some of the tax treaties with foreign countries, in accordance with recommendations in the OECD MTC, have taken a limited form. Where a more limited article is agreed upon, several important issues are not addressed; one being which state covers the costs incurred in the collection of tax claims. This sort of predicament could be a reason for the failure in assistance between countries to get off the ground, as any collecting state would be hesitant to incur costs without a guarantee of recovery. Further, limitations to a request to assist in collection of taxes exist where such a request may be refused by the collecting state. These include:
- where enforcement of the request would result in a contravention of the laws of either country;
- where it would also be contrary to public policy, ;
- where the requesting state has not exhausted all domestic remedies in the collection of tax; and
- where the benefits of collection to the requesting state outweigh the administrative burden placed on the requested state.
Notably, although these are reasons for the request for assistance to be unsuccessful, they also, on the other hand provide the taxpayer with several legitimate avenues to escape liability.
In light of the importance of the domestic law of the requesting state when trying to obtain assistance in the collection of taxes, it is prudent to examine the South African legislation dealing with cross–border collection of taxes. There are several steps and requirements that need to be met in order for a request for assistance in collection of tax to be granted. Section 93, read with section 108 of the Income Tax Act, No 58 of 1962, ('the Act') sets out the procedure and conditions that need to be met and can be summarised as follows:
- The country requesting assistance must have entered into a double tax agreement with South Africa in accordance with section 108 of the Act.
- The South African Revenue Service ('SARS') can request the foreign taxpayer by notice in writing to admit liability (SARS is, however, under no obligation to do so).
- Where the foreign person admits liability or either fails to
respond to the notice, or denies liability but the Commissioner is
satisfied that, having consulted with the competent foreign
- the liability for such amount is not in dispute; or
- if liability for such amount is in dispute that the dispute is carried on solely to delay collection or for the purpose of concealing assets by such person, the Commissioner may in writing, formally request the foreign taxpayer to pay such amount by a certain date.
- If a foreign taxpayer fails to pay the outstanding amount owed by the specified date then the normal domestic remedies for collection in outstanding taxes under the Act will apply.
It is submitted that there must be a certain degree of certainty regarding the liability of the foreign taxpayer for outstanding taxes, before a request for assistance will be met by the collecting state. This is as a result of the burdensome procedure involved and the uncertainty regarding the final recovery of costs of collection. A collecting state, which stands to gain very little from ensuring a foreign taxpayer abides by his or her country's domestic revenue laws, while on the other hand subjects itself to the possibility of extensive costs and an onerous procedure, would in all likelihood only follow the requested procedure in a more certain case where the costs of collection are also covered by the requested state. The mere benefit of enhanced diplomacy with the foreign country as well as a higher chance of reciprocal co-operation would not seem enough where the case is not a cut and dried one.
The increasing co-operation between countries in the collection of taxes, in particular in the case of South Africa, is a sign that South African taxpayers and other taxpayers must be aware of such arrangements and must ensure that their income tax affairs are in order.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.