Most Read Contributor in South Africa, September 2016
Tax authorities worldwide have certain powers aimed at enabling
them to verify information submitted by taxpayers and the
administration of tax legislation in their respective
jurisdictions. Chapter 5 of the Tax Administration Act No. 28 of
2011 ("TAA") grants the South African Revenue Service
("SARS") information gathering powers which include the
power to inspect, verify, audit and conduct criminal
investigations. A contentious issue is whether SARS has the
authority to exercise its information gathering powers
vis-ŕ-vis a controlled foreign company ("CFC") and
in particular, does SARS have the power to conduct a field audit at
the premises of a CFC in a foreign jurisdiction?
A CFC is a foreign company where more than 50% of the total
participation rights or voting rights in that company are directly
or indirectly held or exercisable, respectively by one or more
persons that are tax resident in South Africa. The CFC itself is
not subject to tax in South Africa and therefore not a South
African taxpayer. The net income of the CFC (a notional amount) is,
however, included in the (taxable) income of the CFC's
controlling South African shareholders.
Section 46 of the TAA deals with requests for relevant material
(information, documentation or things that in the opinion of SARS
are foreseeably relevant to the administration of tax legislation).
It provides that SARS may, in relation to a taxpayer, require the
taxpayer or another person to submit relevant material
(whether orally or in writing) that SARS requires. Section 48 of
the TAA deals with field audits and criminal investigations and
provides that an authorised SARS official may require a
person to make available at the person's premises
specified in the notice, relevant material that the official may
require to audit or criminally investigate in connection with the
administration of a tax Act in relation to the person or another
person. The notice must among other things indicate the initial
basis and scope of the audit or investigation.
It goes without saying that SARS requires information gathering
powers to be able to enforce tax legislation and collect revenue
which is necessary for the upkeep of the country. However, do these
powers entitle SARS to enforce its powers extra-territorially in
terms of domestic tax legislation?
Although SARS is of the view that the wording of domestic law
empowers them to perform a foreign field audit, it is our
considered view that for a number of compelling reasons neither
section 46 not section 48 provide SARS with such power in respect
of an entity over which South Africa does not have sovereign
jurisdiction. Any such action by SARS will be unlawful.
SARS may obtain information in respect of a foreign company by
relying either on a bilateral or multi-lateral tax convention to
which SA is a signatory and which is in force and effect. With
effect from 01 March 2014, SA became a signatory to the Convention
on Mutual Administrative Assistance in Tax Matters (the
"Convention"). More than 85 countries are currently
signatories to the Convention. The Convention facilitates
international co-operation among tax authorities.
In terms of the Convention, parties shall exchange any
information that is foreseeably relevant for the administration or
enforcement of their domestic laws which concerns particular
persons or transactions at the request of a State. The Convention
details the manner in which tax examinations abroad should be
conducted. In terms of the Convention, SARS would be required to
request the tax authority of the CFC's foreign jurisdiction to
conduct a tax examination / audit of the CFC. The tax authority of
the foreign jurisdiction may accede to or decline such request.
Should the tax authority of the foreign jurisdiction accede to the
request, SARS would be allowed to have a representative
present "at the appropriate part of a tax
examination". This is very different to SARS conducting a
field audit in the foreign jurisdiction with a full team of people.
All decisions with respect to the conduct of the tax examination
are to be made by the tax authority of the foreign state and will
be subject to the laws and practice of that other state.
The powers of SARS under the Convention may thus limited in
comparison to its powers under the TAA.
In light of SARS' apparent expansive views on the extent of
their powers vis-ŕ-vis information gathering, it is in the
interest of any entity that is the subject of a SARS audit to seek
professional advice to ensure that its rights are sufficiently
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.
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