South Africa: Directors And The Taxation Of The Companies They Lead – Part 2

Last Updated: 22 October 2009
Article by Justin Liebenberg

In this second of a series of articles on tax and corporate governance we consider the formulation of an effective compliance framework and processes over the company's tax obligations.

The Code requires that compliance with laws, which includes tax laws, must form part of the overall risk management process and that the Board should ensure that the company implements an effective compliance framework and processes.

Tax risk management should not be seen in isolation but rather as part of the overall risk management of the entity. For the purpose of this series of articles we have limited our discussion to the tax issues.

The question is how should directors go about assessing tax risk management and formulating a tax compliance framework?

Broadly, the company needs to identify all taxes applicable to its operations, identify the risks associated with each tax, implement appropriate controls, audit these to ensure compliance and report to the board or the appropriate committee. As depicted in the following diagram:

In the rest of this article we focus on a suggested approach to the identification of risks and the establishment of appropriate controls.

The framework suggested in this article should be seen as the 'bare-bones' of the entity's tax risk management framework. The framework adopted will depend on the nature and complexity of the company's activities. The overriding requirement is that it should be effective but should not be overly complex so that the procedures can be understood and implemented with minimum cost and disruption. The suggested process is depicted in the following diagrams, which are explained more fully below:

A suggested approach

The suggested approach is firstly to identify the various activities giving rise to tax consequences and to identify the phases in which the activities are processed.

Using this basic framework,then identify the major risks arising in each phase and the controls that could be implemented to minimise the identified risks. An effective way to identify the major risks is through a workshop conducted by internal or external tax specialists with those people in the organisation involved in the tax process.

We will first discuss the 'activities' depicted in the diagram followed by an explanation of the phases in the tax process with an example of the risks that arise in each phase.

The activities

Since most if not all of a company's financial activities will be subject to one or other piece of tax legislation, a useful starting point it is to consider the various types of financial activities as described in the company's cash flow statement used for financial reporting purposes, since these summarise the most important categories of activities. These are the operating activities, investing activities and financing activities. Operating activities entail the normal business activities, for example selling the product or service to customers, normally routine, repetitive transactions. Investing activities entail the purchase and sale of assets including any property, plant and equipment as well as businesses or shares. Financing activities include the issue of shares, loans,the payment of dividends etc.

The 'tax process'

The treatment of these activities in the 'tax process' should then be considered. The 'tax process' follows a number of phases from the planning phase to the dispute resolution phase. We have provided a brief description of what occurs in each phase including an example of a risk that may occur in each phase and a suggested control to demonstrate the process to be followed.

-The planning phase is as the name implies, where the transaction or transactions, are planned before entering into any legal relationships. This is arguably the most important phase from a tax planning perspective since the company can legally plan the transaction or transactions so as to attract the minimum amount of taxes, both in terms of direct and indirect taxes, and in terms of the timing thereof.

Example of risk and possible control

A company with an assessed loss decides to sell its business which will give rise to a capital gain. It sells the business on the first day of its year of assessment before earning any income. The assessed loss is not carried forward to the following year and the company cannot set the capital gain off against the assessed loss since the company needs to be trading and earning income from trade.

This is an example of a non-routine transaction forming part of the investing activities of the company. If the transaction was planned more carefully the business could have been sold before the end of the year of assessment.

To avoid the risks arising from these types of transactions, a policy should be in place that all non-routine transactions are only undertaken after sign off by a tax expert.

The transaction phase is where the planned transactions are actually entered into and the legal rights and obligations arise.

Example of risk and possible control

A company incurs expenditure on research and development.. The tax law changes to allow the taxpayer to claim a deduction equal to 150% of the expenditure incurred. The company is not aware of the change and fails to claim the enhanced deduction.

The tax laws change continually, which creates the risk that a taxpayer continues with a particular tax treatment.

A person or persons in the organisation should be tasked with keeping the relevant people in the company apprised of changes in tax laws. A useful way to achieve this is to form a tax committee (we will discuss this in more detail in a later article) which is attended by a tax expert that can make the committee aware of significant changes in tax laws.

In the recording phase, the transactions are recorded in the company's accounting records and supporting documentation is retained.

Example and possible control

A company that is a VAT vendor claims input tax in relation to certain expenses in the calculation of its VAT liability. Four years later SARS conducts a VAT audit and requests copies of a sample of invoices. The company has since moved premises and can no longer locate the invoices which are in storage. SARS disallows the input tax deduction and imposes penalties and interest.

A documentation retention policy should be in place to ensure this does not happen.

-In the tax computation phase the company calculates its tax liability based on the information contained in its accounting records.

Example and possible control

The financial manager calculates the tax liability incorrectly. A possible control would be a policy that requires that the tax computation be checked by a expert or performed by an expert.

-The reporting and payment phase entails the recognition and disclosure of the tax in the company's annual financial statements. The financial statements in turn are used to compile the tax return which is submitted to SARS. The company is also required to pay any taxes over to SARS when they become due.

Example and possible control

A company may underestimate its provisional tax resulting in penalties and interest. A process should be in place to ensure that provisional payments are reviewed by an internal or external tax expert.

-Finally, in the dispute resolution phase a dispute may arise between SARS and the taxpayer as to the correct tax treatment of an item in the return. This would begin with an objection to an assessment raised and end with the matter resolved between the parties or through a determination by a court.

Example and possible control

A company disagrees with an assessment and wishes to raise an objection; however, without adequate reasons, it submits the objection late. SARS disallows the objection and the assessment remains. A policy should be in place to ensure that responsibility is allocated to a particular person for the timeous submission of returns to and correspondence with correspondence with SARS.

Once the risk and control identification process is complete, there should be a good understanding of the risks and controls required to address these risks. It is recommended that the risks and controls be documented in a tax policy document. The policy document should be approved by the board so that each director has an understanding of the primary tax risks faced by the company and the framework that has been adopted to reduce these risks.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions