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”

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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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