Two interesting judgments were delivered earlier this month that illustrate the challenging environment in which taxpayers operate these days and the conflicting interests that need to be applied by the South African Revenue Service (SARS).
In the first judgment of the Western Cape High Court in Capstone 556 (Pty) Ltd v Commissioner, for the South African Revenue Service (unreported judgment delivered 22 June 2011, case number 26078/2010) and The Minister of Finance and Kluh Investments (Pty) Ltd v Commissioner, for the South African Revenue Service and The Minister of Finance, the High Court (the Court) confirmed the pay now argue later principle that the noting of an appeal does not suspend the taxpayer's obligation to make payment. A taxpayer is expected to pay the assessed tax and argue the merits of its objection later.
In the second judgment, the Oceanic Trust Co. Ltd N.O v Commissioner for the South African Revenue Services, the taxpayer sought a declaratory order that inter alia it was not a resident of South Africa and did not carry on business in South Africa through a permanent establishment (PE). The declaratory order was sought by the taxpayer as SARS raised an assessment in the amount of R1,5 billion on the basis that the taxpayer's place of effective management was in South Africa, alternatively, the taxpayer carried on business through a PE in South Africa and interest earned by the taxpayer was not exempt in terms of section 10(1)(h) of the Income Tax Act No. 58 of 1962 (the Act).
Soon after the assessment was issued, SARS appointed the taxpayer's South African bank as an agent in terms of section 99 of the Act and required the bank to remit the R1,5 billion to SARS. The bank paid an amount of R20 million to SARS, leaving a few hundred Rand in the account. SARS sought to recover the outstanding amount in terms of section 91(1)(b). This prompted the taxpayer's urgent application to the Court.
The Court did not have jurisdiction to consider the application and determine whether the taxpayer is a resident of South Africa or carries on business through a PE in South Africa (ie the Court could consider legal issues only).
However, it is clear from the facts of the case that the practical effects of the pay now, argue later principle and section 99 of the Act may lead to harsh implications for a taxpayer. For instance, the taxpayer in the Oceanic Trust case may well be a resident of Mauritius and not conduct business through a PE in South Africa. However, until the merits of the taxpayer's objection and/or appeal are considered, a taxpayer is required to pay SARS R1,5 billion (unless alternative arrangements are made with SARS). As it stands, the taxpayer is out of pocket for R20 million and if more money was held in the South African bank account it would certainly have been paid to SARS. Enforcing the pay now argue later principle (along with section 99 of the Act) may clearly have dire consequences for taxpayers.
Obtaining full and speedy settlement of tax disputes and the need to limit the ability of recalcitrant taxpayers to defer the payment of taxes certainly supports the need for the pay now, argue later principle. However, the consequences of enforcing this principle must be appreciated and carefully considered by SARS.