Following the Great Financial Crises global tax collection and information gathering strategies are increasingly being deployed between authorities pursuant to that Double Taxation Agreements (DTAs) and Tax Information Exchange Agreements (TIEAs).
Tax agencies around the world have tightened controls and improved collection methods, and DTAs are being enforced pursuant to domestic legislation in various countries to satisfy a country's obligations under a DTA.
Tax collection agencies (including the ATO) would have welcomed a relatively recent decision of the South African High Court.
The case illustrates how DTA obligations are being fulfilled through a foreign authority cooperating with Australia, even though it required the South African authorities to use domestic legislation to meet its obligations under the DTA.
The case specifically shows how foreign domestic legislation can be relied upon in certain circumstances to obtain information relating to a taxpayer from unrelated third parties (such as accountants or advisors), who may be in possession of taxpayer information.
The current law in Australia is that it’s tax residents, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), are generally taxed on their worldwide income and gains. Foreign residents are taxed on income and some capital gains sourced in Australia.
Australia, being a favourite destination for many migrants, has a good number of residents with assets and income sources in foreign jurisdictions. Australian residents are also progressively earning more income from offshore, facilitated by improvements in communication and travel.
More and more the tax affairs of Australian tax residents are taking on an international flavour.
Double Taxation Agreements
To keep the residency based taxation approach in balance various countries have entered into a great number of DTAs with each other. Many DTAs are formulated on the basis of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital. These agreements are designed to avoid the double taxation of taxpayers on income or capital gains arising in one country while the taxpayer is a resident or deemed a resident of another. They also serve to facilitate the flow of taxpayer information between governments.
Australia currently has DTAs in operation with 42 countries, and has TIEAs with 29 countries. It has also signed two TIEAs, which are not in force yet.
Taxpayers are generally familiar with the concept of being taxed on worldwide income and gains, and aware of the usual double tax avoidance benefit that is afforded by DTAs. They are less familiar though with the fact DTAs and TIEAs are also intended, and often appropriated, as information collection tools by tax agencies. Very few realise that tax related information in hands of third parties may also be collected and distributed amongst tax agencies.
DTAs in practice – an example
In Commissioner for the South African Revenue Service v Werner van Kets 2012 (3) SA 399 (WCC), the Western Cape High Court in South Africa ruled on the application of information exchange provisions contained in the DTA entered into by South Africa and Australia.
The issue for determination by the Court was whether the words 'any taxpayer', which are employed in sections 74A and 74B of the South African Income Tax Act, 58 of 1962 (ITA), can be interpreted to include a person who is not a taxpayer as defined in section 1 of the ITA.
Section 74A of the ITA allows the Commissioner of Taxation to require a taxpayer, or any other person, to furnish information, documents or things as the Commissioner may require. The section is supported by section 74B, in terms of which the Commissioner may require a taxpayer, or any other person, to furnish produce or make available any such information, documents or things as the Commissioner may require to inspect, audit, examine or obtain.
In the relevant case the ATO requested the South African Revenue Services (SARS) for infor-mation into the affairs of certain Mr. Saville (an Australian tax resident), particularly relating to his involvement in a Malaysian entity which had transferred a substantial sum of money to Australia.
The request was made pursuant to the DTA currently in place between Australia and South Africa.
A certain Mr. Van Kets (a South African tax resident) was in possession of information in relation to Mr. Saville. SARS, in order to obtain and provide the information requested by ATO, acted in terms of section 74B of the ITA and requested Mr. Van Kets to hand over the information in his possession.
Van Kets refused to hand over the information to SARS. He argued that Mr. Saville was not a South African taxpayer and therefore SARS could not rely on ss74A and 74B to obtain information held by him in relation to Mr. Saville. He argued further that the meaning that should be given to ‘taxpayer’ in s74B of the ITA should be the defined meaning, that is, a person who pays taxes.
SARS claimed that sections 74A and 74B can be invoked for the purpose of the administration of the ITA and, to that end they include the power to obtain information for the purposes of meeting South Africa's obligation under the applicable DTA. SARS also contended that, based on Van Kets argument, it would then have no legislative mechanism at its disposal to obtain the necessary information within its own jurisdiction to meet the request from foreign authorities.
The Court decided in favour of SARS. It held that sections 74A and 74B should be interpreted to be consistent with South Africa’s obligations under any DTA for the provision of information or any treaty concluded for the exchange of information. It held also that South African residents are bound by the provisions of the DTA concluded between South Africa and Australia, to furnish information pursuant to any request in terms of such DTA.
The Court ordered van Kets to disclose to SARS the information in his possession in relation to the affairs of Mr. Saville for onward transmission of such information by SARS to the ATO.