Times have certainly changed. Ten years ago a tax query from a SARS assessor would find its way to the desk of the financial director or in-house tax advisor who would send it off to their auditors.
The auditors would, in turn, give it to their tax department who would draft a reply to SARS and hope the matter went away. If not, an informal meeting between the financial director and tax advisor at the audit firm would usually settle the dispute.
Nowadays SARS is a word class organisation. It attracts top talent at all levels, is efficient and successful. The query from a SARS assessor is now just the first step in a complex dispute resolution process. And going to your auditor for assistance in a dispute resolution matter is a bit like going to see your lawyer to help finalise your annual financial statements.
Dispute resolution is what law firms do. They are geared for all aspects thereof from mediation to full blown litigation. The law recognises this and grants equal legal privilege to lawyers in law firms. Legal privilege is a fundamental aspect of any dispute resolution process. Quite simply you don’t want the other side to be able to have access to confidential information relating to your dispute.
In developed markets, major tax litigation is principally run by law firms. Fortunately, over the last decade, various South African law firms have built the necessary capacity to run tax dispute resolution matters from the first SARS query to the Supreme Court of Appeal in Bloemfontein.
Our law firm has close to 60 full time tax professionals many of whom are skilled in tax dispute resolution. These tax professionals work together with members of the litigation department. The tax professionals provide, inter alia, the relevant tax technical expertise whilst the litigators provide expertise in the dispute resolution process and also relevant aspects of administrative law.
It is important to realise that the dispute resolution process starts with the first SARS query. The response must be drafted in a manner which considers the possibility of the end game being witnesses giving evidence under cross-examination in court. As Advocate Barry Roux has shown in the Oscar Pistorius trial, cross-examination is not for sissies. A witness will be thoroughly tested on his recollection of all relevant facts.
Therefore, any incorrect factual allegation in the response to the query, however innocently made, may come back to bite the taxpayer later in the dispute resolution process. In addition it is important that any factual statement can be proved by the taxpayer. This requires an understanding of who the relevant witnesses may be, where they are and what they are going to be able to say to support the various factual allegations in the response to SARS.
Often it is not necessary to interview witnesses at this early stage, but it is necessary to understand that such witnesses exist and what they will be able to testify to should the matter ever go to court.
Early on in the dispute resolution process, assuming the parties have not managed to settle the matter, SARS will issue a revised assessment.
In terms of the “pay now argue later” principle confirmed in the Metcash case, the taxpayer must make payment to SARS unless, in terms of the provisions of section 164 of the Tax Administration Act, it can persuade SARS that the payment of the tax should be suspended. If this application is unsuccessful then SARS’s decision may be taken on review. In order to challenge the decision of SARS in a review it is necessary to understand the relevant administrative law principles set out in, inter alia, the Promotion of Administrative Justice Act. This requires administrative law expertise which good litigators have in spades.
For example, in a review hearing a judge will not test whether SARS was wrong in deciding not to suspend the payment of tax, but rather whether it was “reasonable” in so doing. This significantly informs how the suspension application to SARS is drafted.
In respect of the court process, no-one wants to go to court. It is costly, time consuming and absorbs senior management resources. There are plenty of opportunities to settle a tax dispute matter before court. These include the Alternative Dispute Resolution Process as well as other settlement meetings with SARS.
However, unlike in the “old days” there are no cosy meetings over cups of coffee. Instead, by way of example, at a recent meeting SARS brought five representatives most of whom were from their Large Business Centre.
An understanding of the tax technical aspects of the dispute by the taxpayer is simply not sufficient at these meetings. They also require people skilled in dispute resolution and with a proper understanding of the prospects of success at trial. For example, it is not possible to understand whether a proposed settlement is a good or bad settlement for the taxpayer unless it has an understanding of its prospects of success at trial. This, in turn, requires an understanding not only of how strong the tax technical position of the taxpayer is in relation to the tax dispute, but also the ability of the taxpayer to prove its case, inter alia, through its witnesses.
South African taxpayers are now following the rest of the developed world in understanding the complexity of the tax dispute process and using law firms to provide the relevant expertise in these matters. We estimate that the quantum of the tax dispute matters being dealt with by our firm over the last few months is in excess of R20 billion.