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On 28 June 2021, the South African Revenue Service (Sars) issued version 2 of its External Guide: Voluntary Disclosure Programme (the Guide). The Guide provides that the purpose of Sars’s Voluntary Disclosure Programme (VDP) is to encourage taxpayers to voluntarily take steps to regularise their tax affairs with the incentives of –
In Purveyors South Africa Mine Services (Pty) Ltd v Commissioner for the South African Revenue Service (SCA) (unreported case no 135/2021, 7-12-2021) (Mathopo JA (Petse AP, Schippers, Mokgohloa JJA and Molefe AJA concurring)), Purveyors South Africa Mine Services (Pty) Ltd (the taxpayer) entered into a suite of agreements (with cross-border obligations), in terms of which the taxpayer would operate air charter services in respect of an aircraft. The aircraft was stationed at OR Tambo International Airport when it was not in use. Pursuant to a technical opinion received by the taxpayer from its professional advisors, the taxpayer engaged in correspondence with Sars regarding the regularisation of value-added tax (VAT) supposedly due by the taxpayer in respect of the import of the aircraft. During the exchange of correspondence, an official of Sars communicated to the taxpayer that, inter alia, the taxpayer was liable for VAT and penalties. The taxpayer obtained a second opinion, wherein its professional advisors (against the backdrop of their initial opinion) agreed with Sars’s position regarding the taxpayer’s liability for VAT. No further steps were taken by the taxpayer until approximately a year later, when the taxpayer applied to Sars for VDP relief in terms of s 226 of the Tax Administration Act 28 of 2011 (TAA). Sars, placing reliance on s 227, rejected the taxpayer’s voluntary disclosure application (VD Application) because the facts contained therein had been previously disclosed and, thus, were not unknown to Sars.
The dispute progressed to the Gauteng Division of the Hight Court who – in dismissing the taxpayer’s VD Application – found that an element of compulsion was present at the time the taxpayer sought VDP relief (thereby indicating an absence of volition by the taxpayer). The taxpayer appealed the High Court’s decision to the Supreme Court of Appeal (SCA). The SCA expressed that the issue to be decided was whether Sars’s rejection of the taxpayer’s VD Application on the grounds of noncompliance with s 227 was legally sound.
The taxpayer contended that its historical exchanges of correspondence with Sars was irrelevant in the administrative decision-making process because the exchanges had no formal or binding effect on the taxpayer’s views expressed therein. The taxpayer contended that the VD Application had to be decided at the time it was made. The taxpayer contended that Sars’s prior knowledge of the taxpayer’s liability, which arose from the prior exchanges of correspondence did not bar the taxpayer from disclosing the default concerned nor did it affect the validity and voluntariness of its VD Application. In interpreting the term ‘disclosure’ in s 227 of the TAA, the taxpayer relied on commentary from legal authors to support its contention that the information disclosed was not required to be new or information, which was unknown to Sars at the time the VD Application was brought.
Sars contended that it was aware of the facts disclosed by the taxpayer in its VD Application relating to the disclosed default. In amplification, Sars submitted that its customs officials had previously warned the taxpayer that the aircraft had to be declared in South Africa and that VAT would be levied thereon. Furthermore, Sars contended that its confirmation of the taxpayer’s liability prompted the taxpayer’s endeavour to escape looming liability for VAT, penalties and interest. Consequently, Sars argued that the VD Application did not satisfy the requirements of s 227 because it was not voluntary.
Section 227 of the TAA sets out the following requirements for an applicant’s voluntary disclosure to be valid, namely:
The SCA observed that the appeal turned on the correct interpretation of s 227 of the TAA. In Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] 2 All SA 262 (SCA), the SCA instructed that, when interpreting statutes, the interpreter must consider the language of the provision considering the ordinary rules of grammar and syntax. In the Purveyors case, the SCA observed that, key to the interpretation of s 227, was to determine the meaning to be ascribed to the words ‘voluntary’ and ‘disclosure’. The SCA relied on the dictionary definition of the aforementioned words in order to purposively interpret the provision.
The SCA applied a textual interpretation and found that the onus rested on the applicant to establish on a preponderance of probabilities that its VD Application had been brought voluntarily. The SCA found that determining whether a VD Application was brought on an applicant’s own volition or prompted by compulsion was a question of fact, which entailed an examination of the prevailing circumstances precipitating the VD Application. In Reed v Minister of Finance and Others 81 SATC 383, the court (also the Gauteng Division of the High Court) expressed that an applicant’s disclosure must constitute a voluntary disclosure to qualify for VDP relief. The court expressed that, in making the administrative decision, the Sars official had to inquisitorially determine whether the specific disclosure was voluntary as a matter of fact. The court observed that there are no prescribed procedures, which the Sars official had to follow in the process of conducting her factual inquiry. It is my view that the Sars official, in making the administrative decision, must be guided by the requirements of s 227 (which may, for procedural purposes, entail a formalistic or checklist approach).
The SCA inferred from the language used in s 227, that the legislature intended to bar disclosures, which were –
The SCA held that the mischief sought to be removed by the enactment of the section was to guard against a situation where an errant taxpayer makes disclosures to Sars in the process of obtaining informal advice regarding its compliance status and, following the communication of the adverse outcome arising from the disclosures, attempt to escape fiscal liability by bringing a VD Application containing the same disclosures. The SCA held that the purpose of s 227 of the TAA is to afford a bona fide errant taxpayer immunity by voluntarily confessing its default to Sars (fully in all material respects), which default Sars has no knowledge of at the time it is informed, in order to enhance fiscal compliance.
In Endumeni, the SCA instructed that, when interpreting statutes, the interpreter must prefer a sensible meaning to be ascribed to the subject material and not one, which would result in an insensible or unbusinesslike outcome, or which would undermine the clear purpose of the enactment. The SCA found that s 227 of the TAA is not a penalty provision and, therefore, its application is aimed at aiding errant taxpayers to rectify their defaults (ie, liabilities, and/or misstatements or omissions in their tax declarations) by regularising their tax affairs. The SCA held that to grant VDP relief in accordance with the taxpayer’s interpretation of s 227 of the TAA would conflict with the intention of the legislature and the mischief, which the enactment sought to cure. The SCA observed that an errant taxpayer who is aware of its default would only take steps to rectify its default when it is clear that Sars intends to hold such errant taxpayer accountable, which would disincentivise an errant taxpayer from making a full and frank disclosure of its defaults which are unknown to Sars. The SCA held that its acceptance of the taxpayer’s interpretation would defeat the purpose for which the section was introduced (or undermine the clear purpose of the enactment as expressed in Endumeni) and bring about an anomalous result (or result in an insensible or unbusinesslike outcome as expressed in Endumeni).
After examining the prevailing circumstances precipitating the VD Application, the SCA found that –
– the taxpayer did not dispute that it had received any import VAT on the lease of the aircraft;
– Sars had warned the taxpayer about the implications of its non-compliance;
– the taxpayer was prompted to rectify its non-compliance by Sars’ warning and the opinions received from its professional advisors;
– the taxpayer was aware that penalties would be levied because of its default; and
– the VD Application was motivated by the taxpayer’s endeavours to escape its looming liability and not to voluntarily confess its default.
The SCA held that the taxpayer did not discharge the onus of establishing on a balance of probabilities that its VD Application measured up to the requirements of s 227 of the TAA. Consequently, the SCA held that the taxpayer’s disclosures did not fall within the realm of VDP relief and, therefore, the taxpayer’s VD Application could not be recognised as voluntary.
A taxpayer seeking VDP relief is required to take Sars into their confidence and make a full disclosure out of its own volition and in respect of a default which Sars is unaware of at the time of disclosure. The SCA’s judgment records that the first time the taxpayer reached out to Sars to disclose its default occurred on 30 January 2017; and Sars is recorded to have responded to the taxpayer’s e-mail on 1 February 2017. The SCA’s judgment further records that customs officials from Sars advised the taxpayer that, inter alia, VAT ought to be paid in respect of the aircraft on 1 February 2017. The SCA’s judgment does not disclose when the customs official gained knowledge of the taxpayer’s default (as well as whether their knowledge was independently developed). Considering the chronology of events set out in the SCA’s judgment, it is unclear whether Sars’ factually gained knowledge of the taxpayer’s default prior to the taxpayer’s first e-mail on 30 January 2017 (as contended by Sars). Although the SCA’s judgment records that the taxpayer effectively dragged its feet for approximately a year before bringing its VD Application, it is noteworthy that Sars similarly did not take any steps to collect the unpaid VAT and levy penalties and interest. The lesson to be taken from Purveyors is that if the taxpayer, instead of engaging in correspondence with Sars, immediately brought its VD Application on receiving PricewaterhouseCoopers’s first opinion, the taxpayer would have likely been granted VDP relief. A taxpayer desirous of applying for VDP relief may submit a VD Application to Sars via eFiling or at a branch office.
Samuel Mariens LLB (UWC) LLM (Tax Law) (UCT) is a legal practitioner in Cape Town. Mr Mariens writes in his personal capacity.
This article was first published in De Rebus in 2023 (Jan/Feb) DR 26.
