Tax Administration Bill (TAB) [B11-2011]: public hearings Day 1

Meeting report

Introduction
The Chairperson welcomed Members and delegates. He also welcomed observers from the National Treasury and the South African Revenue Service (SARS).

PricewaterhouseCoopers. Presentation
Prof Osman Mollagee, Associate Professor, University of the Western Cape (UWC), Partner and Director: Tax Technical, PriceWaterhouseCoopers (PWC), introduced his firm's presentation, of which the agenda was the balance of the Tax Administration Bill (TAB, the Bill), the Tax Ombud, legal professional privilege, remittance of penalties, understatement penalties, and other submissions.

The balance of the Tax Administration Bill (TAB, the Bill): additional powers and obligations
PWC had noted in the present Bill a significant increase in the powers granted to SARS for the purpose of administering tax acts as well as the obligations placed on taxpayers. PWC had listed these additional powers and obligations in its written submission.

Mr Kyle Mandy, Head: Tax Technical, PriceWaterhouseCoopers (PWC) highlighted:
• SARS, under the Bill, would have additional powers of inspection
• additional powers to interview taxpayers
• powers to search without a warrant
• right to demand security for payment of taxes
• powers to accelerate tax payments
• powers to seize and preserve assets
• powers to hold third parties liable for the payment of tax debts
• the power to hold back refunds, subject to audit
• significantly increased penalties
• enhanced criminal offences

The above were just some of the additional powers granted to SARS under the Bill. (Slide 3).

The Balance of the TAB: additional rights granted to taxpayers
There were just a few additional rights granted to taxpayers (slide 4). For example:
• the introduction of the tax ombud (see further, slide 6)
• the right of taxpayers to be kept informed of the audit process – however, PWC had concerns on the limit placed on those rights, and the ability of SARS to over ride those rights
• the reduction in prescription of tax debt from 30 years to 15 years – a very minor concession by SARS
• the permanent voluntary disclosure programme, which PWC welcomed.

The Balance of the TAB: proposals to improve the balance of the Bill (slide 5)
The Bill as it stood, contrary to what SARS had presented to the Committee, was far from balanced. Balance did not amount to having in place checks and balances in the form of approvals by senior SARS officials in order to invoke certain of SARS' powers. This was not balance.

Balance came when additional powers and obligations granted to SARS and imposed on taxpayers respectively were balanced with additional taxpayer rights. This Bill was sorely lacking in that respect.

PWC was concerned at the potential of abuse of most of these additional powers that would be granted to SARS, against compliant taxpayers. These were some practical examples:

SARS had the right to audit taxpayers: with this PWC had no issue. However, in certain circumstances, SARS would be granted the right to over-ride the requirement to inform taxpayers of the progress of the audit process. These circumstances included where, in SARS opinion, the outcome of the audit would be prejudiced. The example that SARS used in its memorandum of objects was where assessments were about to prescribe. In this situation SARS would ignore that right of taxpayers to be informed of the progress of the audit and issued assessments without obtaining representations from taxpayers before raising those assessments, on the grounds that the assessment was about to prescribe, notwithstanding that SARS had between three and five years in which to raise assessments. Then what SARS often did was to make the date for payment of that assessment the day after the date of that assessment. SARS would then appoint the taxpayers' bankers as an agent, under the old legislation, or send the bankers a notice to pay the taxpayer's debts, under the proposed legislation, and effectively collect payment immediately. This was not a theoretical example. This actually happened in real life and PWC encountered it on a regular basis. It was becoming more and more commonplace, particularly around the end of the Government's financial year when SARS was under pressure to collect revenues.

Prof Mollagee assumed that the majority of SARS officials were reasonable people and the majority of taxpayers were compliant. It was the fringes that were a problem. SARS had looked at only one extreme. This was PWC's complaint. This was the extreme where one had a reasonable SARS auditor, but a downright abusive taxpayer. PWC supported SARS need for this power in such cases.

At the other end of the spectrum was the scenario that was not dealt with. This was where one had a reasonable taxpayer but there was a SARS official who had the tendency to abuse SARS' powers to operate as a law unto themselves. The proposed legislation would open the door to that kind of abuse. PWC wanted SARS to protect ordinary citizens. Prof Mollagee gave examples. PWC requested SARS that if it put out in the public domain a statement of its interpretation, taxpayers should be able to rely on that. The meaning of official publications should be broadened.

Search and seizure (slide 18 'Other submissions')
Constitutionally the right of private South African citizens against search and seizure was a right that was not easily infringed. The Constitutional Court had made a point of clarifying that. One of the safeguards when that right could be infringed was when there was a warrant. This Bill provided for SARS officials to search and seize without a warrant. There was nothing in the Bill about holding SARS officials to account. It was important not to open the doors to abuse of power.

The issue of the conclusion of an investigation
SARS imposed on itself, and this was in keeping with the Promotion of Access to Justice Act (PAJA) anyway, the requirement to report to a taxpayer on the progress of an investigation and its intentions and give the taxpayer an opportunity to explain him or herself. This Bill gave SARS the power to waive that requirement in some circumstances. If SARS ran out of time, it might go ahead and assess the taxpayer for tax anyway without giving the taxpayer a chance to offer an explanation. This was a particular concern of PWC.

The due date (slide 18)
Once an assessment was issued, a taxpayer normally expected a period of 14 days or 30 days, for example, in which to pay. However, there were now assessments being issued which cited a due date which was the same as the date of the assessment, or even before the assessment was issued. Again, PWC thought it only fair to have some lead time.

In this regard, it was important to note that interest began from the due date.

Collection of taxes from third parties (slide 18)
SARS had the authority to instruct the taxpayer's bank or employer to remit funds to SARS pay the taxpayer's tax debts. Again, PWC believed that this was a power that SARS needed, since sometimes people did not pay their taxes, but PWC understood that this power was to be used subject to two considerations:
• as a last resort
• and with due consideration for other hardships that might be caused.
These two considerations should be included in the proposed legislation. Prof Mollagee quoted 'live examples' of hardship, including job losses, caused by not observing these considerations.

Differentiation between non-compliant and compliant taxpayers (slide 4)
Mr Mandy said that SARS had indicated to Members that this Bill differentiated between complaint taxpayers and non-compliant taxpayers. However, PWC submitted that the Bill did not.

The tax ombud (slide 6)
In general, PWC welcomed the proposal for a tax ombud. It was something that had been a long time in coming and PWC supported it wholly. However, PWC had some concerns on the independence of the tax ombud.
• The Bill proposed that the tax ombud should be funded by SARS
• The employees of the tax ombud would be employees seconded from SARS.
PWC was a firm of accountants and as such distinguished being factually independent and being seemingly independent. The above two factors would raise doubts in the minds of taxpayers that the proposed ombud would be factually independent.
• the limited powers granted to the tax ombud. These powers were limited to review and mediation of administrative matters. PWC had no concern about the administrative matters: these conformed to international precedent and into the scope of this Bill itself. However, the ombud would have no power to compel SARS to do anything. This was a particular concern to PWC. In its proposed form this was nothing more than a legislative form of the existing SARS Service Monitoring Office, and created an additional layer through which taxpayers would have to go before they could have access to justice.

PWC suggested that:
• the ombud office should be financed directly from Treasury itself.
• the ombud office should have its own employees, not those of SARS.

More importantly, PWC recommended that
• the ombud office should be granted the power to compel SARS to act, to stop acting, or refrain from acting in relation to administrative matters. There was international precedent for this. There was precedent in the USA in the United States Taxpayer Advocate Service This had the power to issue taxpayer assisted orders on the Internal Revenue Service – an order to the IRS to either act stop acting or refrain from acting in relation to administrative matters. Similar powers should be granted to the ombudsman in South Africa.

Legal professional privilege (slides 7-12)
Legal professional privilege had existed for over three hundred years and had its origins in the United Kingdom. The basis of it was that communication between lawyers and their clients should be treated as confidential. Such was undoubtedly in the public interest. Ultimately legal professional privilege enhanced compliance. However, not all communications between clients and lawyers were privileged. The requirement was that the legal advisor was acting in his professional capacity, in confidence, and not for the purposes of committing a crime. Thus advice to aid and abet was not covered by legal professional privilege.

However, most tax advice was, today, not provided by lawyers but by accountants. In the past it was otherwise. PWC submitted that tax advisors filled a vital role. Without them, there would be more non-compliance. Most tax advisors would not advise a client who was not prepared to be compliant.

PWC submitted that the present arrangements for legal professional privilege gave an unjustified competitive advantage to lawyers over tax professionals. Moreover, lawyers were, in most cases, not more competent to give advice on tax than accountants. Also many professional practices now contained a mix of accountants and lawyers.

PWC submitted that, on the basis of precedence in other jurisdictions, it was desirable to extend legal professional privilege to accountants. This had been done in the USA. PWC wanted a similar extension in South Africa, using the New Zealand model as a basis, and to have this included in the Bill.

Remittance of penalties (slides 13-16)
PWC recommended that penalties should be remittable in full. The only requirement for remittance of penalties should be that reasonable circumstances existed for non-compliance.

Understatement penalties (slide 17)
PWC recommended that taxpayers should be free to adopt reasonable tax positions without fear of understatement penalties. (See PricewaterhouseCoopers documents for full details].

South African Institute of Tax Practitioners (SAIT) submission
Mr Stiaan Klue, SAIT Chief Executive Officer, commended the Bill's drafters for taking cognisance of the Constitution of the Republic of South Africa Act 108 of 1996 (‘the Constitution’) and consulting widely prior to the tabling of the TAB. The harmonisation and incorporation of all the administrative provisions of the various fiscal statutes of South Africa, other than the Customs and Excise legislation, into one piece of legislation was supported. The Bill was a first step to consolidation. The style used in drafting the Bill was also welcomed and was certainly easier to follow than the other fiscal statutes.

Legal professional privilege
Mr Klue believed that it was important to increase tax collection to help grow the economy and deliver services. It was, however, very important to achieve a balance between the taxpayers and SARS.

The TAB sought to introduce additional information gathering powers for SARS, which the Institute supported in order to bring tax evaders to book. However, this must be balanced with taxpayers’ rights to privacy and legal professional privilege.

It was contended, in line with international views, that not to confer and recognise legal professional privilege in respect of all duly registered tax practitioners was iniquitous and might be constitutionally invalid. The Institute's view was supported by research done by Professor Lynette Olivier and published in SA Law Journal in 2009.

Notwithstanding the above, and while supporting Mr Mandy's argument in favour of following international precedent for establishing legal professional privilege, Mr Klue felt that it was necessary to take a step back. South Africa was a unique country. There had not been an in-depth study of the South African situation.

The Institute recommended that it would be far preferable if clients of registered tax practitioners obtained legal professional privilege, where advice or assistance procured from an attorney, advocate
or a tax practitioner were treated equally. The training which the tax advisor had undergone should not result in a distinction being drawn and the consequences facing the taxpayer.

Recovery of costs from SARS
The Institute was concerned that the draft TAB did not address the manner in which taxpayers should
be entitled to recover costs from SARS, where SARS, for example,
1. abused its powers under the law; or
2. where taxpayers incurred costs as a result of the inefficiencies of SARS; or
3. called on a third party to attend to an enquiry into the tax affairs of another party (taxpayer).

The Institute was aware that taxpayers had, on numerous occasions, had to submit documents to SARS and, unfortunately, those documents were lost by SARS and taxpayers had to
supply further copies thereof, sometimes copies of the same documents having to be
submitted on two or three or, in some cases, six occasions.

The Institute appealed that taxpayers should be entitled to recoup both actual and wasted costs
of, for example, the printing of copies under the tariff referred to in the Promotion of Access to Information Act 2000 (Act No. 2 of 2000) (PAIA).

In addition, taxpayers should also be entitled to recover the wasted time and effort and professional costs incurred in attending to SARS repeated calls for the same information, despite the fact that that information had been submitted and had been lost by SARS.

Tax Ombud
Mr Klue said that, while SARS should have extra powers, and commended the introduction of a Tax Ombud, it was important that the Tax Ombud should be independent of SARS – and perceived as independent - and report directly to the Standing Committee on Finance, after consultation with SARS and the Minister of Finance.

Clause 3 – Tax acts to be administered by SARS
Clause 3(2)(a) refers to “future tax period”. The concern was that SARS might request information regarding a future tax period, despite the fact that the transactions relating thereto had not yet been finalised. It was hoped that the wording contained in the clause would not entitle SARS to call for information prior to the conclusions of transactions affecting future tax periods.

It was unfortunate that clause 3 only referred to the powers available to SARS, without setting out what remedies taxpayers might have where SARS either abused its powers or failed to comply with the standards imposed under the provisions of Section 195 of the Constitution of the Republic of South Africa, Act 108 of 1996, as amended (“the Constitution”).

Clause 8 - Identity cards
The requirement that SARS officials must produce their identity card was supported.

The Institute wanted it to be clear that, should an official fail to supply the taxpayer with such proof of identity, the taxpayer had every right to assume that that person was not a SARS official.

Clause 9 - Decision, notice, or communication
It was noted that decisions made by SARS officials might be withdrawn at the request of a taxpayer or
otherwise. Clearly, any withdrawal of a decision must comply with the constitutional imperative contained in Section 33 dealing with the right to administrative justice and, as more fully set out in the Promotion of Administrative Justice Act 2000 (Act No. 3 of 2000) (PAJA).

The Institute commented that Clause 9, therefore, was not only subject to the provisions of the draft TAB itself, but also to the right to administrative justice contained in the Constitution itself.

Clause 37 - Field audit
Clause 37(1) referred to “reasonable prior notice”.

The Institute recommended that guidelines should, therefore, be set as to what constituted “reasonable prior notice” and SARS officials needed to be sensitive to the manner in which the period was determined. It was important also to ensure that the reasonability was consistent within SARS offices and across the country.

Clause 42 - Keeping the taxpayer informed
The proposal to inform taxpayers as to the status of the audit conducted on their affairs was commended.

Search and Seizure
Clause 59 referred to the power that SARS might apply for a search and seizure warrant from a
magistrate.

The term “magistrate”, however, was not defined.

The Institute recommended that the term “magistrate” should be defined similar to the definition of “judge” contained in Clause 1 of the draft TAB.

Serious intrusion into the taxpayer’s right to privacy was made with a search and seizure.

It was submitted, therefore, that in all circumstances, regardless of the amount, which might be the subject of an investigation, a judge should always preferably be required to approve the search and seizure warrant and not a magistrate.

Clause 67 - General prohibition of disclosure
The rationale for the provisions of clause 67(4) of the TAB was understood.

However, it was critical that the correct balance be struck between a taxpayer’s right to privacy enshrined in
Section 14 of the Constitution and SARS’ reputation. The proposed provision further undermined the taxpayer’s right to privacy and also it further watered down unnecessarily the secrecy provisions currently contained in Section 4 of the Act.

The Institute recommended that the provision should only be capable of being used where taxpayers had made false allegations against SARS and the reference to information in Clause 67(4) should also be to false information, not merely to rebut information generally disclosed by a taxpayer.

Clause 172 - Amendment of statement
The Institute noted that SARS might amend the amount of tax due specified in the statement, where SARS was of the opinion that the amount referred to in the statement was incorrect.

The Institute recommended that the TAB should also allow for taxpayers to recover costs where SARS incorrectly filed a statement with the court, as a result of SARS misallocating payments or for some or other reason failing to recognise payments made by the taxpayer.

Discussion
The Chairperson observed that the submissions spoke to each other, though there were divergent views which helped Members to have a broader understanding.

Mr N Koornhof (COPE) ask PWC to comment on the proposal of legal professional privilege for tax practitioners, and if it was in a hurry for this legislation. He believed that SARS wanted to expedite the Bill. Alternatively, he asked if PWC though we needed more time to do a proper job.

Mr Mandy replied that PWC was not in a rush, but SARS wanted these additional powers.

Mr Mandy added that PWC was part of the consultation process. This matter was raised as part of the consultation process and was not new to them.

Dr D George (DA) asked if PWC why it was so concerned to have confidentiality between client and tax practitioner. Was there something to hide?

Prof Osman Mollagee confirmed that PWC urgently wanted legal professional privilege for tax practitioners, but one must not be in denial that there were non-compliant taxpayers. The likelihood of confidentiality strengthened the likelihood of increasing and enhancing compliance. He pointed out that, as in criminal law, where the lawyer needed to know everything, in order to advise and act for a client, the tax practitioner needed to know everything that was relevant to the particular case. Thus confidentiality between client and tax practitioner was vital.

Mr Mandy added his support to Prof Mollagee's view.

Mr Klue agreed that there had been consultation. It was necessary to take a step back and view the legislation holistically. We should learn from our experience. He gave the new Companies Act as an example of the danger of rushing the legislation, and appealed for all concerned to learn from our experiences to get the best from the legislation.

Ms Z Dlamini-Dubazana (ANC) asked PWC where exactly it would like to see the tax ombud. The location of was a problem for both presenters. She also asked about the powers of the ombud.

She had reviewed what SARS had proposed in the consultation process, and asked for more detail on what PWC was proposing so that the Committee could determine that was the right way.

Dr George noted that SARS had argued that staff seconded from it could work better in the ombud office – he asked PWC to please comment.

Dr George asked the SAIT why it had a problem with the tax ombud's reporting to the Minister of Finance, as proposed in the Bill.

Mr J Marais (DA) pointed out to PWC that the ombud him or herself would not, according to the Bill, necessarily be seconded from SARS, only the staff. The ombud would be independent because appointed by the Minister and accountable to the Minister. He asked for clarity.
 
Mr D van Rooyen (ANC) felt that it would be beneficial to know how PWC and SAIT approached the staffing of the ombud office.

Mr Mandy replied that the ombud office staff needed an understanding of administrative law. It was not necessary that they be from SARS itself.

Prof Mollagee added that the ombud office should have suitable staff; they could even be ex-SARS employees, but there should not be a direct umbilical cord between ombud and SARS.

Mr Klue was concerned at the potential for a master-servant relationship. He hoped that ombud would not be a toothless body, which he feared it would be if it were still part of the same organisations. There was a danger of sanitising the reports of the ombud and emphasised the importance of the perception that the ombud be independent. In the USA the ombud reported to Congress. Officials did not take criticism lightly. Such reporting might be a brake on search and seizure, and such reports would not be sanitised. The ombud should report first to Parliament. At the same time, there should be no collusion with the Minister of Finance.

Dr George asked PWC if it accepted the need for search and seize without a warrant but there needed to be some kind of control mechanism or if PWC did not support it.

Prof Mollagee confirmed that PWC agreed that SARS needed search and seize, especially if someone was shredding files. One must not deny that such taxpayers existed; taxpayers would support this too. However, there was nothing in the Bill to check abuse of the power of search and seize. We should not be in denial that there may be people who would abuse the power.

Mr Mandy said that PWC accepted search and seize but wanted checks and balances, and a review process.

Prof Mollagee gave examples of clients against whom SARS had invoked provisions to collect tax debts at short notice and were thereby unable to pay employees. The use of powers of collection needed to take account of clients' financial situation and be invoked after exhausting all the regular payment mechanisms.

Association of Chartered Certified Accountants (ACCA) submission
Mr Nicolaas van Wyk, ACCA Head: Technical Policy, appreciated the efforts of SARS in holding consultations. ACCA believed that SARS should be a model for all legislative drafting processes. The TAB should not be postponed. ACCA believed SARS could implement it.

Mr Van Wyk emphasised the need to balance rights and obligations between SARS and the taxpayer. He concurred with the previous presenters that significant new powers were introduced by the Bill. Taxpayers needed to be safeguarded.

ACCA supported the simplification of the tax system as proposed by the TAB. Positive features were consolidation of administrative parts of various tax structures. There were, however, risks of increase unnecessary compliance costs for taxpayers due to significant new powers allocated to SARS.

The presentation was in three parts: (1) the 12 tenets of taxation; (2) specific issues of concern; and (3) suggestions on tax simplification.

 Mr Van Wyk pointed out that South Africa was very successful in the amount of tax collected. However, he complained that SARS could select individuals for random investigation even though compliant. SARS should be prevented from carrying out frivolous enquiries. The implication of a new definition was that even small companies would have to conform to the International Financial Reporting Standards. SARS should review this, as it would be unnecessary and costly, particularly for small companies. There had been huge increase in investigations on small businesses in the UK, a country which made many mistakes these days. The cost of tax collection should not be transferred to another person (Section 47). It was the responsibility of SARS employees.

The 12 tenets of taxation
An explanation of this would assist the Committee in making a critical assessment of the Bill, as it was easy to get lost in the detail and forget the bigger picture.

The Bill was part of a rewrite of the Income Tax Act (1962). The Bill and any rewrite should support the 12 tenets.

(1) Avoidance versus evasion: [Note that the presentation document defined these terms wrongly]. The submission document stated that there was a clear division between tax avoidance (or planning, or mitigation), which was legal, and tax evasion, which was not. The former attempted to reduce the amount of tax that was payable by means that were within the law, while making a full disclosure of the material information to the tax authorities.

In contrast, tax evasion worked outside the rules by hiding income through non- disclosure, or making wrongful deductions. Tax law must be clear and certain and businesses would always look to minimise the impact of tax as part of their normal commercial activity. But, while most businesses tried only to comply with the law, there were cases of convoluted tax planning schemes designed simply to exploit loopholes in the law.

ACCA did not support this artificial activity.

(2) Tax as a % of gross domestic product (GDP): levels of taxation should be stated as a % of GDP and the Bill should not increase the level of taxation by increasing the cost of compliance; also so imposition of any new tax should be subject to impact assessment.
(3) Tax simplification and stability: companies spent about two months a year on complying with tax regulations; it was small businesses that suffered the most. Reduced ability to trade meant fewer jobs, less profit and less tax.
(4) Openness, transparency, and accountability: consultation and stakeholder briefing was fundamental.
(5) Certainty
(6) tax competitiveness
(7) Efficiency
(8) sunset clauses
(9) A clear link from tax to spend
(10) avoidance of double taxation
(11) Human rights
(12) tax shifting – green taxes
(For full details, see the submission document, pages 2-5)

Specific comments [Please see table in submission document, pages 6-10]
Clause 1: insert a minimum fine amount above which an offence would be deemed to be a serious tax offence.

Clause 3(2)(a)(i): remove the term “future tax period”.

Clause 16: the mandate of the Tax Ombud should be expanded, for example, to review faulty procedures and frivolous investigations conducted randomly by SARS.

Clause 26: insert a new section requiring SARS to inform the taxpayer that additional information was being obtained from third parties, and a new section requiring SARS to compensate the third party providing the information to SARS.

Clause 28(1)(a) and (b) to be replaced.

Clause 34: replace with a new definition of Financial Reporting Standards.

Clause 353(1)(c), (d) and (e) to be replaced.

Clause 40 to be amended.

Section 47(1) to be removed; alternatively the Bill should provide for compensation to be paid to anyone required to appear before SARS official.

Clause 241 should be amended to the effect that SARS and professional bodies should issue a guidance note for tax practitioners and assist and advise member on their professional conduct in relation to taxation. The ACCA was already a signatory to a similar agreement with the Inland Revenue in the UK.

(Please see presentation document, and, more especially, the Association’s submission document for full details.)

Proposal to appoint an Office of Tax Simplification
SARS and National Treasury should be congratulated on the new approach but the tax ombud should be part of a permanent office to simplify the tax system and reduce uncertainty for small businesses.

A simplified tax regime would greatly enhance the
ability of small businesses to focus less time on tax compliance and more time on growing their
businesses and employing more people.

The drive towards tax simplification is not unique to South Africa, indeed the new Government in
the United Kingdom (UK) recently established the Office of Tax Simplification to conduct a review
and make recommendations on how to simplify the tax system, ease administration and reduce
uncertainty for small businesses.

An Office of Tax Simplification would be able to provide independent advice to Parliament and National Treasury.

It was clear that the South African revenue authorities had already made some progress towards
simplification and should be congratulated. However, this process should be part of a permanent office, perhaps and independently appointed committee consisting of business people and Members of the Standing Committee to simplify the tax system, ease administration, and reduce uncertainty for small businesses. (See the Association's submission for full details).

Mr Johnny Eliades, Technical Panel Member, ACCA, who, in his practice specialised in enterprise development, said that this Bill, if it was not considered very carefully, 'would kill the spirit of the taxpayer'. He gave three examples from his practice of clients who had suffered from apparent errors in tax administration. This kind of thing happened every day.

South African Institute of Professional Accountants (SAIPA) submission
Mr Ettiene Retief, SAIPA Chairperson: National Tax Committee, commended SARS on the amount of work it had put into the Bill. SAIPA had only limited issues with the Bill. One must not forget the benefits that could be obtained from some of these provisions.

Clause 16(1)
The mandate of the Tax Ombud was, subject to Clause 18(4), review and address any complaint by a taxpayer regarding a service matter or a procedural or administrative matter arising from the application of the provision of a tax Act by SARS.
 
Clause 20(2)
The Tax Ombud’s recommendations were not binding on taxpayers or SARS. Thus it had no point unless it was strengthened.

SAIPA agreed with SARS that the Tax Ombud should not be engaged in interpretation of tax law, and such should remain the domain of the courts.

SAIPA recommended that section 20(2) be amended so that the decision/ruling of the Tax Ombud be binding to allow for fair and reasonable administrative action.

SAIPA recommended that section 20(2) be extended to allow that a binding decision/ruling of the Tax Ombud could be referred to court if either party was dissatisfied with such.

SAIPA recommended that a binding decision/ruling of the Tax Ombud should carry some consequence for failure to comply (other than such decisions/rulings that have been referred to court).

If a well-resourced Tax Ombud Office with the necessary binding authority was forthcoming, SAIPA would support the re-location of resources from the SSMO division to the Tax Ombud’s office. It might not be necessary to have a separate SSMO division since its function would fall within the office of the Tax Ombud.
(Slides 3-5)

Mr Retief pointed out that SAIPA did not disagree with the proposed framework of the Tax Ombud but was concerned existing remedies within SARS often proved unsuccessful. There was an attitude that clients were 'on a time-line' to submit and nothing was forthcoming on SARS side. Clients had the option to go to court, but most did not have sufficient money to go to court to obtain relief.

Search without warrants
SAIPA recognised the need and justification for SARS to have the legislative power to search and seize documentation and information without first obtaining a search warrant.

SAIPA had some concerns as to abuse of these powers and possible fraudulent use of Clause 63 by unauthorised or non-SARS officials.

SAIPA recommended that section 63 be amended to require the SARS officials who would be carrying out the search must present documentation, issued by the Commissioner of SARS himself, which: clearly identified the SARS officials who would be carrying out the search; provided a reference to allow the person to contact and confirm validity and authorisation of the search; provided the same information, scope of search, and reasons for search as would have been contained in a search warrant; provided justification why a search warrant could not first be obtained; and provide information with regards to the person’s rights
(Slides 6-7)

Legal professional privilege
Mr Retief pointed out that legal professional privilege should be in our law for two main purposes: every person should have the right to understand the law without the fear of self-incrimination while preserving the right to privacy. To deny that did not seem constitutional or conducive to a fair tax system. It should be the nature of the advice given, not the person who gave it, which determined whether legal professional privilege should apply. Legal professional privilege was currently recognised in common law, but was restricted to attorneys. However, the reality was that many taxpayers sought legal council, with regards to tax law, not only from attorneys, but most often from professional accountants and auditors. Theoretical and practical knowledge was required to give tax advice. This legal professional privilege would not impede on SARS' ability to do its job. Practitioners were not asking for privilege to hide behind.

Other countries, such as US, UK, New Zealand, Australia, and Germany, had recognised professional privilege as part of tax administration.

Professional privilege was of great importance to allow a taxpayer the access to proper legal counsel, which should not be limited to communication made for the purpose of litigation only, but to allow a taxpayer the freedom to seek advice and relevant counsel with regards to the interpretation and application of taxation law. The legal privilege would allow the taxpayer to obtain proper advice, which could only be obtained when the professional giving the advice had all the relevant facts and information on the table.

It should be noted that the legal privilege that SAIPA proposed would not impede the collection or assessment of taxes, as SARS still had the powers and authority to request information or supporting documentation from the taxpayer, conduct audits, conduct search and seizure, appointment of agent to settle outstanding taxes, and many more. Also, the legal privilege would not override the person’s obligations with regards to reportable arrangements.

SAIPA recommended the following framework for legal privilege:
 
The legal privilege would only apply to ‘tax advice documents’ to the extent that such was held by the tax practitioner that was appropriately qualified to give such advice, who had a significant function of giving advice on tax law, registered with a professional body or institute, which had an appropriate professional code of conduct and disciplinary processes enforcing compliance with such code of conduct.
(slides 8-13)

Jeopardy assessment and personal liability of responsible third party
SAIPA recognised the need and justification for the power bestowed in terms of Clause 94 (jeopardy assessment) and Clause 159 (personal liability of responsible third party). However, the taxpayer or effected person should be allowed the right to object and appeal any assessment issued or decision made by SARS, and as such SAIPA recommended that the relevant sections be amended to recognise such right.
(Slide 14)

Refunds due to taxpayer
Clause 190(3) allowed SARS to authorise the payment of a refund before the finalisation of the verification, inspection or audit relating to such refund, if the taxpayer provided suitable security.
SAIPA supported this section. However, the cost and accessibility of security for small business should be considered. The refund of taxes had an impact on cash flow and business sustainability. Providing security without a clearly specified validity period could have adverse consequences for companies.

SAIPA recommended that Clause 190 be extended to provide that if within a stipulated period (such as a six-month period), refunds were not paid out to taxpayers and audits are still incomplete, the refund should be paid out to the taxpayers although security had not been delivered, provided that the taxpayer was not be guilty of stalling the audit or verification process.
This was not intended to interfere with SARS audits or other enforcement action, but rather to ensure fair and reasonable tax administration.
(Slides 15-16)

Relationship with controlling bodies
SAIPA acknowledged the need for section 240 (3) and 241. It was not within the professional norm of a tax practitioner to participate in unlawful practices which transgressed any tax laws, and professional bodies had an obligation to ensure proper governance within themselves.

As to the tax discipline
 SAIPA made the following recommendations:
Formal procedure to be followed by SARS to report the tax practitioner to his/her controlling body. The
Commissioner might only lodge a complaint if a registered tax practitioner acted unlawfully. There should be provisions for dealing with tax practitioners that did not belong to any controlling body
(Slides 17-19).

Conclusion
The Bill provided for a significant evolution of our tax system and its administration, which SAIPA supported.
 
SAIPA held the taxpayer’s right to fair and reasonable administrative justice at the highest of priority, while at the same time acknowledging the importance of taxation, and the powers and authority required by SARS to administer and collect such tax effectively.

SAIPA believed that a fair and balances tax system was crucial for tax morality in South Africa. (Slide 20)
(Please see also South African Institute of Professional Accountants. Response to Tax Administration Bill [B11-2011]

Victoria Mxenge Group of Advocates Opinion on the Constitutionality of the Tax Administration Bill
Adv Steven Budlender and Adv Gilbert Marcus, Victoria Mxenge Group of Advocates, submitted that ultimately the Bill was constitutional in all respects.

Advocates Budlender and Marcus's views had been sought by SARS on the constitutionality of the Bill.

In the light of the existing jurisprudence of the courts, Advocates Budlender and Marcus had concluded that the provisions of the Bill were likely consistent the Constitution.

SARS had asked them to set out their reasons for their conclusions on four discreet issues:

The general approach to assessing whether the Bill was consistent with the Constitution;

The constitutionality of clause 63 of the Bill, dealing with search and seizure without warrant;

The constitutionality of clause 164 of the Bill, dealing with the “pay now, argue later” principle; and

The constitutionality of clauses 180 – 184 of the Bill, dealing with the collection of a tax debt from third parties.

Adv Budlender, in Adv Marcus's absence, dealt with these issues in turn with reference to relevant cases.

In particular, Clause 63 was consistent with the Constitution for five main reasons, which were explained, with reference to relevant cases.

The Constitutional Court had exhaustively considered whether the 'pay now, argue later' provision (Clause 164) was unconstitutional and had determined that 'pay now, argue later' was consistent with the Constitution in relation to a tax act. Moreover, Section 88 of the existing Income Tax Act was in substance identical to this Clause, although this Clause gave more detail.

Also the Advocates' conclusions in regard to Clauses 179-180 of the Bill were that other comparable countries had similar provisions for the recovery of tax debts.

In some of the comments seen from interested role-players prior to the Bill being tabled in Parliament, the suggestion had been made that powers conferred on SARS by the Bill were “absolute”, “unfettered” or “draconic”. The Advocates were of the respectful opinion that these views were simply unfounded. The
Bill did not afford SARS absolute, unfettered or draconic powers. The very notion of unfettered or absolute powers was a contradiction in terms. The exercise of all powers was subject to consistency with the Constitution and the control of the Courts. Second, far from undermining the powers of the judiciary, the Bill
preserved and entrenched the role of the judiciary as a check and balance in respect of SARS powers. Third, the powers conferred by the Bill were in no way unprecedented. Similar powers were conferred on various bodies by multiple pieces of legislation in South Africa and similar powers were conferred on revenue
authorities in comparable foreign countries.

Adv Budlender argued that this Bill was more protective of privacy than the Criminal Procedure Act, which did not have an exception for people's homes. 'Far from this being some sort of unprecedented bill which is much more invasive of privacy than every other act, it is actually less invasive: there are additional checks and balances.'

Adv Budlender pointed out that the Constitutional Court had expressly recognised that search and seizure without a warrant was constitutionally permissible provided that checks and balances were put in place.

One needed to understand what the purpose of this provision was. In the case of discovering someone shredding or burning documents, there was no time to obtain a warrant or authorisation from the Commissioner himself: speed was of the essence. At least 20 Organisation of Economic Cooperation and Development (OECD) countries also had search and seizure without warrant.

Adv Budlender stated that it was perfectly constitutional for the Bill to confer the protection of legal professional privilege only on lawyers rather than accountants. Our law had done that for many hundreds of years. The right to a fair criminal trial was an essential part of the Constitution, and that was where legal professional privilege came in. He did not know of any country in the world where it was a constitutional requirement, or Bill of Rights requirement, for legal professional privilege to be extended to accountants. It was a matter of policy and not of a constitutional requirement

Discussion
Mr Koornhof asked Adv Budlender's opinion on whether extending legal professional privilege was a good or a bad thing.

Ms Dlamini-Dubazana asked Adv Budlender about the use of the term 'official' in Clause 61(3).

Mr E Mthethwa (ANC) asked Mr Johnny Eliades what he charged his clients.

The Chairperson assumed that Adv Budlender had given the same opinion to SARS, as the Advocate had been requested, by SARS, to undertake this assignment. Moreover, it was probably not undertaken just pro amico [for a friend]. 'This is a sponsored view.' While not questioning the integrity of Adv Budlender's legal practice, the Chairperson asked him how independent his view was.

The Chairperson had not heard anything in the earlier presentations that morning that ventured to suggest that there was illegality or unconstitutionality of the Bill.

It would have been better for SARS, through the National Treasury, when the Committee would interact with National Treasury, to make its own assessment and present its own views.

The Chairperson inferred from the presentations that there was a subtle expression of the need to check and balance SARS with the office of the ombud as an option. However, he had not heard anyone saying how to strike a balance in order to protect the interests of the ordinary citizens of South Africa in terms of making sure that everyone paid tax and the rights of SARS at the same time. What were the possibilities of the office of the ombud being abused to frustrate the efforts of the tax administrators to achieve the country' goals.

Mr Eliades' examples were very relevant, as we had set 2011 as the year of job creation. The impact of the economic recession on small and medium enterprises (SMMEs) was of special significance as it was the SMMEs that accounted for most job opportunities. Mr Eliades' point about ensuring that third parties were not inconvenienced was most important in this regard. As assets of small companies were frozen, it had to be asked what happened the wages of the employees. National Treasury should have taken note of that point. He hoped Treasury would be able to respond to some of those issues in a subsequent meeting.

The Chairperson did not want to embarrass Adv Budlender, but it was important for the Committee to be at ease with his submission.

Adv Budlender obviously could not speak about why he was presenting here as opposed to presenting as part of a National Treasury engagement, but it was absolutely true that it was SARS which had asked him to make the submission and it was SARS who was paying him. However, 'My views are my views, whether SARS likes them or not'.

Adv Budlender interpreted the Chairperson's question as why these constitutional concerns were being raised now, in the light of his perception that there were no constitutional concerns being raised by others. With great respect, Adv Budlender, pointed out, this was a slight misperception.

If the Chairperson would read the written submissions made by the Law Society (see attached document) which did not request an oral hearing, he would see that the Society expressly took the view that certain clauses were unconstitutional.

In that context, Adv Budlender pointed out, SARS felt it appropriate to put before the Committee his views and those of Adv Marcus.

Moreover, some of the presenters this morning had said that search and seizure without warrant did not take account of the requirements of the Constitution. There was indeed a perception that some clauses might be unconstitutional, hence the need for his submission.

Adv Budlender gave his personal view on legal professional privilege. One should consider extending it only with extraordinary caution. The protection that was given to legal professional privilege in South African law was as high as any other principle imaginable. In other words, it was a cast iron principle, even though sometimes cumbersome in its effect on the criminal justice process, and for good reason.

However, to now go and extend that privilege to another area with people who were not subject to the same rules as lawyers, [was dangerous]. Some accountants were subject to professional rules, but not all those professional rules had the operation by law. The Committee should be very reluctant to consider extending it beyond lawyers, for fear of highly damaging consequences to the justice system and to the revenue system.

Clause 63(1) said that 'a senior SARS official may without warrant exercise the powers referred to in Clause 61(3)'. So even if there were other SARS officials on the ground doing the search, it had to be authorised by a senior SARS official who was satisfied on reasonable grounds that those three requirements were met. The authorisation had to come from a senior SARS official as per Clause 63(1). Adv Budlender was at pains to point out that he had not said that all the people doing the search would be senior SARS officials. It was the person giving the authority who must be a senior SARS official in terms of that clause.

 Mr Retief said that SAIPA was saying was that, if one wanted a fair and reasonable system of tax advice, one needed people who were far better versed in that field than an attorney. However, an attorney had that automatic benefit of a marketing tool. This did not give an opportunity for representation to the taxpayer.

As to why SARS should be able to collect better, many of these powers helped SARS to collect. However, you could not force people to pay tax merely through legislation. There were two basic factors that defined whether people would pay tax willingly: firstly, what their taxes were being spent on; and secondly the fairness of the tax system itself. These were the fundamental points of tax morality. Without them one would battle to collect taxes.

'SARS has done an extraordinary job of collecting taxes.' SARS was world-class in the way taxpayers submitted, the speed at which SARS assessed, and ability to collect those taxes. However, if the taxpayer lost faith in the system, tax morality would drop. Without a tax ombud, tax morality would drop dramatically. People should be able to get proper representation from a person competent and qualified to give tax advice and legal advice on tax law. SAIPA appreciated that it was a very delicate matter to extend legal professional privilege as it had the potential for abuse. SAIPA was suggesting that only people who were competent to do so and who were with a professional body with a proper code of conduct and mechanism where one could address these issues properly should in fact be extended this privilege. So SAICA was asking, in fact, for this privilege to be limited.

Mr Van Wyk supported the above view on legal professional privilege. 'It can be extended as long as it is managed appropriately.' This did not mean that it should not be extended. He disagreed with Adv Budlender. It was a simple conclusion that could be reached to expand the definition.

Mr Van Wyk agreed with the Chairperson that everyone should pay his or fair share of tax. What a fair share constituted was a political decision. Better service delivery would ensure better tax collection. However, tax had also a compliance cost that could be perceived as an additional tax. He quoted from ACCA's submission that it did not want to enter into the political debate on the appropriate level of tax and public spending, but substantial increases in tax would put a considerable burden on business and should be subject to an impact assessment. There should be a constant review of the tax system – hence ACCA's proposal for an Office of Tax Simplification.

The Chairperson adjourned the meeting until the following morning, 17 August 2011.