Tax Administration Bill [B11-2011]: public hearings Day 2

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Finance Standing Committee

15 August 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The South African Institute of Chartered Accountants commended the South African Revenue Service on its consultative process as its detailed workshops resulted in a piece of legislation that was quite workable. The Bill followed a logical approach of simplification. SARS was heavily involved in the drafting of the Bill. The Bill was balanced. Though SARS had given itself more powers, the Institute did not object so long as they were carefully monitored. The Institute then commented on the Bill's provisions for the Tax Ombud, the statutory privilege for tax practitioners, prescription of debt, search and seizure without a warrant, provisional tax issues and constitution of tax court, and gave detailed recommendations in its separate written response.

Professor Michael Katz submitted that the Bill was an important development in modernising South Africa's tax laws and sought to enhance collection and enforcement mechanisms while recognising that the majority of taxpayers were compliant but there was a minority which sought to evade tax. Concerns that the enhanced powers of SARS might be abused and innocent taxpayers might be the victims of abuse deserved serious attention, but clearly all tax laws must be constitutionally compliant; SARS had consulted with and been advised by external constitutional experts. SARS in formulating and drafting the Bill had been guided by similar legislation in other jurisdictions; many of SARS's enhanced powers would be subject to a number of checks and balance; if nonetheless any taxpayer contended that SARS had conducted itself unconstitutionally, the ultimate remedy was to challenge such conduct in the courts; one of the avowed objectives of the Bill was to promote equity and fairness in the tax system and ensure that it was also perceived to be fair, which should in turn enhance compliance. Any abuse by SARS of its powers would undermine this objective.

Members asked the Institute for its views on the SARS Service Monitoring Office and on search and seizure, asked Professor Katz about search and seizure, the document retention period and the prescription period, and for his views on legal professional privilege. Members also asked for views on the structural arrangements for the ombud, access to the ombud at all levels of government including the provinces, lines of accountability of the ombud vis-à-vis the Ministry of Finance, and the additional powers of SARS. Members asked for Prof Katz's objective views on legal professional privilege for tax practitioners and whether he was a member of the Tax Commission at the time of drafting the Bill.
 

Meeting report

South African Institute of Chartered Accountants (SAICA) submission
Mr Munir Hassan: Project Director: Tax, SAICA, gave introductory comments on the consultative process, SARS workshops, simplification, SARS drafting of the Tax Amendment Bill, and the balance of the Bill.

He applauded SARS on its detailed consultation workshops in which each clause was discussed in detail. This resulted in a piece of legislation that was quite workable. This Bill followed a logical approach, and was balanced. Though SARS gave itself more powers, SAICA did not object so long as these powers were carefully monitored.

Mr Hassan then reviewed SAICA's first three focus areas in its submission: The Tax Ombud, the statutory privilege for tax practitioners, and prescription of debt.

Tax Ombud
SAICA welcomed the introduction of the Tax Ombud, but proposed that its budget be from the National Treasury, not from SARS. However, SAICA noted that the provision to staff the Tax Ombud's office with employees seconded from SARS was a good thing as it was necessary to have a working knowledge of SARS procedures. There were international precedents. SAICA proposed that instead of reporting to the Minister of Finance, as proposed in the Bill, SAICA wanted the Tax Ombud to report to Parliament.

The Tax Ombud's mandate, as proposed in the Bill, was to facilitate resolution by mediation and conciliation. SAICA proposed that the Tax Ombud should be able to compel SARS to comply with procedural provisions of the Act and make nominal awards.

The SARS Service Monitoring Office would be retained under the Bill. SAICA proposed that the SARS
Service Monitoring Office (SSMO) be removed.

Statutory privilege for tax practitioners
Legal Professional Privilege (LPP) common law rule applied between client and legal advisor when the legal advisor was acting in a professional capacity, for the purpose of providing legal advice or in litigation, in confidence, and not for the purpose of committing fraud or crime.

The basis of the statutory privilege for tax practitioners was to encourage taxpayers to communicate with their tax advisors in confidence, level the competitive advantage, and international precedent. SAICA noted that Australia was considering statutory privilege. There was regulated statutory privilege in the USA.

SAICA proposed limited statutory privilege similar to the New Zealand model. Advice should be confidential, given regarding the operation of the tax law, and not illegal or wrongful.

SAICA proposed an amendment to the definition of information.

At a minimum, SAICA would require the definition of information to be modified to exclude opinions. [See document: SAICA proposal for a limited statutory privilege for registered tax practitioners]

Prescription of debts
SAICA proposed alignment of the document retention period and the prescription of debts. Mr Hassan referred to Clause 171 and the SAICA response, page 14.

Search and seizure without a warrant
Mr Wessel Smit, Member of SAICA's National Tax Committee, then reviewed search and seizure without a warrant, provisional tax issues,and constitution of the tax court. Here there were issues of keeping a balance between the rights of taxpayers and the needs of SARS.

Mr Smit said that search and seizure without a warrant appeared to go against a person's constitutional right to privacy. Clause 63 gave these rights to SARS in certain cases and appeared to give greater powers to SARS than to the police. He referred to the Constitution. However, he acknowledged that SARS had explained why it needed these rights, but SAICA wanted a better balance. Whilst police were required to obtain search warrants, it was not clear why SARS officials should be exempted from this requirement.

Mr Smit referred to Clauses 59 to 63 and the SAICA response letter, pages 10-11, also to the Constitution of the Republic of South Africa 1996, Chapter 2 – Bill of Rights 14. Privacy.

SAICA contended that the Bill's provision that a SARS official must have 'reasonable grounds' was very subjective; these requirements should be clarified and made less subjective. No provision was made to protect a person against an abusive SARS official nor were there any provisions which would hold SARS officials or SARS liable for negligent behaviour, gross negligence or malignant behaviour.

SAICA referred to court cases in which the search of premises and seizure of documents without warrant was found invalid under the Constitution (slide 15 and SAICA submission, page 15).

At a minimum, SAICA suggested that SARS should be entitled to seize documents where approved by a senior official, but that they be placed in the custody of the court, and that the court, if possible, sanction the seizure after the event.

Provisional tax amendments
The amendment to the definition of 'basic amount' and the automatic 8% per year increase was welcomed

Mr Smit referred to paragraphs 19 and 20 of the Fourth Schedule and to SAICA's submission, page 17 (see also slides 17-21 of the presentation).

Mr Smit, with reference to amendment to paragraph 20 of the Fourth Schedule, said that SAICA requested that the new “understatement” penalty be amended to take into account the actual tax paid (SAICA submission, page 17).

Constitution of tax court
Mr Smit referred to Clause 118 and to the SAICA submission, page 13.

SAICA emphasised that the reference to 'accountant' be retained, since Clause 118(1)(b) of the Bill, in referring to a 'registered accountant', would disqualify a large number of Chartered Accountants (CA [SA]) on the panels around the country, including most of the tax specialists. (Slide 22).

Additional issues for note
These included access to audit working papers; definition of 'senior SARS official' (Clause 1/6(3) [page 2 of the SAICA submission]; keeping the taxpayer informed (Clause 42)[page 5 of the SAICA submission]; and refunds of excess payments (Clause 190) [page 15 of the SAICA submission].

Professor Michael Katz [Independent] submission
Professor Michael Katz concentrated on and contextualised the relevance of tax administration in the totality of the tax system. Tax administration was central to the tax system. It was central to tax policy and legislation. Those who had made submissions had focused on particular features of the Bill, but it was important to examine tax legislation holistically. Every feature of the Bill fitted in with a composite whole.

Prof Katz noted that the drafting of the Tax Administration Bill excluded the Customs and Excise Act which was subject to a separate rewrite process.

Prof Katz emphasised the need to get more people into the tax system. There was a growing conviction worldwide that, in turn the tax burden should be borne by everyone. A lot of submissions were directed to improving tax morality. Compliant taxpayers had the conviction that non-compliant ones must be brought to book, while compliance increased reduced rates. The tax system must be fair and equitable. There was a fine balance that was the objective in the Bill in balancing the powers of SARS and the needs of the taxpayers.

The importance of good tax administration
Professor Katz drew attention to observations in the First Interim Report (Interim Report) of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa (Tax Commission) of which he had been Chairman. The Commission had stated that tax policy and tax reform were inextricably linked to tax administration. Without good tax administration, tax law and tax policy could not be given practical effect.

The Commission had distinguished between the structure and operation of the tax administration (sometimes referred to as 'internal administration'), functions performed by the revenue authorities in their relationships with taxpayers (sometimes referred to as 'external administration', and measures by the revenue authorities to counter tax evasion and undesirable forms of tax avoidance. These were related but separate aspects.

The Commission had found the following potential benefits of feasible reforms:
▪ a significant recovery of additional revenue, enabling the authorities to raise the required revenue while lowering certain rates of taxation
▪ greater certainty in the business community which thereby contributed to investment and economic growth
▪ an enhanced relationship between the revenue authorities and the taxpaying public
▪ enhanced tax morality
▪ a reduction in disputes between the revenue authorities and taxpayers.

The rewriting of tax laws and the Bill's rationale
There was a widespread view that South Africa's tax laws required a total rewrite. The existing structure which dated back to 1962 had largely remained intact, notwithstanding important changes. These changes had simply been grafted onto the original structure, resulting in cumbersome and unwieldy tax legislation that was costly and difficult to administer and comply with.

The Bill provided an important first step in rewriting the tax laws. Its contents accounted for approximately 25% of the total Income Tax Act.

Prof Katz quoted the Bill's Explanatory Memorandum, referring to tax liability and administration provisions. The Tax Administration Bill dealt only with tax administration. The drafting of the Bill focused on reviewing the current tax Acts, but excluded the Customs and Excise Act, since that Act operated in a somewhat different context and was the subject of a separate rewrite. The current provisions in tax legislation were outdated. Although the provisions had been amended over the years, the tax Acts had become fragmented and disparate provisions had arisen in the different Acts. The current framework was outdated, and needed to be aligned with modern approaches modern business and accounting practices, and constitutional rights.

In essence, therefore, the rationale for the tax administration review was to adapt to a fast-developing world and lower the cost and burden of tax administration. A new and modern legislative framework was accordingly required to facilitate the modern administration of the collection of revenue, the consolidation of duplicate provisions, and the alignment of disparate requirements in existing law.

To achieve the above, the Tax Administration Bill incorporated into one piece of legislation certain administrative provisions generic to all the Acts and administrative provisions currently duplicated in the different Acts. The Tax Administration Bill also sought to remove redundant administrative provisions and sought to provide a single and simplified body of law that outlined common procedures, rights and remedies to achieve a balance between the rights and obligations of both SARS and the taxpayers.

Prof Katz quoted Mr James Baker, then Secretary of the United States Treasury, who, in 1989, made a speech at Rutgers University, in which he said that the three most important facts and issues that would define the approach to tax policy in the 21st century would be competition between countries to attract foreign investment by reducing their tax rates; the demographic changes in society in which more and more people would be retired and the workforce would be supporting more and more people outside - these presented huge challenges for the tax structure; and new technologies in tax administration, more particularly in tax collection.

In a highly competitive, border-less world in which countries competed to attract foreign investment, there was a downward pressure on tax rates. This could be achieved only by efficient tax collections, a broader tax base, and economic growth.

Tax authorities worldwide sought to reduce the costs of tax administration and tax compliance. These again required enhanced tax administration.

The preservation of South Africa's tax base was an absolute imperative for SARS in order to provide the finance to fund vital socio-economic expenditure. This had happened with spectacular success in the post 1996 period without any increase in tax rates; in fact there were substantial reductions in this period. This latter factor was an absolute necessity when countries used their tax rates to compete for foreign investment.

Prof Katz noted that the objective of tax base preservation must take place in compliance with the Constitution. SARS had therefore consulted with and been advised by constitutional law experts.

The relationship between good tax administration and the Tax Administration Bill
Prof Katz submitted that the Bill would:
▪ considerably streamline and enhance tax administration
▪ create greater certainty and predictability in tax administration
▪ reduce the number of disputes between SARS and the tax payer
▪ facilitate the resolution of disputes between SARS and the taxpayer
▪ in many respects enhance the rights of taxpayers
▪ enhance tax morality
▪ endeavour to deal effectively and responsibly with the required powers of tax collectors and the rights of taxpayers.

The link between compliance and tax morality
In order to enhance tax revenue, there were a number of tools available: enhanced powers of SARS, administrative efficiencies, and enhancing tax morality. There was a growing conviction, worldwide, that enhanced tax morality was linked to tax compliance. In turn, tax morality was increased if the tax burden was carried by everyone. Secondly, tax morality was increased by reduced rates. Thirdly, the tax system must be fair and equitable, and seen to be so.

Those provisions of the Bill which enhanced taxpayers' rights and SARS' powers
Prof Katz noted that in a number of instances where the Bill provided enhanced powers to SARS, it also imposed correlative duties on SARS. These enhanced powers were needed to achieve sufficient tax collections to meet the needs of this country. Obviously, these would have to be in line with the Constitution. That imperative had been fully canvassed in a number of submissions.

The cost of collection
Conventional wisdom today in the World Bank and the International Monetary Fund (IMF) was that there were two imperatives in the collection process: firstly, reduced costs of administration; and secondly, reduced costs of compliance. Conversely, one must increase the tax yield. This was the taxes recovered, minus the cost of collection. Throughout this Bill – and this was why one must look at this Bill holistically – efficiencies of tax collection were increased.

Those provisions of the Bill which enhanced the efficiencies of tax administration
Prof Katz quoted the Bill's Explanatory Memorandum.

The Tax Ombud
Prof Katz quoted the Tax Commission's Third Interim Report.

Prof Katz quoted the response of the Joint Standing Committee on Finance (JSCOF), to the effect that the Tax Commission's recommendation to appoint a separate Tax Ombud was not supported at this stage, since the JSCOF was concerned at the proliferation of such oversight bodies and suggested the possibility that the Public Protector's Office establish a specialised tax unit.

Prof Katz said that the establishment of the Ombud in terms of the Bill was one of the checks and balances to the extension of SARS' powers in the Bill.

Both the Tax Commission and the Bill's provisions considered the best location for the Tax Ombud to between the SARS Service Monitoring Office (SSMO) and the Public Protector. The Ombud must not intrude on the role of the Public Protector or the courts. The Ombud must be independent of SARS. The Ombud must be provided with adequate finance. There must be appropriate reporting of the Ombud's activities.

A number of international models might be considered:
the United Kingdom's Tax Adjudicator

the Canadian model
the United States' Taxpayer Advocate SARS

Prof Katz submitted that the provisions of the Bill on the establishment of the Tax Ombud take cognisance of the appropriate principles in similar models in other jurisdictions.

Conclusion
Prof Katz concluded that
▪ The Bill was an important development in modernising South Africa's tax laws
▪ The Bill sought to enhance collection and enforcement mechanisms while recognising that the majority of taxpayers were compliant but there was a minority which sought to evade tax
▪ Some of the submissions recognised the above but expressed concern that SARS' enhanced powers might be abused and innocent taxpayers might be the victims of abuse.

These concerns deserved serious attention, but
▪ clearly all tax laws must be constitutionally compliant
▪ SARS had indicated that it had consulted with and been advised by external constitutional experts. Prof Katz referred to the Explanatory Memorandum.
▪ SARS had indicated that in formulating and drafting the Bill it had been guided by similar legislation in many other foreign jurisdictions
▪ many of SARS' enhanced powers would be subject to a number of checks and balances
▪ if despite the above any taxpayer contended that any conduct of SARS was unconstitutional, the ultimate remedy was to challenge such conduct in the courts
▪ one of the avowed objectives of the Bill was to promote equity and fairness to ensure that the tax system was fair and also perceived to be fair, which should in turn enhance compliance. Any abuse by SARS of its powers would undermine this objective (see also Prof Katz's document).

Discussion
The Chairperson asked Prof Katz to provide the Committee with a revised version of his submission to include additional material given in his oral submission.

Mr D van Rooyen (ANC) thought that the SARS Service Monitoring Office should be retained to provide a measure of internal control and thus reduce the number of submissions to the Ombud. He asked SAICA for its views.

Mr Hassan replied that SAICA thought that the ombud, as proposed, was just an elevated SSMO, with the added ability to report on finance issues to the Minister. In its current form, it would be duplication to a large extent. SAICA proposed that removing the SSMO would shorten the period in which the taxpayer needed to engage with SARS. If the proposals that SAICA had tabled to give the ombud a larger mandate were taken into account, then SAICA could see scope for retaining the SSMO to deal with the more trivial issues.

Mr Van Rooyen asked Prof Katz about search and seizure and his emphasis on lowering cost and simplification of tax administration. To what extent was this particular recommendation assisting us to realise that objective.

This question did not appear to have been answered.

Mr Smit said that SAICA saw search and seizure as a last resort. As this would be only in a few isolated cases, the cost to the fiscus would not be that significant.

Mr Van Rooyen asked Prof Katz for clarity on the alignment of the document retention period and the prescription period. What was an acceptable duration?

This question did not appear to have been answered.

Mr Hassan said that the request from SAICA's side was that the 15 years should come down rather than the five years to go up.

Mr Van Rooyen asked Prof Katz for his views on legal professional privilege.

Mr J Marais (DA) asked for Prof Katz's objective views on legal professional privilege for tax practitioners.

Prof Katz replied that this was a very difficult issue. He referred to a recent decision in the United Kingdom, in which one of South Africa's most eminent legal practitioners had given his opinion. The English courts confined it to legal practitioners. Prof Katz understood that SAICA wanted legal professional privilege, not generally but in a limited area. He did not think that he could add to the substantial submissions already made. It was a question of balancing the needs, of protecting the tax base but with suitable checks and balances. Everyone agreed on the desirability of the checks and balances. One had to look at the totality of this legislation.

Dr Z Luyenge (ANC) thanked SAICA and Prof Katz for the most helpful presentations. He asked both for their views on the structural arrangements for the ombud, and access to the ombud at all levels of government including the provinces.

Dr Luyenge asked about the lines of accountability of the ombud vis-à-vis the Ministry of Finance.

Prof Katz quoted the views of the Joint Standing Committee on Finance that, at that time [of the first Commission], the recommendation to appoint a separate tax ombud was not supported because of the proliferation of such oversight bodies. Consideration of alternatives was required, including the possibility that the Public Protector's Office should have a specialised unit for this purpose.

Prof Katz said that there was widespread recognition of the desirability of establishing a process for the resolution of disputes of a procedural or administrative nature. As had been observed by the Commissioner for SARS this had led to the creation of the SSMO in October 1992. As the then Minister of Finance had announced, once SARS processes and procedures had improved sufficiently, the next important step that would be taken in emulating international standards, would entail an important role for an ombud. The establishment of an ombud, in terms of the Tax Administration Bill, was one of the checks and balances to the extension of SARS' powers.

The next important question was the appropriate model for the ombud. Possibilities included SARS' internal resolution service, the SSMO, the Public Protector, and the normal court system. The Tax Commission that he had chaired and the provisions of the Tax Administration Bill considered the best place for an ombud to be between the SSMO and the Public Protector. In doing so a number of objectives had to be satisfied. The ombud must not intrude on the role of the Public Protector or the courts. The ombud must be independent from SARS. The ombud must be provided with adequate resources. There must be appropriate reporting. A number of international models might be considered, including that of the United Kingdom and the United States Taxpayer Advocate Service. Consideration of the location of the ombud had taken cognisance of the totality of the legal system.

Mr Hassan said that, under the Bill, the ombud would be appointed by the Minister of Finance and would report directly to the Minister. SAICA would like to see some interaction between the ombud and the parliamentary process, so that there was engagement with this Standing Committee.

Dr D George (DA) asked SAICA for its views on search and seizure. The Committee, had, the previous day, received a submission that this clause was constitutional. Some other presenters the previous day had said that they would not object to search and seizure, but they would like to have some opportunity after the event to have an analysis of whether the search or seizure was warranted. SAICA had made its own proposal, but he wanted its views on the previous submissions.

Mr Smit said that if other mechanisms could be introduced to ensure checks and balances and avoid the need for search and seizure without a warrant, SAICA would support them. Possibly this clause was unconstitutional, but he said that he was not qualified to pronounce on this subject.

Dr George said that Prof Katz's contributions added much value to the Committee's deliberations. His question to Dr Katz had already been covered by Mr Van Rooyen.

Prof Katz appreciated such kind comments and thanked Members.

Mr E Mthethwa's first question had been covered by Dr George. He asked SAICA about its view that search and seizure was unconstitutional. What exactly was unconstitutional?

Mr Smit said that possibly this clause was unconstitutional, but he was not qualified to pronounce on this subject. Smaller taxpayers might not be able to go to the Constitutional Court because they could not afford the legal costs.

Mr Mthethwa asked SAICA to allude to the additional powers of SARS, and the potential for abuse if given those powers.

Mr Smit said that smaller taxpayers might not be able to go to the Constitutional Court because they could not afford the legal costs. He preferred inherent controls built into the legislation.

Mr Marais thought that Prof Katz had not addressed 'the flip side of the coin'. Some of the issues that had been raised yesterday and today sounded like there were unintended consequences. However, Prof Katz had alluded to the need to be fair and equitable, yet several submissions had indicated concern that there was not enough fairness and equity in the Bill.

Mr Mthethwa asked Prof Katz to allude to the constitutionality of the Bill. Prof Katz had given the issues of competition, demographics, and technology. However, Prof Katz's views on the constitutionality of the Bill differed from those of other presenters. Was he talking of constitutionality in respect of the Bill as a whole or in respect of just one item?

Prof Katz referred to Advocates Steven Budlender and Gilbert Marcus's submission of the previous day. He would be misleading Members if he said that he could meaningfully add to what had been said about the constitutional issues. These issues were, however, not unique to South Africa. The objective was to try to balance the rights of taxpayers with the necessity to protect the tax base to finance socio-economic expenditure. Endeavours had been made here. Different people would have different views on whether it had been achieved or not.

Mr Marais's said his questions had largely already been covered. He commended Prof Katz's 'objective' view. However, he was not sure that Prof Katz could be objective if he had been part of the Commission, although Mr Marais noted that the meeting's agenda referred to Prof Katz's submission as 'independent'. Was he a member of the Tax Commission at the time of drafting this Bill?

Prof Katz replied that he had chaired the Commission appointed in 1994. He had nothing to do with the Tax Administration Bill.

The Chairperson adjourned the meeting.

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