Draft Tax Write-off Regulations: briefing

FINANCE PORTFOLIO COMMITTEE
13 February 2007
DRAFT TAX WRITE-OFF REGULATIONS: BRIEFING

Chairperson: Mr N Nene (ANC)

Document handed out:
South African Revenue Service Presentation on Regulations for Write-off or Compromise of Tax Debts
Draft Regulations for Write-off or Compromise of Tax Debts

Audio Recording of the meeting

SUMMARY
The South African Revenue Service presented the Committee with its draft Regulations for the Write-off or Compromise of Tax Debts. The Public Finance Management Act and its Regulations provided for the write off of state money and the waiver of claims by the state. However, section 76(1) and its Regulations did not apply to the South African Revenue Service as these Regulations only related to Government Departments and the South African Revenue Service was defined in the Public Finance Management Act as a "public entity."

The basic principle was that the Commissioner had to pursue the recovery of all debts and not to forego any debts. However, circumstances may require that the strictness and the rigidity of the basic principle could be relaxed where it would be to the best advantage of the State. The decision to write off (or reverse) a tax debt could be of a temporary or permanent nature.

To request for a compromise, the debtor had to submit a written request setting out reasons for seeking a compromise of the tax debt. There were however, circumstances where Commissioner could not compromise a tax debt. These included if the amount payable in terms of the compromise was less than the market value of the total net assets, which could be taken into account to reduce the tax debt. The Commissioner was not bound by the compromise in certain circumstances, for example where the debtor failed to make full disclosure of material facts. The power to write off or compromise debts could be delegated by the Commissioner. No relationship between the debtor and the person writing off or compromising the debt was permitted.

MINUTES
Mr Frans Tomasek, the South African Revenue Service (SARS) Assistant General Manager of Legislation, said that before its, repeal the Exchequer Act of 1975 enabled the then Commissioner for Inland Revenue, as part of the then Department of Finance, to write off the whole or any portion of a tax claim. The Exchequer Act was repealed upon commencement of the Public Finance Management Act (PFMA). Section 76(1) of the PFMA and its Regulations provided for the write off of state money and the waiver of claims by the state. However, section 76(1) and its Regulations did not apply to SARS as these Regulations only related to Government Departments and SARS was defined in the PFMA as a "public entity" listed in Schedule 3A of the PFMA.

Therefore, an appropriate legislative framework in terms of which undisputed tax debts should be written-off or compromised was required. Several jurisdictions, such as Australia, Canada and New Zealand, provided their revenue authorities with the power to write off or compromise undisputed tax debts.
Enabling legislation in the form of section 91A was incorporated into the Income Tax Act (ITA) during 2005, with subsection (1) providing that the Minister may by Regulations prescribe the circumstances under which the Commissioner may write off or compromise a tax debt.

Section 91A(2) provided that the Regulations had to prescribe the procedures to be followed by the Commissioner in writing off or compromising an amount and the requirements for reporting by the Commissioner of any amounts which had been written-off or compromised. Subsection (3) provided that prior to publication of the draft Regulations, the Regulations had to be published for external comment and had to be submitted for Parliamentary scrutiny at least 30 days before their promulgation.

The draft Regulations were published for external comment on the 31^st of July 2006 and the closing date for comment was the 25^th of August 2006. He said that the various comments received were considered and the final Regulations were formulated and formally submitted to Parliament on 5 February 2007.

Paragraph 2 of the Regulations set out the Commissioner's duty, which was to collect tax debts. The basic principle was that the Commissioner had to pursue the recovery of all debts and not to forego any debts. However, circumstances may require that the strictness and the rigidity of the basic principle could be relaxed where it would be to the best advantage of the State. The Regulations sought to prescribe the circumstances under which the Commissioner could exercise this power.

The decision to write off (or reverse) a tax debt could be of a temporary or permanent nature. Temporary write off could be allowed where the Commissioner was satisfied that the tax debt was uneconomical to pursue (paragraph 5). This did not absolve the debtor permanently from the liability of that tax debt however. If the financial position of the debtor improved, the debt could be re-raised and action to collect the debt may recommence. On reinstatement of the tax debt, interest would be calculated for the period from the date that the debt was written-off, to the date of payment.

A tax debt was uneconomical to pursue if the Commissioner was satisfied that it was probable that the total costs of recovery of the tax debt would exceed the amount of the tax debt recovered. The question of whether amount was uneconomical to pursue had to be decided on a case-by-case basis taking into account various factors, including: the amount of the tax debt; the length of time that the tax debt has been outstanding; the steps taken to date to recover the tax debts and the costs involved in those steps, including tracing fees; the likely costs of continuing action to recover the tax debt and the anticipated return from that action and the financial position of the debtor (including assets and liabilities, cash flow and any possible future income streams).

Paragraph 6 set out the provisions for permanent write-offs. This could occur if the Commissioner was satisfied that the tax debt was irrecoverable at law (paragraph 7), or if he had compromised a tax debt in terms of the Regulations (paragraphs 9 -14). Once a permanent write-off was awarded, the taxpayer was permanently absolved from liability of tax. The taxpayer would also be notified in writing.

Tax debts were irrecoverable at law only if: the tax debt could not be recovered by action and judgment of a court; or the tax debt was owed by a debtor that has been liquidated or sequestrated, or there was a court sanctioned offer of compromise or scheme of arrangement. If the debtor was a company or trust, the Commissioner had to first explore action against, or recovery from the personal assets of any director, shareholder, trustee or persons who acted in the management of that debtor.

The procedure for writing off a tax debt on a temporary or permanent basis (paragraph 8) included the consolidation and reconciliation of all amounts owed by and to the debtor, including penalties, interest and costs; a breakdown of the tax debt and periods to which the outstanding amounts related; the document history of the recovery process and the reasons for deciding to write off the tax debt and offers of compromise in terms of section 311 of Companies Act. The Commissioner also had to consider information relevant for purposes of a compromise in terms of these Regulations. The purpose of the compromise had to be to secure the highest net return from the recovery of that tax debt, taking into account considerations of good management of the tax system and administrative efficiency.

To request for a compromise (paragraph 10), the debtor had to submit a written request setting out reasons for seeking a compromise of the tax debt. The request had to be accompanied by evidence supporting the debtor's claims for not being able to make payment of the full amount of the tax debt. The assessment of the request would be based on a detailed knowledge of the financial affairs of the debtor, past, present and future. Full and frank disclosure by the debtor was therefore fundamental to the success of the debtor's request.

In assessing the request (paragraph 11), the factors to be considered were: any savings in the cost of collection; the collection at an earlier date than would otherwise be the case without the compromise; the collection of a greater sum than would otherwise have been recovered and abandonment by the debtor of any claims arising under any Act administered by the Commissioner.

There were however, circumstances where Commissioner could not compromise a tax debt (paragraph 12). These included if the amount payable in terms of the compromise was less than the market value of the total net assets, which could be taken into account to reduce the tax debt. Other factors were if the compromise would prejudice other creditors; if liquidation or sequestration proceedings had been initiated; if the only reason to support the request for the compromise was the debtor's claim of hardship in paying the tax debt; if the taxpayer's tax affairs were not in order and it may adversely affect broader taxpayer compliance.

The agreement to compromise had to set out the amount payable in full satisfaction of the debt, it had to contain an undertaking by the Commissioner not to pursue the recovery of the balance of the debt and it could contain any other condition as the Commissioner may determine, including a requirement that the debtor had to comply with other Acts administered by the Commissioner (paragraph 13).

The Commissioner was not bound by the compromise in certain circumstances (paragraph 14), for example where the debtor failed to make full disclosure of material facts, or made incorrect disclosures of material facts, the debtor failed to comply with any provision or condition contained in the agreement, or the debtor was liquidated or his estate was sequestrated before he/she had fully complied with all conditions in the agreement. The agreement to the compromise would be invalid and the Commissioner could reinstitute recovery proceedings for the full tax debt.

The Commissioner had to maintain a register with following detail (paragraph 15): details of debtors, including their names, addresses and tax reference numbers, the amount of tax debt written-off or compromised and the reasons for writing off or compromising the tax debt.

The amount of tax debts written-off or compromised during any financial year had to be reflected in annual financial statement of SARS (paragraph 16). The Commissioner had to provide an annual summary of all tax debts which were written-off or compromised to the Auditor-General and to the Minister of Finance
The power to write off or compromise debts could be delegated by the Commissioner. No relationship between the debtor and the person writing off or compromising the debt was permitted.

Discussion
Mr I Davidson (DA) asked why disputed debts were not dealt with in the Regulations.

Mr Tomasek replied that disputed debts were not dealt with here, as there were specific provisions for them in the ITA.

Mr J Bici (UDM) asked if it was really necessary to inform taxpayers that their debts had been permanently written-off.

Mr Tomasek replied that notification was necessary for certainty.

Ms N Mokoto (ANC) asked information about written off debts and compromises was made public in line with SARS’ “name and shame” campaign. Did the write-off apply to the debt only alone or did it include the interest as well?

Mr Tomasek replied that there were provisions in the ITA and the Value Added Tax Act that allowed “naming and shaming,” but this was only after an offence had been committed. In the case of writing off debt and compromises, there was no offence and the situations dealt with in these Regulations were private ones between SARS and the taxpayer. Thus, these cases were confidential. The debt did include the interest as well.

The Chairperson asked what the current practice was with writing off debts.

Mr Tomasek replied that at present there were no provisions that allowed SARS to write off debts or make compromises. As a result their debt book was getting very large, which necessitated the drafting of these Regulations.

In conclusion the Chairperson wanted it placed on record that the Committee did not meet last week as reported in the Sunday Times of the 11^th of February 2007.