Achieving success with requests for remission/reduction of tax penalties and interest in South Africa

---

Achieving success with requests for remission/reduction of tax penalties and interest in South Africa

• 21 April 2023
• Tax Administration
• Lebo Motsumi-Nkoloti

The late payment or underpayment of taxes and non-compliance with tax obligations have hefty financial implications for taxpayers. The South African Revenue Service (SARS) is entitled, in terms of the Tax Administration Act 28 of 2011 (TAA) read together with applicable tax legislation ¹ , to levy interest and penalties on outstanding tax amounts and where there has been a failure by the taxpayer to comply with its obligations under the relevant tax legislation.

Taxpayers have the right to request SARS to remit interest and penalties levied against them, and the grounds upon which such remission requests may be made is dealt with in the TAA. The TAA also provides for the procedure that must be followed when submitting a request for remission of either interest or penalties. It is accordingly essential for taxpayers to equip themselves with the knowledge of when and how they can request a remission for interest and/or penalties levied against them.

Levying of interest

Chapter 12 of the TAA provides the framework within which interest provisions may be aligned across taxes. ² The TAA provides for the charging of interest against a taxpayer, the purpose of which is to compensate the fiscus for the late payment of taxes. At the same time, the TAA makes provision for the payment of interest by SARS in respect of excess payments made by the taxpayer.

A tax debt that is not paid in full by the effective date accrues interest at the prescribed rate ³ currently 10.5%, subject to change from time to time), from the effective date of the tax to the date on which the tax is paid. ⁴ The TAA also specifically deals with the period of the imposition of interest payable in respect of the first and second payments of provisional tax ⁵ , and the first and second payment under the Mineral and Petroleum Resources Royalty Administration Act 29 of 2008. ⁶

Levying of penalties

The TAA empowers SARS to levy penalties against taxpayers, with the purpose of ensuring the widest possible compliance with, and the effective administration of, tax legislation. The TAA provides for example, the Income Tax Act, the Value-Added Tax Act, Customs and Excise Act, etc.

for two broad types of penalties, being administrative non-compliance penalties (in the form of fixed amount penalties and percentage-based penalties) and understatement penalties.

Administrative non-compliance penalties

Fixed amount penalties are imposed when there is a failure to comply with an obligation that is imposed by or under a tax Act and is listed in a public notice issued by SARS. ⁷ The incidences of non-compliance subject to non-compliance penalties are the failure to submit an income tax return as and when it is required under legislation. ⁸ The failure to disclose information in respect of a reportable arrangement is also liable to a penalty (which is a set amount) for each month that the failure continues. ⁹

Percentage based penalties are imposed if SARS is satisfied that an amount of tax was not paid as and when required under a tax Act and are in addition to any other ‘penalty’ or interest for which a person may be liable. The penalty is equal to the percentage of the amount of unpaid tax as prescribed in the tax Act. ¹⁰ These are normally in the form of late payment or late submission penalties, imposed in terms of the relevant tax Acts (i.e., 10% late payment penalty for VAT or PAYE, 20% underestimate penalty for provisional tax, etc.).

Understatement penalties

Understatement penalties are imposed in the event of an ‘understatement’ by a taxpayer and they are paid in addition to the ‘tax’ payable for the relevant tax period. ¹¹ The understatement penalty is the amount resulting from applying the highest applicable understatement penalty percentage in accordance with the table in section 223 of the TAA to each shortfall determined under 222(3) and (4) in relation to each ‘understatement’. ¹²

Remittance of interest

In terms of section 187(6), a senior SARS official has the discretion to direct that interest due because of the late or under payment of taxes is not payable if they are satisfied that interest is payable as a result of ‘circumstances beyond the taxpayer’s control’, unless prohibited by a tax Act. Section 187(7) limits such ‘circumstances’ to a natural or human-made disaster, a civil disturbance or disruption in services; or a serious illness or accident.

In the SARS Interpretation Note No. 61 dated 29 March 2011, dealing with the remittance of interest in terms of section 39(7)(a) of the VAT Act, SARS states that ‘circumstances beyond a person’s control are generally those that are external, unforeseeable, unavoidable or in the nature of an emergency, such as an accident, disaster or illness which resulted in the person being unable to make payment of VAT due.’ It is submitted that, although the Interpretation Note specifically deals with the interpretation of the requirement ‘circumstances beyond a person’s control’ within the context of the VAT Act, this would equally apply to the meaning of the phrase as it appears in the TAA (and replicated in the specific tax Acts).

SARS provides the following examples of circumstances that are generally beyond a person’s control and that qualify for the remission of interest: the destruction by fire, flood or other natural or human- made disaster of the person’s place of business records, key personnel not available due to sudden resignation, ill health or death; a person has initiated an electronic funds transfer payment timeously and such payment is not made due to a banking system failure. On the other hand, examples of circumstances that would not qualify as being beyond a person’s control include: a person’s financial position, failure to timeously initiate an EFT payment instruction to a financial institution, a misunderstanding or lack of knowledge of a tax liability, misconduct on the part of the person or any other person under the control or acting on behalf of that person, and negligence on the part of the person or any other person under the control or acting on behalf of that person.

The right to request interest remittance is not open ended. In terms of section 187(8), SARS may not make a direction that interest is not payable under section 187(6) after the expiry of three years, in the case of an assessment by SARS, or five years, in the case of self-assessment, from the date of assessment of the tax in respect of which the interest accrued. Therefore, a taxpayer seeking to make an application for the remission of interest would be required to make sure that such application reaches SARS ahead of the three- or five-year date in order to stand a good chance of a successful request.

Remittance of fixed amount and percentage-based penalties

A taxpayer that is aggrieved by a ‘penalty assessment’ notice (in the form of administrative non-compliance penalties) may, on or before the date for payment in the ‘penalty assessment’, in the prescribed form and manner, request SARS to remit the ‘penalty’ in accordance with Part E of Chapter 15. ¹³

In terms of section 215 of the TAA, the ‘remittance request’ must include a description of the circumstances which prevented them from complying with the relevant obligation under a tax Act in ¹³ respect of which the ‘penalty’ has been imposed; and the supporting documents and information as may be required by SARS in the prescribed form. There is an automatic suspension of penalty liability from the date of the remittance request, until 21 business days after SARS’ decision not to remit. ¹⁴

Penalties imposed for a failure to register as and when required under the TAA, may be remitted if the failure to register was discovered because the person approached SARS voluntarily; and the person has filed all returns required under a tax Act. ¹⁵ Penalties for nominal or first incidence of non-compliance may be remitted if SARS is satisfied that there are reasonable grounds for the non-compliance and the non-compliances has been remedied. ¹⁶ A taxpayer should make submissions at both corporate and individual level, i.e., that the company acted reasonably in appointing suitably qualified and experienced person, and that an individual in the same circumstances would reasonably make the same mistake. Penalties may also be remitted if SARS is satisfied that one or more of the following circumstances rendered the taxpayer incapable of complying with the relevant obligation under the relevant tax Act ¹⁷:

• a natural or human-made disaster;
• a civil disturbance or disruption in services;
• a serious illness or accident;
• serious emotional or mental distress; or
• any of the following acts by SARS—a capturing error; a processing delay; provision of incorrect information in an official publication or media release issued by SARS;

delay in providing information to any person; or failure by SARS to provide sufficient time for an adequate response to a request for information by SARS; serious financial hardship; and any other circumstance of analogous seriousness. ¹⁸

Remittance of understatement penalties

Section 223(2) of the TAA obliges SARS to remit a penalty imposed for a substantial understatement if it is satisfied that a taxpayer made full disclosure to SARS of the arrangement that gave rise to the prejudice to SARS or the fiscus by no later than the date that the relevant return was due and was in possession of an opinion by an independent registered tax practitioner. The opinion must have been issued by no later than the date that the relevant return was due and must have been based upon full disclosure of the specific facts and circumstances of the arrangement. If the opinion dealt with the applicability of the substance over form doctrine or the anti-avoidance provisions, the taxpayer must be able to demonstrate that all of the steps in or parts of the arrangement were fully disclosed to the tax practitioner, whether or not the taxpayer was a direct party to the steps or parts in question.

Lastly, for such an opinion to be valid, it must confirm that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

Key takeaways

To be successful with requests for remission or reduction of interest and penalties, taxpayers should make sure that their requests for remission are sent to SARS timeously. That is, within the timeframes set out by the legislation (as discussed above) for such requests. In their requests, taxpayers are encouraged to make sure that the specific averments relating to their specific request are made with reference to applicable legislative provisions. This is where the assistance of a tax practitioner would be valuable. A taxpayer must be able to properly set out in the request the full factual reasons or explanations for the request such that the SARS official is ‘satisfied’ that a good reason exists as to why interest and/or penalties should be remitted.

Footnotes:

1 For example, the Income Tax Act, the Value-Added Tax Act, Customs and Excise Act, etc.  

2 Memorandum on the objects of the Tax Administration Bill, 2011.

3 187(1) read with 189(1) of the TAA.

4 188(1) TAA.

5 188(2)(a) and (b)

6 188(2)(c) and (d)

7 210(2) TAA.

8 GG 45540 Notice 1531 Incidences of non-compliance by a person in terms of section 210(2) that are subject to a fixed amount penalty dated 26 November 2021.

9 212 TAA.

10 213(1) TAA.

11 222(1) TAA

12 222(2) TAA.

13 215 TAA.

14 215(3) TAA.

15 216 TAA.

16 217 TAA.

17 218 TAA.

18 218 TAA.

 

0 COMMENTS

LEAVE A COMMENT