This article is based on tax law for the year ending 28 February 2022.
Of late, the Voluntary Disclosure Programme (‘VDP’) legislation in Chapter 16 of the Tax Administration Act, No. 28 of 2011 (‘TAA’) seems to be causing confusion in practice. This is brought about by a combination of the inconsistent application of the VDP provisions by SARS’s VDP Unit as well as certain loosely worded provisions contained in Chapter 16 of the TAA.
An example of such provision is section 229 of the TAA, which provides for the relief that an applicant could qualify for, should they participate in the VDP: i.e., SARS must not pursue criminal prosecution for a tax offence arising from the default, SARS must grant relief in respect of understatement penalties and SARS must grant 100% relief in respect of administrative non-compliance penalties. The section, however, remains silent on relief from interest levied in terms of a VDP application. Additionally, Chapter 16 of the TAA, as a whole, is silent on the interest component of a VDP application.
This stance differs from the ‘old’ VDP process, as under section 6 of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, No. 8 of 2010, the Commissioner was empowered to grant 50% or 100% relief in respect of interest otherwise payable by the VDP applicant.
This begs the question of whether a VDP applicant can request the remission of interest outside the VDP process, via the normal channels, for example section 187 of the TAA (which has been partially promulgated) read with section 89quat(3) of the Income Tax Act, No. 58 of 1962 or section 39(7) of the Value-Added Tax Act, 89 of 1991 (‘VAT Act’).
In the recent case of Medtronic International Trading S.A.R.L v The Commissioner for SARS (‘Medtronic case’), SARS had refused to consider the Applicant’s request for the remission of interest in terms of section 39(7)(a) of the VAT Act following the conclusion of two VDP agreements between SARS and the Applicant. The Applicant sought a review of, inter alia, this decision.
The facts of this case are that an employee of the Applicant had embezzled an amount of R537,236,176 from the Applicant. This was attained by the employee submitting false VAT201 returns to SARS and then seeking reimbursements from SARS in order to conceal her embezzlement.
The Applicant thus sought to regularise its affairs via the VDP. On 14 and 18 June 2018 two VDP agreements were concluded between SARS and the Applicant. According to these VDP agreements the Applicant was liable for the payment of the capital VAT amount of R286,464,756.62 and interest of R171,205,356.12.
SARS’ VDP Unit had waived all understatement and administrative noncompliance penalties amounting to R172m and also agreed to refrain from pursuing any criminal action against the applicant. The Applicant proceeded to sign the VDP agreement as well as pay over the capital and interest amounts to SARS.
The Applicant then sought to have the interest in the amount of R171,205,356.12 remitted in terms of section 39(7) of the VAT Act, which states:
‘Where the Commissioner is satisfied that the failure on the part of the person concerned or any other person under the control or acting on behalf of that person to make payment of the tax within the period for payment contemplated in subsection (1) (a), (2), (3), (4), (6), (6A) or (8) or on the date referred to in subsection (5), as the case may be-
(a) was due to circumstances beyond the control of the said person, he or she may remit, in whole or in part, the interest payable in terms of section ....’
Further, the Applicant relied on the explanation of what constitutes ‘circumstances beyond a person’s control’ per interpretation note 61:
‘circumstances beyond a person' 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.’
According to the Applicant, the embezzlement of funds by an employee of the Applicant was beyond the control of the Applicant.
However, SARS argued that the application of section 187(6) of the TAA Act and likewise section 39(7)(a) of the VAT Act are not applicable to a situation where the VDP agreement is in play. In addition, SARS alleged that the Applicant’s request for remission of interest effectively constituted an attempt to renege on the VDP agreements.
The Gauteng High Court held that ‘it is evident that the interest and penalties were added to the eventual amount attained in the VDP agreement by virtue of the application of section 39(1) of the VAT Act.’
Hughes J took the view that ‘if remission requests of interest were not intended to be sought in situations where there was a VDP agreement, either by way of section 187 of the [TAA] or section 39(7) of the VAT Act, the legislature would have set this out succinctly in the provisions regulating the VDP agreement and procedure.’
On this basis, the Court held that ‘the notion adopted by [SARS] that the Applicant seeks to vary the VDP agreement through the back door by seeking the remission cannot stand muster. This is so because it is common cause that the applicant has already complied with the VDP agreement as it has paid the interest sought’ and went on to state that ‘The entire purpose of the VDP process pertains to taxes and is regulated by Acts which are tax related with the Tax Act being the default position if there is conflict or confusion. How then does one exclude that which is a self-prevailing Act when dealing with a process borne out in that same Act. Hence, the analogy being that if section 187(6) can be applied then the equivalent that being section 39(7) of the VAT Act, most certainly is applicable.’
Accordingly, the Court held that the VDP provisions contained in the TAA do not prohibit a request for remission of interest in terms of section 39(7) of the VAT Act, notwithstanding a VDP agreement being entered into. The impugned decisions taken by SARS were pertinently swayed by errors in law, were not authorised by any empowering legislation and were made without important and relevant considerations being considered.
Ultimately, the decision made by SARS (i.e. the refusal to consider the Applicant’s request for the remission of interest in terms of section 39(7)(a) of the VAT Act) was referred to SARS for consideration.
This article first appeared on pwc.co.za.
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