Tax experts agree that the number of disputes between taxpayers and the tax authority in South Africa has seen a marked increase in recent years.
The South African Revenue Service (Sars) has introduced a new electronic process this month, enabling taxpayers to request reasons when they are aggrieved with a raised assessment.
The new electronic process will allow taxpayers to request reasons for an assessment where the grounds provided in the assessment do not sufficiently enable a taxpayer to understand the basis of the assessment and to formulate an objection.
“Once the system has identified that a valid request for reasons has been submitted, the period within which an objection must be lodged will be automatically extended for the period permitted by the dispute resolution rules,” Sars says in a statement published last week.
It may make the process less painful. There is, however, no sign of a slowdown in disputes and full-blown audits.
Joon Chong, tax partner at law firm Webber Wentzel, says their practice has seen an increase in ordinary disputes and audits, interviews and enquiries from Sars.
“We are also seeing a lot of transfer pricing disputes between multinationals and Sars… Sars is reluctant to settle disputes or to accept settlement agreements.”
There is a need to collect more revenue to fill the expenditure gaps. More audits and disputes coupled with an unwillingness to settle makes for a more contentious tax environment, says Chong.
Some taxpayers have also experienced an increase in the reopening of assessments and the raising of additional assessments before the prescription period.
“If Sars wants to reopen an assessment beyond the three-year subscription period, it must show there has been either fraud, material nondisclosure or misrepresentation,” says Chong.
Sars says it has no specific records on the frequency of cases of this nature. “Each case is handled according to the merits of the case and the guidance of the Tax Administration Act,” the agency says.
KPMG recently did a global survey with 270 respondents in 35 countries regarding disputes and audits. The survey reports that the greatest increase in tax authorities’ audit focus was on global compliance issues such as transfer pricing and diverted profits.
Elle-Sarah Rossato, associate director at KPMG, says 85% of the survey respondents saw an increase in dispute and audit activities.
In the 2015 –’16 tax year Sars conducted 1.8 million audits on a total registered taxpayer base of 24.4 million registered taxpayers. In 2010 – ‘11 Sars conducted 79 631 audits, on a total registered taxpayer base of 14.6 million registered taxpayers.
The number of registered taxpayers increased by 67% in the five years, while the number of audits increased by 2 161% in the same period.
“This is as a result of increased efficiency and modernisation in the audit space, with the help of feedback from taxpayers and stakeholders such as tax practitioners,” says Sars.
Compliance audits – high volume, automated, desk-based interventions on tax declaration risks identified through a risk engine – have been modernised.
“The modernised process allows for an exceptionally rapid verification of declarations when risks are identified through the risk engine. This means Sars can conduct a significantly higher number of audits in less the time,” the agency says.
Sars acknowledges that the current dispute process causes confusion regarding the outcome of a dispute where the request for a late submission of a request for reasons, a notice of objection or a notice of appeal was unsuccessful.
The new automated condonation process will allow Sars to attend to the request for late submission. It will ensure that the request for late submission is “aligned” with legislation as Sars will now inform the taxpayer that the submission is late instead of classifying the dispute invalid.
Dan Foster, vice chair of the South African Institute of Tax Professionals’ personal tax group, says Sars needs to follow the procedures laid out in the Tax Administration Act.
However, taxpayers must be on guard that Sars is not acting outside these procedures. “Many avenues are open to taxpayers to push back and challenge Sars during an audit or dispute, but this generally requires an understanding of their rights and Sars’s obligations in terms of the law,” says Foster.
Chong says there is no doubt that there will be an automated request for verification if an assessment results in a refund, whether it is Value Added Tax (VAT) or Income Tax.
“Usually the taxpayer is given 21 days to respond to request for supporting documents for income earned, deductions or expenses claimed as a result of the a deduction of taxable income.”
According to Rossato all the documents are available on the electronic filing system. “Effectively when engaging with Sars you are engaging with a machine, which makes it very difficult to communicate,” she says.
She refers to instances where information has been submitted to Sars and the taxpayer is only informed three months later that it can take three to 12 months to finalise the audit.
“Can you imagine what happens to a company with a refund due to it – how it affects commercial reality and cash flow.” In one instance Sars sat on a R500 000 refund for a small business for 18 months.
Chong says taxpayers have the right to know the scope of an audit. “Sometimes the letter of audit commencement is open-ended. There has to be some link to the audit and the request for information.”
Sars has become increasingly “impatient” with taxpayers denying to provide information, remarks Chong. If information is not subject to legal privilege, Sars may ask to be given access to it.
Sars has reached 130 settlements in 2010 -’11 and 192 in 2015 -‘16. A settlement is the resolution of an objection or appeal by way of compromise when neither party accepts the facts or interpretation of law advanced by the other, Sars explains.
Read more from Amanda:
Oops! We could not locate your form.