The South African Revenue Service (Sars) has taken out one of its most powerful weapons against tax avoidance and tax evasion – the Section 50 inquiry in terms of the Tax Administration Act.
It has approached the Johannesburg High Court for an order to conduct an inquiry into the tax affairs of Bravura Equity Services, Bravura’s director Ian Matthews, Bravura Treasury and 126 others. The court has granted the order.
In terms of the act a judge may grant an inquiry order if he is satisfied that there are reasonable grounds to believe that a person has failed to comply with a tax obligation; has committed a tax offence, and relevant material is likely to be revealed during the inquiry which may prove non-compliance. During such an inquiry taxpayers are questioned under oath.
Elle-Sarah Rossato, associate director at PwC, says the courts are not in the habit of granting these orders, unless there is sufficient evidence in the application to back Sars’s allegations.
Sars said in its application it has been investigating the financial structures of Bravura, an independent investment and advisory firm, for many years.
It claims Bravura has, since inception, been devoted exclusively to designing, marketing, selling, and implementing tax avoidance schemes.
The Sars investigation showed that Bravura created special purpose vehicles to facilitate the flow of income, or to house offsetting assets and liabilities. It has identified simulated transactions, “round-tripping” and cross-border arrangements involving convertible capital loans.
Bravura “vehemently denied” these claims. They said the business provides corporate advisory services to clients in relation to “corporate finance, mining and property-related transactions, mergers and acquisitions and Black Economic Empowerment (BEE) requirements”.
Keith Engel, CEO of the South African Institute of Tax Professionals (Sait), says this dispute is indeed a seminal area to be watched closely.
“Sars has, for many years, been seeking to root out aggressive advisors. This is the first time we are seeing real action.”
The first Bravura structure to be investigated was the Hudaco BEE scheme. Following the investigation Hudaco reached a settlement with Sars and agreed to pay an amount of R312 million.
Hudaco stated at the time that Bravura had used special purpose vehicles with no apparent commercial role “but to effectively convert interest into exempt preference dividends”. The purpose was to shield taxable interest from tax.
Engel says cases like Hudaco are an “unfortunate hangover” of days gone by for many advisors who are now stuck in a “post-base erosion profit shifting” era.
“The legal and publicity risks of aggressive tax practices are simply too great. Still, Sars’s action is a reminder for both listed companies and high-powered firms to stay away (from these practices).”
The victory in the Hudaco case invigorated the Sars investigations and numerous requests for documentation were made. To date all but one of the known Bravura structures have been investigated by Sars.
Sars has concluded that all the structures constitute a reportable arrangement. If an arrangement has not been reported the promotor and participant in the structure can receive heavy penalties running into hundreds of thousands of rand.
Sars argued in its inquiry application that despite the threat of penalties none of the Bravura entities involved in the investigated structures complied with their reporting obligations.
Sars says there are certain structures entered into by Bravura of which it only has code names such as Project Fox, Project Feather and Project M-Power.
Rossato, vice chair of the tax administration work group of Sait, says an inquiry is a drastic enforcement step for Sars. It is a costly and lengthy process.
“It would seem that Sars is sending a message to taxpayers and their advisors that they are refocusing their efforts on enforcement investigations.”
The court found that even though Sars has already investigated most of the Bravura structures, and despite Bravura’s “protestations” that they have provided all relevant material, it was satisfied that Sars does not have full information about its tax affairs.
Bravura has asked the court to dismiss the application describing it “far-reaching, open-ended and invasive”. It indicated that it would be similar to an “interrogation involving coercion”.
Bravura has argued that Sars rely on broad, vague, general and unsubstantiated allegations. It further argued that Sars draws “factual bereft” conclusions of its case.
The court however found that the application was not “factually bereft”, nor was it based on generalised, vague, and unsubstantiated averments.
It authorised Sars to conduct an inquiry into whether Bravura entities have failed to submit tax returns and to pay income tax in respect of the fees charged by them, whether they have failed to pay secondary tax on companies and VAT and whether they have “dishonestly evaded their tax obligations”.
Sars will now convene an inquiry, chaired by Renata Williams SC and commence to issue subpoenas to the identified individuals or witnesses who can be called to reveal certain documents or information required by Sars.
Rossato says on the face of it, it is going to be a large-scale tax inquiry.