The Covid-19 pandemic, the largest economic disruptor since the 2008 global financial crisis, has pushed many households and businesses into a liquidity crisis, including large business.
It is essential that government strives to assist the largest contributors to the economy.
If large business is left to flounder, and the vulnerable to close up shop, the impact on the economy will be devastating. As reflected in the Statistics SA chart below, the South African economy was in dire straits before Covid-19 started colonising the world.
Options available to financially-distressed taxpayers
Many large businesses are suffering severe liquidity constraints and are struggling to meet their Vat, PAYE, excise duty and provisional tax commitments. The 21-day lockdown brought exports and imports to a halt and manufacturing operations have ceased, with a loss on sales of non-essential goods. But all businesses are still liable for the fixed costs of doing business.
There is no Covid-19 tax relief for large business, despite the essential role they play in providing employment and contributing to the fiscus.
The Tax Administration Act (TAA) provides for various remedies that are applicable only once there is an amount outstanding. These include an instalment payment agreement with the South African Revenue Service (Sars) and the remission of late payment penalties on the grounds of an “exceptional circumstance”. A taxpayer in financial stress may enter into a compromise with Sars, in terms of which the taxpayer will pay an agreed amount and Sars will write off the rest.
If the taxpayer is unable to pay its debt, and Sars deems it uneconomical to pursue the debt, or the taxpayer is subject to business rescue proceedings, a senior tax official may temporarily write off the debt. But the debt remains owing.
Applying for an instalment payment agreement with Sars
An instalment sale agreement may cover Vat, PAYE or a corporate tax payment.
So what is the catch?
Instalment arrangements cannot be made until the debt is outstanding. As soon as a debt is outstanding, interest and penalties will start accumulating. The taxpayer will have to apply for a waiver of penalties and a deferment of interest.
On application, Sars will have to “consider” the matter, and will request certain information (not standardised) from the taxpayer, such as the latest financial statements, six months of bank statements, management accounts and cash flow projections for the year.
How long will it take for Sars to consider the matter? Does Sars have the resources to properly consider all the applications? Are we expecting too much of a Sars official to take a look at current market conditions and understand that there are liquidity problems?
Patricia Williams, a partner at Bowmans, says Sars’s stance throughout the Covid-19 pandemic has been disappointing: “While other countries’ revenue authorities provide relief, such as general extensions for submission of various returns, and general relief from penalties, Sars appears to have taken a very hard line.”
No general ruling regarding “exceptional circumstances”
Williams says various registered controlling bodies (of tax practitioners) have approached Sars to request a binding general ruling that the current situation qualifies as an “exceptional circumstance” that justifies remission of the normal late payment penalties.
This will simplify the process of applying for the remission of late payment penalties, and will make it easier for less sophisticated taxpayers to know their rights.
Sars has so far refused to issue a binding general ruling.
Williams refers to Section 195 of the Constitution, which states that Sars is mandated to promote the effective, efficient and economic use of resources, and to respond to taxpayer needs, and concludes: “In the circumstances, Sars’s unwillingness to issue the relevant general ruling appears to be in sharp contrast to Sars’s constitutional duties.”
No extension for submission of returns
Many other countries have granted extensions for the submission of tax returns, and the JSE has announced two-month extensions for publishing provisional annual financial statements, the requisite notices, and the submission of audited financial statements.
Yet Sars has firmly maintained its stance of no extension for the submission of tax returns.
Nor have extensions been granted of the period within which a taxpayer must respond to a Sars “letter of findings” at the end of an audit, nor for a Sars request for relevant material.
Williams is perturbed that in the event that Sars turns down a taxpayer’s suspension application, no extra time is given to the taxpayer to take any necessary further legal steps, such as taking Sars’s decision on review.
Will a proactive approach work?
Elle-Sarah Rossato, tax controversy and dispute resolution lead at PwC, is of the view that a taxpayer should be transparent in dealing with Sars and maintain a spirit of cooperation. A taxpayer should be proactive and reach out to Sars before it has reached a cash crisis.
Before contacting Sars, the taxpayer should (if possible) have on hand its cash flow projections, current bank statements, total tax contributions to date (for example, through income tax, Vat, PAYE, UIF, and customs and excise), the number of employees, and its role in the economy, in order to either draft a note to Sars or commence a proactive discussion with Sars.
Rossato is optimistic that Sars will maintain a more pragmatic and hopefully lenient stance in considering an application for an extension of payment and the waiver of penalties and deferral of interest (which the TAA specifically provides for) in line with what its commissioner has stated in the past weeks. She is optimistic that Sars will maintain a more lenient stance in considering such applications.
Sars is obliged to act fairly and reasonably
PwC partner and director of tax technical and policy Kyle Mandy notes: “Sars is obliged to act fairly and reasonably in applying the provisions relating to deferral of payment in sections 167 and 168 of the TAA and remitting penalties (in terms of section 218) and interest (in terms of section 187(6)).
The natural disaster stemming from Covid-19 is clearly an exceptional circumstance as contemplated in the TAA and Sars would be obliged to take this into account in applying these provisions.
To the extent that Sars does not do so, a taxpayer would have the right to have such decision reviewed or to object and appeal against such decision as appropriate.”
Though our future is uncertain, the Covid-19 pandemic will pass. But if Sars makes bad economic decisions in offering tax relief, and treats taxpayers as guilty until proven innocent, this will not pass.