This is a reprint of an earlier article – but still very relevant today:
What follows is a discussion that is relevant to South African tax law, read with the Constitution and administrative law, which may apply in various other African jurisdictions as well:
Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another 2011 (1) SA 327 (CC) para :
…the Promotion of Administrative Justice Act 3 of 2000 (PAJA) defines “administrative action” as a decision or failure to take a decision that adversely affects the rights of any person, which has a direct, external legal effect. This includes “action that has the capacity to affect legal rights”. Whether or not administrative action, which would make PAJA applicable, has been taken cannot be determined in the abstract. Regard must always be had to the facts of each case.
The relevance of this is whether or not conducting a tax audit is administrative action subject to full constitutional scrutiny?
In Corpclo 2290 cc t/a U-Care v The Registrar of Banks (755/11)  ZASCA 156 (2 November 2012)] the SCA held at para  that the Registrar’s decisions to investigate the appellants’ business and institute proceedings against the appellants for an interdict in terms of s 81 of the Act were not administrative actions for the purposes of PAJA as they did not (as required by the definition of ‘administrative action’ in s 1 of PAJA) adversely affect the rights of the appellants or have a direct, external legal effect or have that capacity. Whether or not administrative action, which would make PAJA applicable, has been taken, cannot be determined in the abstract. Regard must always be had to the facts of the case. A decision to investigate and the process of investigation, which exclude a determination of culpability, could not adversely affect the rights of the appellants in a manner that has a direct and external legal effect. So too a decision to institute proceedings in the high court for an interdict does not affect the rights of the appellants or have that capacity. It is the high court which decides that the Act is being contravened and decides to grant the interdict.
In Roux v Helath Professions Council of South Africa and Another (SCA 21 September 2011 (case 786/2010) unreported) the court held that the formulation of a charge sheet from which disciplinary action would follow is ‘administrative action’ in terms of PAJA. The court held if they were wrong in this conclusion, the principle of legality would apply anyway. This is a move away from Du Preez v Truth and Reconciliation Commission 1997 (3) SA 204 (A) where the common-law position was that preliminary decisions are not subject to judicial review. In Daniels and Others v WP Rugby and Another (WCC 4 November 2011 (case 15468/11) unreported), it was held that disciplinary steps taken constituted ‘administrative action’ under PAJA.
Many reader’s who have attended Prof Dr Daniel N. Erasmus’ lectures in the past will know that he says something different. It is thus appropriate to justify his view why a decision to audit a taxpayer is ‘administrative action’ as defined in PAJA.
His views are based on his PhD thesis which analyses the inter-relationship in particular between ss 2, 33, 41(1), 172(1), 195(1) and 237 of the Constitution 108 of 1996 (‘the Constitution’); s 4(2) of the South African Revenue Service Act 34 of 1997 (‘SARS Act’); the Promotion of Administrative Justice Act 3 of 2000 (‘PAJA’); and a decision by the Commissioner for the South African Revenue Service (hereafter referred to collectively as ‘SARS’) to exercise his powers under ss 40, 46, 47 and 48 of the Tax Administration Act 28 of 2011 (‘40, 46, 47 and 48 of the Tax Administration Act’) by requiring taxpayers to submit, produce or make available relevant material (as defined). The thesis concludes that such a decision by the Commissioner (or SARS) constitutes ‘administrative action’ as defined in s 1 of PAJA. This conclusion is reached on the basis that such a decision will:
- have been taken by an organ of State exercising a public power or performing a public function in terms of legislation;
- involve the exercise of a discretionary power, in that it is for SARS to determine whether and in what circumstances it will require any particular taxpayer to submit, produce or make available relevant material (as defined);
- adversely affect taxpayers’ rights, and has a direct, external legal effect. The fact that the power in question is preliminary and investigative, and that its exercise does not in itself determine whether any tax, penalties and interest is payable, does not detract from the conclusion that tax, penalties and interest may become payable as a result of the preliminary investigation. The decision imposes on taxpayers an obligation to do something (to submit, produce or make available relevant material (as defined)) which, but for the exercise of the power, taxpayers would not in law be obliged to do: normally taxpayers would have a right to keep private and confidential information, documents and things that must now be produced or provided to a SARS official. A failure by taxpayers to comply exposes them to criminal prosecution under s 234(d) and (i) of the Tax Administration Act. Furthermore, these powers exercised by SARS are not made specifically subject to the normal objection and appeal processes in the Tax Administration Act.
Lastly, there is no relevant exclusion in the definition of ‘administrative action’that removes this type of decision from that definition in PAJA.
In exercising this power, despite the decision not being subject to objection and appeal, SARS is obliged to act in a lawful, reasonable and procedurally fair manner, adhering to its constitutional obligations. A failure to do so would render its decision to invoke its powers under these sections liable to be set aside on review on any applicable codified review grounds stated in s 6(2) of PAJA.
Consequently, in order for taxpayers to satisfy themselves that their constitutional rights to lawful, reasonable and procedurally fair conduct from SARS have not been violated, they are entitled in terms of s 3(1) and (2) of PAJA to adequate notice and to ‘adequate reasons’ in terms of s 5(1) and (2) of PAJA for its decision made in terms of ss 40, 46, 47 and 48 of the Tax Administration Act on the basis that such a decision materially and adversely affects the rights of the taxpayer.
Through the analysis of the inter-relationship between ss 40, 46, 47 and 48 of the Tax Administration Act, the Constitution, the SARS Act and PAJA, the thesis goes further to conclude that even if PAJA were not applicable (primarily because the ‘administrative action’definition may be held to be too restrictive to include a decision in terms of ss 40, 46, 47 and 48 of the Tax Administration Act), SARS would still be bound by its constitutional obligations to comply with the principle of legality as stated by the Constitutional Court in various cases including the important case of Pharmaceutical Manufacturers Association of SA & Another: In re Ex parte President of South Africa & Others, which entails inter alia, a basic level of rationality in SARS’ decision-making, that SARS should apply its mind properly in deciding whether and in what manner to exercise its discretionary investigative powers, and that SARS should exercise such powers only for the purposes they were conferred, and not in an arbitrary or irrational manner: satisfying the jurisdictional facts of the empowering provisions of ss 40, 46, 47 and 48 of the Tax Administration Act, read with the SARS’ constitutional obligations and those in terms of s 4(2) of the SARS Act. Often it is not evident to taxpayers from SARS’ wide-ranging demands that the information, documents and things have been requested for purposes lawfully mandated by the legislation and read with the constitutional obligations set out in the Constitution, or that SARS has properly applied its mind in deciding to target a particular taxpayer for enquiry and audit in formulating its demands by adhering to the SARS Code of Conduct and the legitimate expectations created by SARS.
SARS is to ensure its conduct is not inconsistent with the Constitution as envisaged in s 2, and in doing so, must adhere to the norms, spirit and purpose of the Constitution, by fulfilling SARS’ constitutional obligations such as those in terms of ss 41(1), 195(1) and 237 of the Constitution where: only power conferred by the Constitution should be assumed; and public administration must be governed by the democratic values and principles enshrined in the Constitution, including a high standard of professional ethics; impartial, fair and unbiased conduct; efficient, economic and effective use of resources; public administration that must be accountable; and transparent providing the public with timely, accessible and accurate information. In terms of s 4(2) of the SARS Act, SARS is specifically enjoined to perform its functions in the most cost-efficient and effective manner and in accordance with the values and principles mentioned in s 195 of the Constitution. Failure by SARS to adhere to these constitutional obligations will entitle taxpayers to approach the courts in terms of s 172(1) of the Constitution to declare the conduct of SARS invalid.
The ultimate conclusion to the thesis is that where SARS’ conduct is unlawful, unreasonable or procedurally unfair (or ‘invalid’ conduct in terms of s 2 of the Constitution) in exercising its powers in making a decision in terms of ss 40, 46, 47 and 48 of the Tax Administration Act, taxpayers must first and foremost attempt to bring a review application in terms of s 6(1), 7(1) and 8(1) of PAJA to the High Court on the basis that the decision is ‘administrative action’ as defined in PAJA; and failing that, in the alternative, a Rule 53 application to the High Court on the basis that SARS has transgressed the principle of legality. Taxpayers, under these facts and circumstances, would also be entitled to raise the defence of ‘just cause’ in s 49 of the Tax Administration Act for refusing to submit, produce or make available relevant material (as defined) to SARS, escaping criminal prosecution under s 234 of the Tax Administration Act.
Remember, the SCA held: Regard must always be had to the facts of the case. Well, in the case of an audit by SARS, it is almost certain that “a direct, external legal effect” will follow, or that the decision by SARS will ” have that capacity…”.
HENCE, TAXPAYERS ARE ADVISED TO FORMULATE THE FOLLOWING LETTER TO SARS AT THE COMMENCEMENT OF AN AUDIT
The Audit Letter addressed to SARS at the commencement of a SARS Audit
To put this into proper perspective, what follows are examples of some of the letters received from SARS that indicate the commencement of an audit invoking the provisions of ss 40 to 49 of the Tax Administration Act, 2011:
- IT 14 SD verification audits;
- VAT audits;
- Income Tax audits; and
- Refund audits.
The Proposed Audit Commencement Letter
[NOTE: If this is a computer generated request with no named reference for a SARS official, make sure you reflect the case number, the CORRECT taxpayer reference number (OTHERWISE SARS CAN IGNORE YOUR CORRESPONDENCE), and the original computer generated letter (you must keep a copy) with the bar code at the bottom, and address the letter to the legal department at the SARS Branch (eg. Alberton) after finding out who is the senior legal advisor there. If you get no joy, e-mail email@example.com at head office in Pretoria, requesting his urgent intervention). Send this letter with annexures by email and hand deliver the original. Keep copies.
We act for and on behalf of the taxpayer and are instructed to act as his/her/its agent in respect of any correspondence between you and the taxpayer, where we will facilitate the exchange of relevant material as defined in the Tax Administration Act, 2011 (“the TAA”). Anything we communicate to you must be accepted as relevant information provided by the taxpayer directly to you, thereby ensuring the taxpayer’s various constitutional guarantees, and adherence by you to your constitutional obligations, including but not limited to the taxpayer’s:
- right to privacy – s14 of the Constitution;
- right to information – s32 of the Constitution read with the Promotion of Access to Information Act, 2000 (‘PAIA”);
- right to just administrative action – s33 of the Constitution read with the Promotion of Administrative Justice Act, 2000 (‘PAJA”), including the giving of adequate reasons for any administrative action by you, such as for the commencement of this audit;
- right not to give self incriminating evidence – s35 of the Constitution;
- The adherence by you to your constitutional obligations in terms of s195 of the Constitution:
o SARS is to act with a high degree of professional ethics;
o SARS must be accountable;
o SARS must use resources effectively and efficiently;
o SARS must act impartially, fairly and without bias;
o SARS must be transparent.
[NOTE: This clause sets out the fact that the advisor is not the one giving the relevant material, but that it is the taxpayer, assisting the later argument that it was not the advisor giving the information, but that it is the taxpayer doing so, to protect the taxpayer against PAYE and VAT criminal charges – refer to various TAA lectures by Prof Dr Daniel N. Erasmus on this. Please email firstname.lastname@example.org for assistance].
Section 1 provides that “administrative action”—“means any decision taken, or any failure to take a decision, by—(a) an organ of state, when—(i) exercising a power in terms of the Constitution or a provincialconstitution; or
(ii) exercising a public power or performing a public function in terms of any legislation; or
(b) a natural or juristic person, other than an organ of state, when exercising a public power or performing a public function in terms of an empowering provision, which adversely affects the rights of any person and which has a direct, external legal effect”.
 Grey’s Marine Hout Bay (Pty) Ltd and Others v Minister of Public Works and Others 2005 (6) SA 313 (SCA) at para 23.
President of the Republic of South Africa and Others v South African Rugby Football Union and Others  ZACC 11; 2000 (1) SA 1 (CC); 1999 (10) BCLR 1059 (CC) at para 143.
Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another 2011 (1) SA 327 (CC) para 37; Joseph & another v City of Johannesburg & others 2010 (4) SA 55 (CC) para 27; Grey’s Marine Hout Bay (Pty) Ltd & others v Minister of Public Works & others 2005 (6) SA 313 (SCA) par 23; City of Cape Town v Hendricks & another  ZASCA 90; J R de Ville Judicial Review of Administrative Action in South Africa, (2003) para 2 1 6; Cora Hoexter Administrative Law in South Africa 2 ed (2012) at 220-227.
Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & Another 2011 (1) SA 327 (CC) para 37.
Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another, supra, para 37.
Competition Commission of SA v Telkom SA Ltd & another  2 All SA 433 (SCA) para 11.
Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & Another 2011 (1) SA 327 (CC) para 37.
Prof Dr. Daniel N. Erasmus Esq. BA (Wits) BProc (UNISA) H Dip Tax Law (Wits) Ph.D law (KwaZulu-Natal), is a practicing international tax attorney, www.TaxRiskManagement.com, and adjunct Professor of International Tax Law at Thomas Jefferson School of Law, San Diego, CA, USA and it’s Africa partner http://www.IITF.net.
He can be contacted at email@example.com
Posted on August 15, 2014.
The above link not only introduces you to various treaties and laws per country on IP issues (relevant to transfer pricing issues), but also gives you access to the latest Constitutions.
In tax law, Constitutions are important to establish if:
– the Constitution is the Supreme Law and overrides all other laws;
-there are administrative law remedies – when a Revenue Authority conducts an audit, should this be followed by a letter of findings before revised tax assessments are raised? Are you entitled to reasons for a revised assessment?
– and other issues discussed in detail in the seminal Ph.D thesis of Prof Dr Daniel N. Erasmus “An Analysis of Challenging the Commissioner’s Discretionary Powers to Audi Taxpayers in light of the Constitution, 1996” available here – http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426754 – where similar principles applicable in South Africa in analyzing taxpayer constitutional rights during tax audits, are applicable to other jurisdictions with similar Constitutions;
-the implications of international law, especially to transfer pricing, PE’s and the like.