proposed unilateral extension of prescription by SARS
Section 99 of the Tax Administration Act, 28 of 2011 (“Tax Admin Act”) regulates prescription in relation to tax assessments and provides for a three year prescription period in respect of income tax assessments and a five year prescription period in the case of self-assessment taxes (e.g. value-added tax and employees’ tax).
Generally, the prescription period that prohibits SARS from issuing an additional assessment does not apply if the reason why the full amount of tax was not charged was due to fraud, misrepresentation or non-disclosure of material facts by the taxpayer. When the tax is a self-assessment tax, the basis on which the prescription period does not apply differs in that it refers to fraud, as well as intentional and negligent misrepresentation or non-disclosure.
In terms of the draft Tax Administration Laws Amendment Bill, 2015 (“draft Bill”), released for public comment on 22 July 2015, it has been proposed that the Commissioner for the South African Revenue Service (“the Commissioner”) may extend the relevant prescription period prior to the expiry thereof, inter alia, if an audit or investigation relates to a complex matter such as the application of the general anti-avoidance provisions (“GAAR”) under a tax Act, an audit or investigation under section 31 of the Income Tax Act, 58 of 1962 (which deals with transfer pricing), or a matter of analogous complexity. It is proposed that, in these circumstances, the relevant prescription period may be extended by the Commissioner by a period of up to three years. The proposed amendment appears to have the effect of allowing the Commissioner to unilaterally extend the prescription period provided for in section 99(1) of the Tax Administration Act, in the case of income tax, to a maximum of six years.
A number of issues arise from this proposed amendment. Firstly, the terms “complex matter” and “analogous complexity” are wide, and no objective standard is given by which SARS must measure the alleged complexity of a matter. The citing of examples of complex matters as being GAAR and the transfer pricing rules is in our view not helpful, and does not set an objective standard against which the complexity of a matter may be measured. The decision as to the complexity of a matter and whether an extension of the legislative prescription periods is thus warranted, and therefore appears to be a largely subjective matter which is left to the discretion of the Commissioner. This will lead to uncertainty for taxpayers in relation to whether a decision by SARS to extend the prescription period in relation to a particular tax aspect in this context is justified or appropriate.
Secondly, the proposed amendment does not stipulate that SARS has to notify the taxpayer that prescription has been extended. Section 3 of the Promotion of Administrative Justice Act 3 of 2000 (“PAJA”) provides that administrative action which materially and adversely affects the rights or legitimate expectations of any person must be procedurally fair. In terms of section 3(2) of PAJA, in order to give effect to this right, an administrator (i.e. SARS) must give adequate notice of proposed administrative action. It is trite law that any decision taken by the Commissioner constitutes administrative action and therefore has to comply with the provisions of PAJA. It is therefore submitted that, in order to create certainty for taxpayers and to bring the proposed amendment in compliance with section 3 of PAJA, a requirement should be added that the Commissioner notifies the taxpayer of its intention to extend prescription.
Thirdly, there is no procedure for a taxpayer to challenge a decision by the Commissioner to extend prescription on the basis that it regards a matter as being complex, as a taxpayer is not given the ability to object to such a determination by SARS in terms of section 104 of the Tax Administration Act. Therefore, since such a decision by the Commissioner would constitute an administrative action, a taxpayer’s only remedy would be to request reasons in terms of PAJA, and, following the receipt of reasons and if considered necessary, to take such a decision on review under PAJA. This is a costly and time-consuming process, and does not seem to be an appropriate manner in which to deal with this issue. Presumably, the taxpayer would have to wait for SARS to issue an additional assessment after availing itself of the additional time, and then raise this aspect as a ground of objection against the raising of the assessment.
Lastly, the proposed effective date of this amendment is the date of promulgation of the draft Bill. The question arises how this will affect a taxpayer’s existing rights in relation to prescription and in particular where an assessment was issued prior to the date that the proposed amendment comes into effect. The untenable situation could arise where a taxpayer’s 3 year (or 5 year) prescription period is close to expiry, the draft Bill is promulgated and the Commissioner, prior to expiry of such period, unilaterally decides to extend the prescription period based on a subjective determination of the complexity of a particular tax aspect. It is therefore submitted that the proposed amendment should only apply to years of assessment commencing on or after the date of promulgation of the proposed amendment.
Due to the importance of prescription for taxpayers in obtaining finality as to their tax affairs, it is crucial for taxpayers to be aware of the prescription status of assessments and their rights in this context. ENSafrica is submitting comments to National Treasury in respect of, inter alia, this proposed amendment, as it has far reaching implications on the rights of taxpayers and will result in great uncertainty for taxpayers in relation to prescription of assessments, will severely impact on a taxpayer’s ability to reach finality in relation to their tax affairs and will widen the already considerable powers of SARS in the context of tax disputes.