Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

CHAPTER 3 – LIMITATIONS TO INVOKING SECTIONS 74A AND 74B OF THE INCOME TAX ACT

3.6 LEGITIMATE EXPECTATIONS
3.6.1 The Legitimate Expectations Doctrine in the context of ss 74A and 74B

A legitimate expectation may arise in the context of taxation157 by means of a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or opinions; or a legitimate expectation based on a prevailing practice or a publically published document: such as the Code of Conduct, as supported by the unpublished SARS Internal Audit Manual. Taxpayers may expect SARS to apply these legitimate expectations fairly, impartially and without bias to all taxpayers.

The requirements that should be met in determining the legitimate expectations created by SARS, are as follows:158

(a) induced by the decision-maker159 – a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or
opinions, and prevailing practice – are induced by SARS to taxpayers;

(b) an express or implied promise or undertaking160 – a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or opinions, and prevailing practice, are express or implied promises or undertakings by SARS to taxpayers;

(c) a general or specific representations161 – a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or opinions and prevailing practice – are general or specific representations issued by SARS to taxpayers;

(d) clear, unambiguous and devoid of relevant qualification162– a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or opinions, and prevailing practice – is generally ‘clear, unambiguous and devoid of relevant qualification’ by SARS to taxpayers;

(e) reasonable, competent and lawful, and induced by the decision-maker163– a ruling or undertaking, the issuing of interpretation notes, media statements, practice notes and advance rulings or opinions, and prevailing practice – is generally reasonable, competent and lawful, and induced by SARS to taxpayers;

In the context of ss 74A and 74B, failure by SARS to follow its legitimate expectations created, such as its published Code of Conduct, or any other substantive or procedural legitimate expectations created in respect of a particular taxpayer, will be conduct inconsistent with the Constitution and invalid. In terms of s 2 of the Constitution read with s 172 of the Constitution, such conduct would be subject to judicial review as explained in section 5.5.6 below.

In the exercise of a decision in terms of ss 74A and 74B written communication between a taxpayer and SARS is required. This written communication may lead to and create a legitimate expectation between the taxpayer and SARS that the process between them will follow a particular procedure – such as SARS issuing a letter of findings before any revised assessment is issued. Such a legitimate expectation created by SARS triggers the applicability of the adequate notice provisions of ss 3(1) and (2) of PAJA.164

Section 3(1) has a requirement that the legitimate expectation must be ‘materially and adversely’ affected.165 De Ville166 holds the view that ‘this appears to be nothing more than an expression of the de minimis non curat lex principle’ and that the phrase affecting legitimate expectations has been interpreted widely. De Ville goes on to state:167 ‘There is no natural limit to what can be understood as falling within the concept of ‘rights’ (or legitimate expectations) in section 3(1) of PAJA.’ (Insertion supplied)

Thus, if SARS fails to comply with its legitimate expectations (read with the constitutional obligations of s 195(1) of the Constitution (inter alia, a high standard of ethics, impartial, fair and unbiased conduct) and s 4(2) of the SARS Act) SARS will prima facie ‘materially and adversely’ affect the legitimate expectations of taxpayers. Taxpayers are then entitled to rely upon the provisions of PAJA, and the fair procedural terms of s 3(1) of PAJA, and the provision of ‘adequate reasons’168 as contemplated in s 5(2) of PAJA.

As stated previously the salient provisions of the SARS’ Service Charter and Standards (under review) or Code of Conduct creates a legitimate expectation in favour of taxpayers in summarising the constitutional duties applicable to SARS when exercising its powers under ss 74A and 74B. The Code of Conduct prior to its current ‘under review’ format provided as follows:

…This code of conduct has been formulated to help SARS employees to understand the standards of personal and professional behaviour required of them…(Emphasis supplied)

In line with the high standard of professional ethics required of administrators in s 195(1)(a) of the Constitution (one of SARS’ constitutional obligations), the SARS Code of Conduct records that a high standard of professional behaviour is required of SARS officials. What does this mean? It is at this juncture, it is submitted, that the SARS Internal Audit Manual169 of SARS plays a guiding role. The SARS Internal Audit Manual require of the SARS assessor: ‘… insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part’.170 Failure on the part of SARS to take this step is indicative that SARS’ conduct is not of a high professional standard.

Another example is: ‘The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit. The audit assignment is thus the link between the audit plan and the auditing process.’171 The failure by SARS to conduct an audit scope plan is another example of conduct that falls short of the high standard of professional ethics standard.

For instance, SARS have made international presentations to the African Tax Administration Forum to share with other African Tax Administrations best practice in the approach towards determining whether or not a taxpayer should undergo a transfer pricing and tax audit. The steps demonstrated in the presentation172 follow the audit process set out in the SARS Internal Audit Manual. The result is that by the time SARS decides to use its ss 74A and 74B powers in respect of a taxpayer, a collection of relevant information detailing the preliminary reasons for the inquiry and audit will exist. This information is available to the taxpayer as discussed below. Failure by SARS to plan the inquiry and audit, would also be indicative of a failure to adhere to the high professional ethics standard required as part of SARS’ constitutional obligations, and in line with their own internal standards, and the legitimate expectations created in their Code of Conduct.

The Code of Conduct (prior to its current ‘under review’ format) stated:

…SARS and its employees:

1.1 are loyal to the Republic, honour the Constitution and abide by it in the execution of daily tasks;
1.2 put the public interest first in the execution of daily duties. (Emphasis supplied)

SARS’ Code of Conduct reiterates that SARS officials must abide by the provisions of the Constitution.

The Code of Conduct continues:

…A SARS employee:

2.1 will serve the public in an unbiased and impartial manner in order to create confidence in the SOUTH AFRICAN REVENUE SERVICE;
2.2 is polite, helpful and readily accessible in his or her dealings with the public, at all times treating members of the public as valued clients who are entitled to receive the highest standards of service;… and
2.7 recognises the public’s right of access to information excluding that information which is specifically protected by law. (Emphasis supplied)

Transparency, as required in the provisions of s 195(1)(g) of the Constitution, is emphasized in the Code of Conduct (and detailed in the SARS Internal Audit Manual in respect of inquiries and audits as set out in section 3.2 above). SARS must disclose to taxpayers any information they require to justify the conduct of SARS. In terms of SARS’ practice, in following the steps demonstrated in the SARS Internal Audit Manual, by the time SARS decide to use its ss 74A and 74B powers in respect of a taxpayer, a collection of relevant information detailing the preliminary reasons for the inquiry and audit will exist. As this is the practice of SARS, all taxpayers have legitimate expectations, on the basis of fairness, impartiality and unbiased conduct, that similar information will exist at the commencement of their inquiry and audit, and be available to them in respect of their tax affairs. The only information that is excluded is that which is subject to legal professional privilege,173 and information about other taxpayers’ affairs, owing to the secrecy provisions in the Income Tax Act.

The Code of Conduct continues:

…A SARS employee…

5.2
strives to achieve the objectives of the South African Revenue Service cost-effectively and cost efficiently without compromising the legitimate expectations of the public;
…
5.7
will recuse himself or herself from any official action or decision making process which may result in improper personal gain, and declares this interest;
…
5.10
promotes sound, efficient, effective, transparent and accountable administration;
….
Compliance will ensure that the conduct of SARS personnel is not just legally correct but is ethical, enabling SARS to uphold its standards in a manner acceptable to Government and the public they serve.(Emphasis supplied)

The undertakings of cost effective and efficient service; not compromising legitimate expectations; recusing themselves from decisions that may result in improper personal gain (because they may be biased as their remuneration, bonus or promotion depends directly or indirectly on the outcome of the inquiry and audit); and, with transparent and accountable administration, demonstrates the duties of SARS in s 4(2) of the SARS Act and s 195(1) of the Constitution.

These principles set out in the Code of Conduct emphasizes the constitutional duties of SARS, and the rights and legitimate expectations of taxpayers, in a public document for the benefit of taxpayers. Furthermore, its provisions are in line with the international benchmark rules of the International Ethics  Standards Board for Accountants and its Code of Ethics for Professional Accountants.174

An abuse of power could also occur if the Commissioner were to discriminate between different taxpayers in like circumstances, and deny to some the benefits of a discretion or power exercised favourably to others. In the New Zealand case Reckitt and Coleman (NZ) Ltd v The Taxation Board of Review and The Commissioner of Inland Revenue175 Turner J stated: ‘It is of the highest public importance that in the administration of [tax] statues every taxpayer shall be treated exactly alike, no concession being made …; he must with Olympian impartiality hold the scales between the taxpayer and the crown giving to no one any latitude not given to others.’ (Emphasis supplied)

The statement of Turner J supports the constitutional obligations of SARS to diligently and without delay conduct itself in an impartial, equitable and fair manner towards all taxpayers; as others before them.

The issuance of a letter of findings at the conclusion of all inquiries and audits is a clear example, despite the fact that this procedure is not a provision of tax legislation (but will change with the new s 42 in the Tax Administration Act 28 of 2011). Also if taxpayer’s have enjoyed a practice up until the date of an adverse decision taken by SARS, they can expect that in terms of the rule of law and the principle of legality, the practice will not be changed retrospectively, in line with the application of the doctrine of legitimate expectations. SARS failure to adhere to the rule of law and these legitimate expectations, would amount to unfairness and an abuse of power. The audi alteram partem principle will have to be adhered to, and the promise or practice would have to be left intact, prior to the change of decision.

Finally, the onus is on the taxpayer to prove that the Commissioner has abused his powers.176 This is not an easy task to overcome. However, the standard of proof is based on the taxpayer showing that SARS has abused its powers on a balance of probabilities in the review application brought by SARS.

Next:  3.6.2 Limitation to the Legitimate Expectation Doctrine

In accordance with Circular 230 Disclosure

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Footnotes:

157 Williams R C et al Silke on Tax Administration (April 2009) Lexi Nexis at para 3.25 generally.
158 Summarised from a collective reading of the various cases that have contributed to the development of the legitimate expectations doctrine in South Africa: Administrator, Transvaal and Others v Traub and Others 1989 (4) SA 731 (A) at para’s 756H-J; Lord Fraser in the English case Council of Civil Service Unions and Others v Minister for the Civil Service [1984] 3 ALL ER 935 (HL); Lord Templeman in the English case Re Preston [1985] 2 ALL ER 327; Pharmaceutical Manufacturers Association of South Africa and another: In Re: Ex Parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC) at para [33]; ITC 167462 SATC 116; South African Veterinary Council And Another v Szymanski 2003 (4) SA 42 (SCA) at page 49 and para [19] as quoted from National Director of Public Prosecutions v Phillips and Others 2002 (4) SA 60 (W) (2001 (2) SACR 542) at para [28]; Premier Mpumalanga and another v Executive Committee, Association of State-Aided School 1999 (2) SA 91 (CC) at para [38]; Jenkins v Government of the RSA 1996 1 All SA 659 (Tk); Dilokong Chrome Mines v Direkteur-Generaal, Departement van Handel en Nywerheid 1992 (4) SA 1 (A); National Director of Public Prosecutions v Phillips and Others 2002 (4) SA 60 (W) (2001 (2) SACR 542) at para [28] where the requirements for legitimacy of the expectation, include the following: (i)The representation underlying the expectation must be ”clear, unambiguous and devoid of relevant qualification”: De Smith, Woolf and Jowell (op. cit. [Judicial Review of Administrative Action 5th ed] at page 425 para 8-055). The requirement is a sensible one. It accords with the principle of fairness in public administration, fairness both to the administration and the subject. It protects public officials against the risk that their unwitting ambiguous statements may create legitimate expectations. It is also not unfair to those who choose to rely on such statements. It is always open to them to seek clarification before they do so, failing which they act at their peril. (ii)The expectation must be reasonable: Administrator, Transvaal v Traub ((1989 (4) SA 731 (A)) at 756I – 757B); De Smith, Woolf and Jowell (op. cit. at page 417 para 8-037). (iii)The representation must have been induced by the decision-maker: De Smith, Woolf and Jowell (op cit at 422 para 8 – 050); Attorney-General of Hong Kong v Ng Yuen Shiu [1983] 2 All ER 346 (PC) at 350h – j. (iv) The representation must be one which it was competent and lawful for the decision-maker to make without which the reliance cannot be legitimate: Hauptfleisch v Caledon Divisional Council 1963 (4) SA 53 (C) at 59E – G.’ (Emphasis supplied); Attorney General of Hong Kong v Ng Yuen Shiu [1983] 2 All ER 346 (PC) at page 350; Walele v City Of Cape Town and Others 2008 (6) SA 129 (CC) at pages 183-4; Zuma and Others v National Director of Public Prosecutions[2008] 1 All SA 234 (SCA); ITC 168262 SATC 380 at page 403; De Ville J Judicial Review of Administrative Action in South Africa (2003) Juta at pages 219 and 220; Currie I & Klaaren J Promotion of Administrative Justice Act Benchbook (2001) SiberInk at page 80, Baxter L Administrative Law (1984) Juta; LAWSA Volume 1 Administrative Law 2nd ed Lexis Nexis at para 113 (last accessed 30 June 2008); Hoexter (2012) at pages 394-6; Croome B & Olivier L Tax Administration 2010 (Juta) at pages 63-70.
159 South African Veterinary Council And Another v Szymanski 2003 (4) SA 42 (SCA) at para [49] and para [19] as quoted from National Director of Public Prosecutions v Phillips and Others 2002 (4) SA 60 (W) (2001 (2) SACR 542) at para [28]; The representation must have been induced by the decision-maker: De Smith, Woolf and Jowell (op cit at 422 para 8 – 050); Attorney-General of Hong Kong v Ng Yuen Shiu [1983] 2 All ER 346 (PC) at para’s 350h – j.
160 Administrator Transvaal v Traub & Others 1989 (4) SA 731 (A) at para’s 756H-J.
161 Ibid.
162 SA Veterinary Council v Szymanski 2003 (4) SA 42 (SCA) at para [19].
163 Ibid. at para [29].
164 Williams R C et al Silke on Tax Administration (April 2009) Lexi Nexis at para 3.25 generally.
165 However, Williams R C et al ibid. at para 3.25 place no significance on this requirement in respect of legitimate expectations.
166 De Ville J Judicial Review of Administrative Action in South Africa (2003) Juta at page 224.
167 Ibid. at page 227; Transnet Ltd v Goodman Brothers (Pty) Ltd 2001(1) SA 853 (SCA) at para [42].
168 See section 2.5: Adequate Reasons supra.
169 See section 3.2: The SARS Internal Audit Manual supra.
170 Ibid. at page 2.
171 Ibid. at page 5; In an Africa Tax Administration Forum presentation in Kigali, Rwanda – September 2011, SARS made a presentation to various African Tax Administrations confirming this process in respect of Transfer Pricing tax inquiries and audits (http://www.ataftax.net/events/events-calendar_1/technical-event-on-transfer-pricingimplementation-and-case-studies.aspx. (last accessed 30 March 2013).
172 In an Africa Tax Administration Forum presentation in Kigali, Rwanda – September 2011, SARS made a presentation to various African Tax Administrations confirming this process in respect of Transfer Pricing tax inquiries and audits (http://www.ataftax.net/events/events-calendar_1/technical-event-on-transfer-pricing-implementation-andcase-studies.aspx(last accessed 29 January 2013).
173 See Heiman Maasdorp & Barker v SIR 1968 (4) SA 160 (W); Krew v Commissioner of Taxation (1971) 45 ALJR 249 where documents subject to legal professional privilege fall outside the parameters of information, documents or things that SARS are entitled to. See generally Williams R C et al Silke on Tax Administration (April 2009) Lexis Nexis at para’s 3.15 and 3.16.
174 Handbook of the Code of Ethics for Professional Accountants, 2012 edition, International Federation of Accountants (IFAC), www.ethicsboard.org (last accessed 31 March 2013), at pages 17-24; See section 4.2.3: High Standards of Professional Ethics infra for a summary of the relevant rules.
175 [1996] NZLR 1032: ‘It is of the highest public importance that in the administration of [tax] statues every taxpayer shall be treated exactly alike, no concession being made to one to which another is not equally entitled. This is not to say that in cases where the statute has so expressly provided the Commissioner has no discretion to differentiate between cases – but this is in my opinion only to be done when provision for it is expressly, or it may be impliedly, made in the legislation. Where there is no express provision for discretion, however, and none can be properly implied from the tenor of the statute, the Commissioner can have none; he must with Olympian impartiality hold the scales between the taxpayer and the crown giving to no one any latitude not given to others.’ (Emphasis supplied)