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 4 – SECTION 195(1) OF THE CONSTITUTION AND PUBLIC ADMINISTRATION DUTIES WITH REFERENCE TO SECTIONS 74A AND 74B

4.2.3 High Standard of Professional Ethics

Section 195(1)(a) of the Constitution30 reads:

195 (1) Public administration must be governed by the democratic values and principles enshrined in the Constitution, including the following:

(a) A high standard of professional ethics must be promoted and maintained. (Emphasis supplied)

What are professional ethics?31 In the absence of direct authority in any defining provisions in the Constitution, a dearth of case law, and a lack of legal academic writings on the subject, it is necessary to establish what is meant by this term in similar or analogous circumstances.

The International Ethics Standards Board of Accountants (IESBA) has developed the Code of Ethics for Professional Accountants (the Code).32 Section 110 dealing with integrity, requires professional accountants to be straightforward, honest, dealing fairly and with truthfulness. Section 120 dealing with objectivity imposes an obligation on all professional accountants not to compromise their professional and business judgment because of bias, conflict of interest or the undue influence of others. Section 130 dealing with professional competence and due care, requires all professional accountants to act diligently in accordance with applicable technical and professional standards. Section 140 dealing with professional behaviour, states that professional accountants must comply with relevant laws and regulations weighing all the specific facts and circumstances available.

These international benchmark professional rules hold accord with the SARS Code of Conduct analysed in 3.6 above and sections 4.2.4 and 4.2.5 below (read with the SARS Internal Audit Manual discussed in section 3.2 above) and assists to inform the meaning of ‘a high standard of professional ethics’ that must be promoted and maintained by SARS.

The Oxford English Dictionary33 defines ethics as:

…
b. The moral principles by which a person is guided … c. The rules of conduct recognised in certain associations or departments of human life … (Emphasis supplied)

Moral is defined in the Oxford English Dictionary34 as:

…of or pertaining to the distinction between right and wrong…4. Moral law: the body of requirements in conformity to which right or virtuous action consists…opposed to ‘positive’ or ‘instituted’ laws, the obligation of which depends solely on the fact that they have been imposed by a rightful authority…7. Pertaining to, affecting, or operating on the character of conduct, as distinguished from the intellectual or physical nature of human beings… (Emphasis supplied)

Hammer, the author of Misconduct in Science: Do Scientists need a Professional code of Ethics?,35 makes the point that a professional code of conduct will show all that professionals are concerned with proper conduct, human affairs, beliefs and perspectives, just as others in society. Although administrators such as SARS have an even greater responsibility towards taxpayers in light of their constitutional obligations, the reference to a professional code of conduct as set out in the SARS Code of Conduct and the SARS Internal Audit Manual (analysed in section 3.2 and 3.6 above, and 4.2.4 and 4.2.5 below) become an important tools to benchmark the conduct displayed by SARS officials towards taxpayers in an inquiry and audit situation, especially when read in the light of
the IESBA Code referred to above. Non compliance with all these guidelines would be indicative of behaviour that is not of a high professional standard.

In relation to other professions,36 it has been written that professional ethics refer not only to a basic duty of honesty, of doing what is right, but also to collegiality towards each other. This latter quality requires respect for the opinion of others, respect for the rights of others, the refusal to spread unfounded accusations or rumours about each other, commitment to discussing differences openly and honestly, the adoption of a high standard of fairness, and the upholding of the dignity of others.

In Kekana v Society of Advocates of South Africa,37 the Supreme Court of Appeal had the following to say about a high standard of professional ethics:
The preservation of a high standard of professional ethics having thus been left almost entirely in the hands of individual practitioners, it stands to reason, firstly, that absolute personal integrity and scrupulous honesty are demanded of each of them and, secondly, that a practitioner who lacks these qualities cannot be expected to play his part. (Emphasis supplied)

SARS, as an organ of state, must promote and maintain a high standard of professional ethics as contemplated in s 195(1)(a) of the Constitution when exercising its discretion in terms of ss 74A and 74B. The courts have held38 that organs of state such as SARS (when, exercising its discretion under ss 74A and 74B) are obligated to comply with the provision of promoting and maintaining a high standard of professional ethics. This according to the analysis above means: a basic duty of honesty, doing what is right, collegiality towards taxpayers; respect for the opinion of taxpayers; respect for the rights of taxpayers; the refusal to spread unfounded accusations or rumours about taxpayers (including conduct supportive of such a negative outcome); commitment to discussing differences openly and honestly; adopting a high standard of fairness; and upholding the dignity of taxpayers .

In the build-up to Metcash,39 the Taxgram40 published an advertisement that illustrated the taxpayer’s frustrations, ‘accusing Revenue of high-handed, bullying tactics during the investigation’. A section of the advertisement read:

Metro abhors the high-handed and bullying tactics used by SARS … and feels that the commission arrangements existing between SARS and their investigators have given rise to the acts of SARS, and that SARS have failed to demonstrate the high standard of professional ethics or impartial, fair and equitable service, expected of a public administration … . (Emphasis supplied)

In response, SARS issued a Media Release,41 part of which stated:

… SARS reiterates its open door policy for purposes of discussions with any taxpayer. It is the stated policy of SARS to be accessible to taxpayers and it invites frank discussions between it and taxpayers at any time …

In the same Taxgram article42 Pierre du Toit, states:

The overall job of revenue administration is not to get in the money at all costs; it is to administer our tax laws with efficiency and dispassionate objectivity. That involves both collection from, and protection for, the taxpayer. (Emphasis supplied)

This sentiment is echoed in the stance taken by Professor Reynolds in A lawyer’s conscience43 when commenting on ethics and the legal profession:

The personal attributes and moral standards required of the attorney are high. C.H. van Zyl put them as follows in his The Judicial Practice of South Africa 14 ed. (1931) 33:

‘He must manifest in all business matters an inflexible regard for the truth; there must be a vigorous accuracy in minutiae, a high sense of honour and incorruptible integrity.’

It must be stated at the outset that most lawyers meet these standards, and are properly described as men of honour, dignity and integrity. As so often happens, however, it is the few ‘rotten apples that spoil the barrel’. (Emphasis supplied)

One of the ‘rotten apples’ and, as Prof. Reynolds states, ‘possibly the most common one relates to matters monetary’.44 He states:

But this aspect should, of course, never be elevated to the extent that his integrity – in the full sense of the word – and the ideals of professional service give way to the avid acquisition of a ‘heavy purse’.

The words of Reynolds45 quoted above mirror the complaint in the press made by Metro Cash46 in respect to the commission arrangements between SARS and its investigators, giving rise to actions where SARS failed to demonstrate a high standard of professional ethics. SARS, in compliance with its fundamental duties under the Constitution, will have to be mindful not to be seen to be doing this, especially in the more precise transgression of financial bias.47

In the Third Interim Katz Commission Report, released in December 1995,48 the Commission recommended a charter of taxpayers’ rights. SARS complied with this by publishing on 4 December 199749 the first ‘Client Charter’50 (now replaced by Code of Conduct published by SARS)51:

… containing thirteen points setting out what taxpayers are ‘entitled to expect’ from the SARS, three points stating what taxpayers can do if they ‘are not satisfied’, and four points listing taxpayers’ reciprocal obligations towards the SARS.

The accompanying media release52 stated that:

…the Charter ‘is a commitment to the taxpaying public that SARS aims to deliver a professional, effective and efficient client service’. (Emphasis supplied)

This is a restatement of the duties of SARS under ss 41(1) and 195(1) of the Constitution.

As Prof. Williams puts it53 referring to the Code of Conduct (in its prior format to the one currently ‘under review’):

The Charter is headed ‘Your rights and obligations’ … [and] … ‘You are entitled to expect the SARS …’. In other words, what the Charter professes to articulate are legitimate expectations and not enforceable rights.

The original Code of Conduct coincided with the release of the Batho Pele – People First:  White Paper on Transforming Public Service Delivery,54 with its opening statement:

…a guiding principle of the public service in South Africa will be that of
service to the people …

As explained by Beukes in The Constitutional Foundation of the Implementation and Interpretation of the Promotion of Administrative Justice Act 3 of 2000:55

Batho Pele reflects the important message that the chief function of the
public administration is to serve all the people of the country. In this sense it represents an affirmation of both s 195 and s 33.

What is more, included in the ‘Revenue Handbooks, and internal memoranda’ referred to by the Katz Commission56 is, no doubt, the unpublished SARS Internal Audit Manual,57 which provides clear guidelines to SARS officials on how to conduct itself in an inquiry and audit process. This is of particular relevance to invoking the discretionary powers of SARS. The SARS Internal Audit Manual58 indicates clearly the ‘high standard of professional ethics’ that SARS must maintain and promote and which are also in line with the Batho Pele principles.

In determining the duties of SARS in conforming to the principle of maintaining and promoting a high standard of ethics, it is essential to determine the rules of conduct applicable to SARS in executing its discretionary powers under ss 74A and 74B. It follows that one of the key areas in determining the accepted standards of conduct comes from SARS’ own internal memoranda, such as the SARS Internal Audit Manual. Owing to the fact that the high standard of professional ethics is based on doing right as opposed to wrong, s 195(1)(a) of the Constitution applies to virtually all SARS’ duties.

Some of those duties contained in the SARS Internal Audit Manual are relevant to the duty of promoting and maintaining, inter alia, high standards of professional ethics. The opening section of these SARS guidelines refers to a high standard of professional ethics:59

In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit…

From a careful perusal of the SARS Internal Audit Manual, it becomes apparent that taxpayers need not tolerate non-compliance by SARS with its constitutional duty to maintain and promote a high standard of ethics in executing its functions as tax administrator. Any such non-compliance will amount to unconstitutional and ‘invalid’ conduct.

This is reiterated in the Code of Conduct:

2.6 In dealing with you, we will endeavor to: Respect, protect, promote and fulfill your constitutional rights; Act professionally and in accordance with a high standard of professional ethics; Treat you impartially, fairly, equitably and without bias; …Be accountable; Provide you with timely, accessible and accurate information and feedback; Treat you with respect…; (Emphasis supplied)

Conduct of a high, professional, ethical standard would include:

(a) honest conduct as a basic requirement (SARS should be able to show clearly that it has no ulterior purpose or motive and that it is merely dispassionately establishing whether one of the criteria in the definition of ‘for the purposes of the administration of this Act’ in s 74 exists);

(b) collegiality (where SARS will inform the taxpayer of its conclusions, with an explanation of the decisions to be taken. If the taxpayer disagrees, SARS will listen to the reasons and consider whether these call for an unbiased adjustment of the conclusion);

(c) respect for taxpayers’ opinions;

(d) respect for the rights and legitimate expectations of taxpayers;

(e) no unfounded accusations or rumours about taxpayers (including conduct supportive of such a negative outcome);

(f) commitment to discussing differences openly and honestly with taxpayers;

(g) a high standard of fairness towards taxpayers;

(h) upholding the dignity of taxpayers.

Most of these requirements in the Code of Conduct and the SARS Internal Audit Manual are reinterated in the international benchmark of professional accountants ethical standards published by the IESBA Code referred to above.
In conclusion, the display of a high standard of professional ethics by SARS in  exercising any discretion under ss 74A and 74B means:

(a) displaying the highest degree of honesty and integrity towards taxpayers in executing its duties in exercising its decision under ss 74A and 74B;

(b) showing objectivity towards any taxpayer submissions, and giving those submissions the appropriate respect and consideration, as opposed to merely processing such submissions in a rote fashion with only a show of objectivity and respect;

(c) displaying the highest degree of collegiality towards taxpayers in conducting audits and reviews, being concerned with the facts of each particular case, rather than with the policies foisted upon it by SARS management;

(d) showing a degree of fairness greater than that expected from the general public towards each other;

(e) being bound by moral principles rather than strict adherence to the law.

The Supreme Court of Appeal has held that ‘…investigatory proceedings, which have been recognised to be absolutely essential to achieve important policy objectives, are nevertheless subject to the constraint that the powers of investigation are not exercised in a vexatious, oppressive or unfair manner.’60 In the context of ss 74A and 74B, if the highest professional ethical standards are not displayed, as explained above, SARS will have breached one of its constitutional obligations, and their conduct is reviewable.  Section 195(1)(a) is a lawful step that SARS is constitutionally obliged to take to ensure that a decision it takes falls within the scope of its legislated powers.

Next:  4.2.4 Services must be provided impartially, fairly, equitably and without bias

In accordance with Circular 230 Disclosure

*******************

Footnotes:

30 To be read in conjunction with the constitutional obligations placed on organs of state such as SARS in terms of s 41(1) of the Constitution: ‘…all organs of state…must…provide effective, transparent, accountable and coherent government…be loyal to the Constitution…not assume any power or function except those conferred on them in terms of the Constitution…’.
31 Generally see: Handbook of the Code of Ethics for Professional Accountants, 2012 edition, International Federation of Accountants (IFAC): ‘This publication(s)..mission is to serve the public interest by: contributing to the development, adoption and implementation of high-quality international standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to  high-quality practices by professional accountants; promoting the value of professional accountants worldwide; speaking out on public interest issues where the accountancy profession’s expertise is most relevant.’; www.ethicsboard.org (last accessed 31 March 2013).
32 Op. cit. the 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.
33 The Compact Edition of the Oxford Dictionary (1971) Oxford University Pressat page 312.
34 Ibid. at page 288.
35 http://www.csu.edu.au/learning/eis/www_ethx.html,1 (last accessed June 2005).
36 www.arg.org/Publications/other%20Pubs/EthicsStatement.htmlOctober 18 1988 (last accessed June 2005).
37 1998 (4) SA 649 (SCA).
38 In the President of the Republic of South Africa & Others v South African Football Rugby Union & Others1999 (2) SA 14 (CC) at para [133], the Constitutional Court observed that: ‘Public administration … is subject to a variety of constitutional controls … [and] … The importance of ensuring that the administration observe fundamental rights and acts both ethically and accountably should not be understated.’ (Emphasis supplied); In Barkhuizen NO v Independent Communications Authority of South Africa and Another[2001] JOL 8458 (E) at para [19]the Court held: ‘… [a] high standard of professional ethics must be promoted and maintained (s 195(1)(a)) …’. (Emphasis supplied); In Mpande Foodliner CC v Commissioner for South African Revenue Service and Others, 2000(4) SA 1048 (T) at para [46] Patel A J stated: ‘… In the circumstances, the fiscus owes a legal duty to the general body of taxpayers to act fairly when deploying its discretionary powers which are subject to the requirements of good management, namely by promoting and maintaining a high standard of professional ethics, efficient, economic and effective use of resources, providing a service that is impartial, fair, equitable and without bias as well as responding to needs and fostering transparency by providing the public with timely, accessible and accurate information (ss 195(1)(a),(b),(d),(e) and (g) of the Constitution), thereby ensuring that there are no favourites and no sacrificial victims.’; see generally Inland Revenue Commissioners v National Federation of Self-Employed and Small Business Ltd [1981] 2 All ER 93 at 112-13; Preston v Inland Revenue Commissioners [1952] 2 All ER 327 at page 339; F & I Services Ltd v Custom and Excise Commissioners [2000] STC 364 (QB) at page 377; Income Tax Case 1674 2000 SATC 116 (ZA)).’ (Emphasis supplied)
39 Metcash Trading Limited v C SARS and Another2001(1) SA 1109 (CC).
40 Metro Cash, SARS and the laws (1999) Taxgram Juta October, at page 1.
41 SARS Media Release No 22 of 1999 September; and Metro Cash, SARS and the law (1999) Taxgram Juta October, at page 2.
42 Metro Cash, SARS and the law (1999) Taxgram Juta October.
43 Reynolds D A A Lawyer’s Conscience South African Law Journal (1993) 10 at page 153.
44 Ibid. at page 155.
45 Ibid.
46 Metro Cash, SARS and the law (1999) Taxgram Juta October, at page 1.
47 Hoexter C & Lyster R The New Constitutional & Administrative Law (2002) Juta, at page 193; Rose v Johannesburg Local Road Transportation Board 1947 (4) SA 272 (W).
48 South Africa.1995.Third Interim Report of the Commission of Inquiry into certain aspects of the Tax Structure of South Africa. Pretoria: Government Printers. Chairperson: M. Katz.
49 Williams R C The South African Revenue Service ‘Client Charter’ South African Law Journal (1998) 115(3) at 527.
50 Ibid.
51 See sections 3.6 supra and 4.2.4 and 4.2.5 infra.
52 Ibid at page 528.
53 Williams R C The South African Revenue Service ‘Client Charter’ South African Law Journal (1998) 115(3) at page 530.
54 South Africa.1997. Batho Pele – People First: White Note on Transforming Public Service Delivery. Pretoria: Government Printers.
55 C Lange et al (eds) The Right to Know Siberlnk 2004 at page 7.
56 South Africa.1994. First Interim Report of the Katz Commission of Inquiry. Pretoria: Government Printer.
57 SARS Internal Audit Manual – Part 4: The Audit Process; Williams R C et al Silke on Tax Administration (April 2009) Lexis Nexis at para 8.17 generally. In Minister for Provincial and Local Government of the RSA v Unrecognised Traditional Leaders of the Limpopo Province, Sekhukhuneland [2005] 1 All SA 559 (SCA) the appeal court found in favour of the public member seeking a report upholding the right of access to information held by the State, read with sections 36 (the limitation clause) and 39(2) (obliging every court to promote “the spirit, purport and objects of the Bill of Rights” of the Constitution (Bato Star Fishing (Pty) Ltd v Minister of Environmental Affairs 2004 (7) BCLR 687 (CC) followed)); In Scherer v Kelley (1978) 584 F.2d 170 where the United States of America Freedom of Information Act §552(a)(2)(C) requires agencies to make public administrative staff manuals and instructions to staff that affect members of the public. This is similar to provisions in the Promotion of Access to Information Act 2 of 2000.
58 Ibid.
59 Ibid.
60 Chairman of the Board on Tariffs and Trade and Others vs Brenko Inc and Others 64 SATC 130 at para’s [29] and [30]; cf Bernstein and Others v Bester and Others NNO 1996(2) SA 751 (CC) at para’s 584F-I; See also Gardener v East London Transitional Local Council and Others 1996(3) SA 99 (E) 116E-G.