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 5 – JUDICIAL REVIEW WITH REFERENCE TO SS 74A AND 74B –

5.5.4 Save where any law otherwise provides and 5.5.5 Show cause

The ‘save where any other law otherwise provides’ is a limitation to applying Rule 53. This limitation would be applicable in the case where statutory provisions require a specific course of action to be taken, such as following the objection and appeal procedure prescribed in the Income Tax Act in specified and promulgated instances. This is not the case with ss 74A and 74B, as this decision is not subject to the objection and appeal procedures in the Income Tax Act. The analysis in section 5.4: Review Application directly to the Tax Court above is also applicable to this section.

Consequently, the review of ss 74A and 74B is available to the taxpayers seeking redress against any unconstitutional and ‘invalid’ conduct by SARS in the exercise of public power, in terms of Rule 53(1). 5.5.5 Show cause In the notice of motion under Rule 53, a supporting affidavit must set out the grounds and the facts and circumstances upon which the taxpayer relies to have the SARS decision set aside or corrected, giving SARS the opportunity to show cause why the decision or proceedings should not be reviewed and corrected or set aside. In such an affidavit, the major premise will set out the provisions of ss 74A and 74B that are being subjected to review, and the supporting constitutional legal principles:

(a) the constitutional premise on which any conduct by SARS must be based, and on which the application is based;
(b) ‘may’, and the manner in which the discretion of SARS is exercised;
(c) for the purposes of ‘the administration of this (Income Tax) Act’, and the satisfaction of one or more of the jurisdictional facts (words added);
(d) ‘taxpayer’, and whether or not the inquiry relates to a named taxpayer;
(e) ‘information, documents and things’, and whether or not the requested information, documents or things are available in a less intrusive manner58 to SARS.

The minor premise will narrow down the legal provisions that are applicable to the facts of the matter under review. The taxpayer can explain that the conduct of SARS in making a decision in terms of ss 74A and 74B is unconstitutional and ‘invalid’ in terms of s 2 of the Constitution, in that SARS has exercised its powers, and has therefore exercised unconstitutional and ‘invalid’ conduct in one or more of the following ways:

o SARS has transgressed ‘the rule of law’ in contravention of s 1(c) of the Constitution by failing generally to comply with its constitution obligations spelt out below – this includes the constitutional principle of legality;

o SARS has failed to ‘respect and protect’ the dignity of the taxpayer (where a natural person), because the overhanded conduct by SARS in making demands without proper reasons impairs the self-esteem of the taxpayer, as the taxpayer regards SARS’ conduct offensive, and SARS has failed to respect the taxpayer’s right to privacy without proper justification (applicable to all taxpayers);59

o SARS has acted ultra vires as demonstrated by not satisfying the jurisdictional facts of ss 74A and 74B, read with the constitutional obligations set out in ss 1(c), 41(1), 195(1) and 237 of the Constitution, and read with s 4(2) of the SARS Act;

o SARS has not complied with the taxpayer’s right to ‘just administrative action’ in terms of s 33 of the Constitution, and as expanded in terms of PAJA, in that SARS has failed to comply with its obligations to give proper and adequate notice of its decision in terms of s 3(2) of PAJA, and ‘adequate reasons’ in terms of s 5(1) and (2) of PAJA (without proper justification in terms of s 5(3)) for its decision in terms of ss 74A and 74B, thereby transgressing one or more of the grounds of review in s 6(2) of PAJA;

o SARS has transgressed its constitutional obligation in terms of s 41(1) of the Constitution, and thereby the constitutional principle of legality60 by ignoring that provision – SARS is not entitled to ‘assume any power or function except those conferred on them in terms of s 41(1) of the Constitution’. In terms of the constitutional principle of legality SARS cannot act ultra vires its empowering provision in ss 74A and 74B, meaning compliance with all the jurisdictional facts read with its constitutional obligations in ss 1(c), 33, 195(1) and 237 of the Constitution, read with s 4(2) of the SARS Act;

o SARS has transgressed its constitutional obligations in terms of s 195(1) of the Constitution, as SARS is not entitled to conduct itself contrary to:

 Promoting and maintaining ‘a high standard of ethics’;

 Promoting ‘efficient, economic and effective use of resources’;

 Services that are delivered ‘impartially, fairly, equitably and without bias’;

 ‘accountable’ Public Administration; and

 ‘timely, accessible and accurate information’ fostering ‘transparency’, as set out in s 195(1)(a), (b), (d), (f) and (g);

o SARS has transgressed s 237 of the Constitution, and thereby the principle of legality by ignoring the provisions that state ‘all constitutional obligations must be performed diligently and without delay’; and/or

o SARS has transgressed its legitimate expectations created.61

To illustrate this effectively, the following set of hypothetical facts62 is discussed:

The taxpayer, a professional consultant, has acted on behalf of high profiled clients over a number of years.

A major dispute develops between the taxpayer and one high profile client. The dispute is widely covered in a negative light in the media, setting out unproven and unsubstantiated allegations about the taxpayer’s business dealings.

The client in question is also closely connected to various politicians and government administrators.

At the height of the media reports, the taxpayer receives notices in terms of ss 74A and 74B in respect of various entities where the taxpayer is a shareholder and/or director.

The notices are not addressed to the public officers of these entities, which is the customary manner in which these investigations are usually conducted.

Despite the suspicion that SARS are on a blind fishing expedition63 that is being motivated by the negative media publicity, and the possibility of a complaint lodged by the former high profile client, the taxpayer decides not to question the motives of SARS and enters into an agreed arrangement with SARS to provide information on a weekly basis over a period of time.

In line with the agreement, the exchange of information takes place weekly, until abruptly one week SARS fails to respond to numerous calls made by the taxpayer to furnish the next segment of information.

As a result of this, the taxpayer accepts that SARS have ceased and concluded the audit, without making any findings.

For three years there is no further communication between SARS and the taxpayer.

Until, as abruptly as the inquiry ended, the taxpayer receives a telephone call from SARS to request a meeting. The meeting is conducted and the taxpayer is handed seven notices in terms of ss 74A and 74B, requesting information, documents or things.

It appears ex facie the notices that three of them are in respect of the previous entities already inquired about, where the inquiry ended some three years ago without further explanation or communication. Two of the notices were in respect of shelf companies which the taxpayer sold to clients, in which he has no further interest.

The taxpayer is now especially suspicious that the latest inquiries are being driven by ulterior motives, and that SARS have not done the required homework before they embark upon such an audit. They make no reference to any of the provisions of s 74, or to why the previously concluded audits are being commenced again.

In following and applying the logical sequence of a syllogistic argument in the founding affidavit (based on these hypothetical facts), the minor premise that will underpin the legal principles being sought to being applied will be as follows:

(a) The taxpayer will as applicant aver that he is requesting the review of the conduct of SARS in accordance with the provisions of the Constitution64 on the basis that:

a. The rule of law and the principle of legality is applicable to SARS;65

b. Conduct of SARS must be consistent with the Constitution;66

c. The conduct of SARS is governed by the constitutional obligations imposed on it by ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution.

(b) The following material facts are present:

a. SARS made a decision to audit or investigate the taxpayer, which is conduct as contemplated in the Constitution and PAJA;

b. SARS’ decision was originally made at the height of the negative media reports of the taxpayer;

c. SARS and the taxpayer agreed on what they were auditing and the basis for the exchange of information;

d. The taxpayer complied with the terms of that agreement;

e. SARS unilaterally terminated the agreement abruptly without explanation;

f. The taxpayer accepted SARS’ decision to terminate the audit;

g. Three years later SARS suddenly re-commenced the audit expanding its parameters to include new entities by delivering seven notices on the taxpayer;

h. It is clear ex facie the notices that none of the notices:

i. Are addressed to the public officer, where it is customary for SARS to request and obtain information from an entity’s public officer, unless they are unable to do so;

ii. State compliance with one or more of the jurisdictional facts in the definition of ‘for the purposes of the administration’ of the Income Tax Act;

iii. State why the audit of the previous three entities is being reopened and the same information is being requested again; 176

iv. State why the notices are being addressed to the taxpayer in respect of two entities that he has no association with;

v. Indicate that SARS has at least complied with its Practice Manual that requires it to rely upon concrete evidence, or its Code of Conduct read with the SARS Internal Audit Manual, that requires it to follow certain preliminary procedures on conducting an audit.

i. The taxpayer has not agreed at this early re-commenced audit to participate in the audit absent SARS answering certain questions about the lawfulness of the audit – so as to ensure that SARS is not conducting a fishing expedition influenced by improper motives. The conclusion to the founding affidavit will match the legal principles to the facts. The decision made by SARS to issue seven new notices in terms of ss 74A and 74B to the taxpayer, must be:

(a) grounded on the rule of law and the constitutional principle of legality and be made in compliance will all the jurisdictional facts of ss 74A and 74B – this has not happened here because SARS do not specify which provisions of s 74 (with supporting and explanatory facts) are applicable in the notices. Proof of its compliance would be an explanation of the preparatory work done by it in accordance with the provisions of its Code of Conduct read with the SARS Internal Audit Manual. Evidence of the existence of this (or not) will become apparent when SARS is expected to make its internal record available to the taxpayer as part of the Rule 53 review proceedings;

(b) consistent with the provisions of the Constitution in that the decision must be: 177

a. driven by a high standard of professional ethics – this has not been adhered to because SARS abruptly terminated the audit without reason, and as suddenly recommenced the audit on an expanded basis without reason or explanation;

b. impartial and not influenced by the dictates of outsiders – a reasonable inference can be drawn that the bad media publicity is the one motivator for the audit, as opposed to the audit risk indicators that SARS researches in accordance with the provisions of its Code of Conduct read with the SARS Internal Audit Manual;

c. unbiased conduct – not unduly influenced by financial reward of the SARS officials;

d. accountable – SARS must demonstrate why it is necessary to reopen the previous three audits that it deemed closed, and why the taxpayer must supply it with the same information again. SARS must comply with the jurisdictional facts of s 74 in giving these reasons;

e. transparent – to what extent has SARS conducted a preliminary internal investigation to justify approaching the taxpayer for the information, and is SARS able to furnish proof of this.

It is clear from the conclusions drawn above that sufficient opportunity exists for taxpayers to raise various grounds for reviewing the unlawful, unreasonable or procedurally unfair (and unconstitutional) conduct of SARS in the exercise of its powers in terms of ss 74A and 74B. Sufficient cause would exist to bring a review application in terms of PAJA, or, the principle of legality, in that the conduct of SARS is inconsistent with the terms of the Constitution, and is ‘invalid’ conduct.

Next:  5.5.6 The grounds of review 5.5.6.1 Introduction

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Footnotes:

58 See also US v Coopers and Lybrand 913 F Supp 942.
59 Sections 10 and 14 of the Bill of Rights; See Pretoria Portland Cement & Another v Competition ommission & Others 2003(2) SA 385 (SCA); Bernstein & Others v Bester NO & Others 1996(2) SA 751 (CC) at parra’s [67], [73] and [79] identifies ‘privacy’ with the ‘inner sanctum of a person’, but that all privacy rights are limited ‘to the most personal aspects of a person’s existence, and not to every aspect within his/her personal knowledge and experience.’; See also Investigative Directorate: Serious Economic Offences v Hyundai Motor Distributors (Pty) Ltd: In re Hyundai Motor Distributors (Pty) Ltd v Smit NO 2001(1) SA 545 (CC) at para [18] where it was held that the right to privacy protects intimate space because such a space is a prerequisite for human dignity; See also Probe Security CC v Security Offices’ Board and Others 98 JER 0849 (W).
60 See section 2.4: The Relevance of PAJA and the Principle of Legality supra.
61 in accordance with the analysis in section 3.6: Legitimate Expectations supra. 62 Based on various actual case studies in the writer’s legal practice.
63 Croome B & Olivier L Tax Administration 2010 (Juta) at page 155 where the authors infer fishing expeditions are not lawful; For a comparative American viewpoint see US v Third Northwestern National Bank 102 F Supp 879 where the court held that an arbitrary (random) audit would be unlawful.
64 All administrative law and the review thereof is no seen as part of the Constitution in line with the decision in Pharmaceutical Manufacturers Association of South Africa and another: In Re: Ex Parte President of the Republic of South African and Others 2000 (2) SA 674 (CC). 65 Section 1(c) of the Constitution; Section 2.4: The Relevance of PAJA and the Principle of Legality supra. 66Ibid. s 2.