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 –
188.8.131.52 Constitutionality of the inquiry and audit
The lawfulness of the inquiry and audit on constitutional grounds is applicable in this instance where SARS has failed to comply with its constitutional obligations in ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution, read with s 4(2) of the SARS Act. SARS is governed by the values and principles enshrined in the Constitution that specifically obligate it to provide services within the scope of the powers provided in the Constitution, and which are impartial, fair, equitable and without bias, in an accountable fashion and through fostering transparency with timely, accessible and accurate information (as analysed and discussed in Chapter 4). Transgressing these constitutional obligations brings the conduct of SARS within the realms of the constitutional principle of legality, and subject to review in terms of Rule 53.
SARS would also have to show compliance with its Code of Conduct85 published on the SARS website, read with its unpublished SARS Internal Audit Manual86 which provides specific guidelines to SARS officials on how to conduct an inquiry and audit in line with these constitutional obligations. The manual is a practical working tool for SARS officials, ensuring that they perform their statutory duties in accordance with the directions given under the hand of the Commissioner, who is given the power to administer the Income Tax Act. Consequently, for SARS to exercise its discretion lawfully in terms of ss 74A and 74B, it should (in line with the guidelines) demonstrate that: it has ‘insight into…the business process of the taxpayer…’;87 after ‘screening the tax returns…(the taxpayer)…warrant(s) an audit…’;88 it has identified ‘which elements of the tax return(s) need to be audited…’;89 and it has obtained ‘information from other sources…(on)…the potential issues of the relevant case…’.90
Furthermore, one or more of the jurisdictional facts set out in the definition of ‘the administration of this Act’ in s 74 of the Income Tax Act must exist. For instance: there must be an amount received by accrual to any person that must be in question;91 there must be a property disposed of under a donation;92 there must be a dividend declared;93 in relation to an inquiry into a return, financial statement, document, declaration of facts or valuation, the originating document must also exist to enable the further inquiry;94 the determination of a liability to any tax, interest or penalty with the existence of general evidence to suggest that the person is a taxpayer should at least exist;95 on collecting a liability, where a liability must exist;96 ascertaining an offence under civil investigation (which in itself is an unconstitutional provision because the inquiry and audit provisions are being used for self-incrimination purposes);97 ascertaining general compliance of tax affairs, prefaced by evidence that the person under investigation is subject to the provisions in question by virtue of some fact that exists pointing to the fact that the person is or should be a taxpayer;98 and the enforcement and performance of administrative functions generally under the provision of the Income Tax Act.
If these jurisdictional facts are not met, the conduct of SARS will be unlawful, and inconsistent with the Constitution, and therefore invalid in terms of s 2 of the Constitution.
As a result, ‘just cause’ can be shown to exist under s 75(1)(b) of the Income Tax Act as to why a taxpayer may challenge SARS’ entitlement to seek to enforce the provisions of ss 74A and 74B. The unconstitutional conduct of SARS is also reviewable by virtue of the provisions of s 172(1) of the Constitution: in terms of Rule 53 to the High Court on the basis of a transgression of s 6(2)(i) being ‘action that is otherwise unconstitutional or unlawful’, or in terms of the constitutional principle of legality.
85 http://www.sars.gov.za/home.asp?pid=54195 (last accessed 31 March 2013). 86 See section 3.2: The SARS Internal Audit Manual supra.
87 Ibid, at page 2.
88 Ibid, at page 4.
89 Ibid, at page 5.
90 Ibid, at page 6.
91 Section 74(1)(a)(i) of the Income Tax Act.
92 Ibid s 74(1)(a)(ii).
93 Ibid s 74(1)(a)(iii).
94 Ibid s 74(1)(b).
95 Ibid s 74(1)(c).
96 Ibid s 74(1)(d).
97 R v Jarvis 2002 (3) SCR 757.
98 Ibid s74(1)(f).