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 –
184.108.40.206 Legitimate expectations
Depending upon the circumstances of the case, a taxpayer may have legitimate expectations120 that a hearing will be given, or that he or she will be consulted before a decision is taken, or that a decision will be taken in his or her favour when SARS seeks to invoke its powers in terms of ss 74A and 74B. Such legitimate expectations may arise because a taxpayer has relied on an arrangement (SARS has agreed to enter into an exchange of information with the taxpayer), a promise (SARS has agreed not to take further steps until certain undertakings for information have been concluded with the taxpayer – such as a letter of findings) or previous conduct by SARS where it has become practice or customary for SARS to exchange information with the taxpayer before making formal demands in terms of ss 74A and 74B – such as compliance with SARS’ Code of Conduct read with its internal guidelines in the unpublished SARS Internal Audit Manual.
In many instances these open lines of communication will not exist between SARS and the taxpayer. So, in order for the taxpayer to determine the lawfulness, reasonableness and procedural fairness121 of SARS’ actions in commencing any inquiry and audit, it is necessary for the taxpayer to obtain certain key information that SARS to ensure that their conduct is constitutionally compliant with their constitutional obligations of a high degree of professional ethics being displayed, impartiality, fairness and unbiased conduct, with accountability and transparency, as envisaged in s 195(1) of the Constitution, read together with SARS’ general duty to give adequate notice of its decision to inquire and audit in terms of s 3(1) and (2) of PAJA, and adequate reasons in terms of s 5(1) and (2) of PAJA as to why the inquiry and audit is required. All these constitutional obligations form part of SARS’ Code of Conduct, creating the legitimate expectations (with the constitutional obligations imposed on them) that taxpayers are entitled to rely upon.
Should SARS fail to adhere to these legitimate expectations (with the supporting constitutional obligations), the taxpayer may refuse to submit to the requests of SARS in terms of ss 74A and 74B. The appropriate defence to SARS raising the criminal provisions of s 75(1)(b) of Income Tax Act would be that the taxpayer’s conduct is justified, and that the taxpayer has ‘just cause ‘not to answer to SARS’ request, until SARS complies with its legitimate expectations, and other constitutional obligations.
Should SARS seek to obtain the information by force, it would have to bring the
appropriate application to court in terms of s 74D122 of the Income Tax Act setting out in an ex parte application what its suspicions regarding the taxpayer are – so SARS would have to provide a form of ‘adequate reasons’ anyway. The process of providing information to the court is in essence no different to providing the taxpayer with the information justifying the decision by SARS in terms of ss 74A and 74B.The taxpayer would also be entitled to the information placed before the court to justify the application brought by SARS in terms of s 74D.
Once a legitimate expectation has been created, any attempt by SARS to avoid that legitimate expectation can be met by a review application, and ss 6, 7 and 8 of PAJA, or the principle of legality, would be appropriate. The transgression of a legitimate expectation will be reviewable directly in accordance with a transgression of the codified ground of review that SARS’ conduct is unlawful or unconstitutional as envisaged in s 6(2)(i) of PAJA, or contrary to certainty and compliance with the rule of law in terms of the constitutional principle of legality.
120 Section 3.6: Legitimate Expectations supra; See also Williams R C et al Silke on Tax Administration (April 2012) Lexis Nexis at para 3.25 generally.
121 See sections 3.3: Lawfulness, 3.4: Reasonableness and 3.5: Procedural Fairness, supra; LAWSA Vol 5(3) 2nd ed at para 165; Commissioner of Taxes v CW (Pvt) Ltd 1989 (3) ZLR 361 (S) at 370F-372C; Union Government (Minister of Mines and Industries) v Union Steel Corporation (South Africa) Limited 1928 AD 220, 236-7; and National Transport Commission v Chetty’s Motor Transport (Pty) Ltd 1972 (3) SA 726 (A); See also Local 174 International Brotherhood
of Teamsters v US, 240 F.2d 387; US v Newman 441 F.2d 170; US v Coopers and Lybrand F Supp 942; Hubner v Tucker 245 F.2d 35; First National Bank of Mobile v US 160 F.2d 532.
122 In Pullen NO Bartman NO & Orr NO v Waja 1929 TPD 838; Haynes v Commissioner for Inland Revenue 2000 (6) BCLR 596 (T); See also Hunter et al v Southam Inc (1984) 2 SCR 184, (1984) 11 DLR (4th) 641 (SCC); Williams R C
et alSilke on Tax Administration (April 2009) Lexis Nexis at para 8.12 generally.
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