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 6 – THE IMMEDIATE FUTURE
6.4 REQUEST FOR RELEVANT MATERIAL, AUDIT SELECTION AND FIELD AUDIT
The differences between the provisions of ss 40 through 49 of the proposed Tax Administration Act, and ss 74A and 74B are summarised infra. SARS will be able to:
1. Request information ‘that may be useful in assessing tax, collecting tax, or showing non-compliance’,22 broadening the scope of its audit investigation to include ‘relevant material’ that it subjectively believes ‘may be useful’ for its purpose;
2. Request information for the ‘administration of a tax act’ to ‘investigate whether an offence has been committed in terms of a tax act’ and then, if in its subjective belief this is so ‘lay criminal charges…(and)…provide the assistance that is reasonably required for the investigation and prosecution of tax offences or related common law’,23 broadening the scope of the offence investigation provisions currently contained in s 74 of the Income Tax Act under the definition of ‘the administration of this Act’;
3. Request information in respect of classes of taxpayers, and not just in respect of a named taxpayer, ‘whether identified by name or otherwise objectively identifiable’ and ‘objectively identifiable class of taxpayers’.24 For example, members of an exclusive sports club, although SARS will still have to identify the class of taxpayers using an objective means. It may be in the example cited that some of the members of the club are foreigners, who are not taxpayers, and the club may have no objective means at its disposal to objectively identify who is a taxpayer, or should be a taxpayer, and who is not. The scope of the request for information has broadened to ‘for the purposes of tax policy design or estimation’.25 If the ‘relevant material’ is specifically requested for this purpose, based on the conclusions reached elsewhere in this thesis, if SARS were to make this information available to assessors to issue revised assessments or criminal investigators to investigate a prosecution or imposition of a penalty26 (that is punitive in nature, such as additional tax), the legal concept of entrapment would be available to the taxpayer as a defence. This is an untested proposition, but one entitled to know what case they are facing if they are the subject of an adversarial investigation.27 Facing an inquiry for statistical information that is subsequently used to pursue the taxpayer would be constitutionally questionable. However, in S v Riaz Hassen and Another28 the Constitutional Court endorsed the finding of Le Roux J that ‘entrapment’ is not per se a violation of an accused’s right to a ‘fair trial’ contained in s 35(3) of the Constitution. The Constitutional Court confirmed that the propriety of the admission of evidence consequent to the ‘entrapment’ of an accused must be examined on an ad hoc basis with the court carefully examining whether the prerequisites for the setting up of the trap were complied with prior to the setting up thereof.29 The question of entrapment is potentially a difficult one. In Dube v S30 the constitutional challenge of the appellant was whether the admission of the evidence of the entrapment rendered the trial of the appellant unfair. The court concluded that the admission of the evidence of the entrapment had not rendered the trial unfair and that, if anything, it was advantageous to the administration of justice. There was, in its opinion, nothing unfair about the setting up of the trap and it was held that the appellant was the victim of his own greed and dishonesty.31 However, entrapment was specifically used in that case to entrap a suspected and allegedly dishonest accused. The approach by SARS would not normally be premised by such facts. What would more likely happen is that SARS may discover evidence, in the course of conducting the statistical analysis, of a transgression and only then submit the information to the assessor or the criminal investigator after the fact. In Nortjé v S32 Foxcroft J at 459 states:
In a work called “Entrapment in Canadian Criminal Law”, Michael Stober summarizes the position in Canada as follows at 74: “Although entrapment situations have been before the Courts that is nevertheless available to taxpayers, simply because SARS would have obtained information from the taxpayers concerned under the false pretences of actually accumulating information to attend to statistical analysis, and not to collect evidence for revised assessment or criminal investigation purposes. Taxpayers are always, in terms of constitutional guarantees analysed in this thesis, in Canada on several occasions, there is no clear authority, statutory or otherwise, nor a rational foundation for a defence of entrapment. In some cases, Judges have either denied the existence of the defence or skirted the issue entirely, disposing of the case before them upon other considerations. In others, there has been a common feeling among Judges that a person should not be subjected to such unconscionable practices, and consequently, courts have groped for some legal principle or device in order to exonerate the accused.” The Canadian cases show a move towards recognising the defence but in R v Mack 44 CCC 3D at 513, the Canadian Supreme Court ruled that while entrapment is a “defence”, it is based on the need to preserve the purity of the administration of justice and to prevent an abuse of its own processes. With reference to the Canadian Charter of Rights and the defence of entrapment, Stober points out (and I use the language of the Report at page 63), that “an aggrieved person must demonstrate to the court that police action infringed his rights and freedoms. The courts must, in reviewing police practices, decide first whether these practices violated the person’s fundamental rights (for example right to life, liberty and security) and second whether such practices have been carried out in accordance with the principles of fundamental justice. In answering these questions the Charter prescribes that such limits be placed on these rights as can be demonstrably justified in a free and democratic society.” Stober concludes at 189 that where, for example, government officials violate the personal integrity and privacy of a person through entrapment (by means of coercive tactics designed to induce an innocent person to commit an offence) it cannot be denied that his fundamental rights have been infringed. “Such conduct is far removed from any notion of fair play inherent in the principles of fundamental justice.” See Commission Report, p 64. The Canadian Courts are therefore not prepared to allow the criminal justice system to be discredited by the admission of evidence obtained in contravention of constitutional rights. Where the police act improperly, a balance should be struck between protection of the community and the protection of the individual. This balance is struck by the exclusion of evidence which brings the administration of justice into disrepute. In the words of Stober at 217: “It is offensive to common notions of decency and fair play to admit such evidence.” [Commission Report, p 65].
The writer submits that the Constitutional Court should ultimately follow the line of reasoning set out in the Canadian Commission report above. However, further discussion or analysis of this point is outside the scope of this thesis.
Despite the difficulties with entrapment, the other defence available to the taxpayer would be a transgression by SARS of the constitutional guarantee of not using any evidence given to SARS under compulsion, as discussed in detail earlier in this chapter. This defence would assist in criminal prosecutions, but not in SARS raising a revised assessment. The final point on this proposed section, is that the taxpayer would have ‘just cause’ in not furnishing any information to SARS until it was advised what the precise scope and purpose of the request for ‘relevant material’ was, so as to enable it to enforce any rights the taxpayer may have to avoid constitutional breaches by SARS. This begs the question – if the taxpayer has been dishonest and this has been unearthed by the statistical analysis taking place, why should SARS not be entitled to hand over the information to the appropriate authorities? The answer to this question lies in the fact that organs of state such as SARS must also abide by a set of laws equally applicable to them that ensures the prevalence of the rule of law. Just because the taxpayer breaks the law, does not mean that SARS can also break the law so as to pursue the taxpayer. The wrong of SARS does not trump the wrong of the accused. The provisions of the Constitution apply specifically to SARS to ensure they comply with respecting the fundamental rights of accused who have allegedly broken provisions of tax acts;
4. Request any ‘relevant material’ that ‘is foreseeably relevant’.33 This new proposed addition can be relied upon by taxpayers to ensure that SARS is specific in what they require as ‘relevant material’ from taxpayers. It would not suffice to request the taxpayer to make available general information such as all trial balances for specified years of assessment, but that SARS is required to be more specific – specify which information from the trial balances they require. Again ‘just cause’ would arise in favour of the taxpayer not to submit just any ‘relevant material’ until SARS can specify with ‘reasonable certainty’ what is specifically sought by SARS, and for what purpose;
5. Request that the person submitting the ‘relevant material’ must do so ‘under oath or solemn declaration’34 giving rise to the additional potential exposure to that person of a criminal charge of perjury, if the information turns out to be incorrect. Once again, ‘just cause’ will arise in favour of that person not to submit any information ‘under oath or solemn declaration’ until they are certain they will not be committing perjury at some point in the future;
6. Select a taxpayer for audit ‘for the proper administration of a tax act, including on random or a risk assessment basis’.35 Despite the specific proposed wording referring to ‘random’ audits, this is in line with current practice of SARS. Constitutional questions still arise, nevertheless, on whether or not the conduct by SARS would be arbitrary in conducting random audits without the support of at least a risk analysis performed internally at SARS to suggest that a random audit of that taxpayer would be appropriate. Taxpayers would be entitled to access any information from SARS in terms of the Promotion of Access to Information Act36 to access any relevant information from SARS on a risk review of a group of taxpayers that the taxpayer being sought to audit falls into, so that the taxpayer can better understand what the scope and purpose of the random audit is. If SARS can provide these answers, the random audit would not simply be arbitrary, and can be justified by SARS and in line with the Bill of Rights guarantee to taxpayers that they can expect just administrative action from SARS;37
7. Request entry to the business premises of the taxpayer to conduct the audit as set out in s 74B of the current Income Tax Act, but in terms of s 37(5) ‘a SARS official must not enter a dwelling-house or domestic premises (except any part thereof used for the purposes of trade) … without the consent of the occupant’. The use of the word ‘occupant’ is not specific to a representative of a taxpayer, or the owner, or lessee of the premises, but may be any occupant, as long as the occupant gives consent. This provision is in accordance with developed Constitutional Court judgments on the privacy of persons, where the invasion of privacy becomes more justified where the premises in the place of business of the taxpayer.38
The proposed information gathering provisions in the proposed Tax Administration Act do not change the conclusions reached in this thesis. As demonstrated above, the opportunity for the taxpayer to raise the ‘just cause’ defence is increased in some instances where taxpayers have good reason not to participate in an audit. Section 3(3)(f) of the Tax Administration Act on what is meant by for the purposes of the administration of a tax act, was severely criticised by submissions made by the Law Societies of South Africa in respect of the Tax Administration Act,39 as follows:
In terms of paragraph 3 of the Tax Administration Act, SARS is authorised to liaise with the prosecuting authorities and charged with the duty to do all things required for the due prosecution of tax and other offences. In my view Parliament does not have the power to pass an Act containing such a provision. An amendment to the Constitution, 1996 would be required. This is so because section 179 of the Constitution establishes an independent prosecuting authority. It must exercise its functions without fear, favour or prejudice. Neither the Constitution nor the national legislation contemplated in section 179 contemplates that another organ of state, in the executive arm of Government, should be charged with the responsibility of ensuring the due prosecution of charges in relation to which it is the complainant! It is the function of the prosecuting authority to deal fairly with any charge made by a complainant, to have due regard to the rights of the accused person and to decide independently and without fear or favour whether to proceed with a prosecution. I am aware that SARS already has a Criminal Investigations Division that has a liaison of sorts with the DPP. It has with some justification been referred to as a “clandestine collusion” between SARS and the DPP. Details of the liaison have not, as far as I am aware, been made public but we are all aware of the arrangements in terms of which the work of the traditional “investigating officer” [very definitely not employed by the complainant] is now done by a SARS employee in the SARS Criminal Investigations Division, assisted, or even directed, by the special prosecutor presented by the DPP by arrangement with SARS. The prosecution is presided over by a magistrate specially arranged to hear prosecutions of tax offences and presented by courtesy of the Department of Justice by prior arrangement with SARS. Early morning arrests and search and seizure raids are conducted by SARS officials and police officers with media reporters and television cameras in tow arranged, according to the evidence of a SARS official in a recent case, by courtesy of the SARS Media Department. There are those who hold the view that these arrangements and the involvement of SARS officials in the investigation and prosecution process will not withstand scrutiny. They might well be correct. Even if they were not, I am of the opinion that the involvement of SARS officials in the prosecution process cannot be legitimised in the manner now provided for in paragraph 3(2)(e)(ii) and (iii) of the Tax Administration Act.
The Cape Bar prepared a memorandum criticising the Tax Administration Act under the hand of Advocates Milton Seligson SC, Trevor Emslie SC and Joe published in the February 2010 edition of The Taxpayer journal:40
(On s 3(1), (2) and (3) of the Tax Administration Act) – In our view, it should be clarified that the role of SARS is limited…(and)…not itself prosecute taxpayers…The power to prosecute is vested by s 179 of the Constitution in the national prosecuting authority.
(On s 33(1) (and what is now s 40) of the Tax Administration Act) – The broad category of ‘another person’ may include persons who are in possession of ‘relevant material’ that includes material that is subject to legal professional privilege. Provision should be made van Dorsten, for a procedure to challenge any requirement of SARS relating to privileged material, in order to safeguard documents or information that is subject to such privilege.
The scope of the LSSA, Cape Bar Council and other criticisms are beyond the subject matter of this thesis. However, the criticisms clearly illustrate the extent of other concerns expressed on the ability for SARS to investigate, lay and prosecute criminal charges as set out in the Tax Administration Act, and the potential ability for SARS to access through third parties information of a taxpayer subject to legal professional privilege.41
If these proposed provisions become law, taxpayers will have more reason than before to challenge SARS on the scope and purpose of a contemplated inquiry and audit.
Any participation in the prosecution of taxpayers by SARS in the Tax Administration Act is contrary to the provisions of s 179 of the Constitution and the doctrine of the separation of powers entrenched in the Constitution. This may cause a constitutional challenge as to the validity of this aspect of the proposed s 3 of the Tax Administration Act. This may lead to an opportunity for taxpayers affected by this offending proposed provision to raise the ‘just cause’ defence in not participating in an inquiry and audit initiated by SARS, until the constitutional validity of the proposed provision is deliberated upon by the courts.
The uncertainty surrounding the issue of legal privileged information will give taxpayers the opportunity with ‘just cause’ not to participate in the SARS inquiry and audit, until either SARS or a court acknowledges that the ‘relevant material’ excludes legal privileged information of taxpayers.
Next: 6.5 CONCLUSION
22 Section 1 of the Tax Administration Act, definition of ‘relevant material’.
23 Ibid. s 3(1)(f).
24 Ibid. s46.
25 Ibid. s 70(1)(b).
26 See the discussion in this thesis on the Canadian Supreme Court case of R v Jarvis2002 (3) SCR 757, at page 88.
27 R v Jarvis  3 SCR 757.
28 1997 (1) SACR 247 (T).
29 Omar Z The right to privacy and an accused’s right to a ‘fair trial’ under the Constitution De Rebus December 1998 Lexis Nexis (lasted accessed 21 March 2010).
30  1 All SA 41 (N).
31 Dube v S  1 All SA 41 (N) at page 62b.
32  4 All SA 449 (C).
33 Definition of ‘relevant material’ in the Tax Administration Act. These provisions echo the findings of the American courts as follows: US v Powell 379 US 48 (quoted from the headnote): where ‘(p)rimary purpose of clause that no taxpayer shall be subjected to unnecessary examinations or investigations in sub-section of statute going on to provide that only one inspection of taxpayer’s books shall be made for each taxable year unless taxpayer otherwise requests or Secretary or delegate, after investigation, notifies taxpayer in writing that additional inspections are necessary, was no more than to emphasize responsibility of agents to exercise prudent judgment in wielding extensive powers granted to them by Internal Revenue Code’. (Emphasis supplied); US v Brown 536 F.2d 117 (quoted from the headnote): where the cout held ‘“Books, papers, records, or other data” to be produced under … the Internal Revenue Code relating to examination of books and witnesses … did not … authorize the IRS to require the manufacture of documents or other data for examination’; see also Local 174 International Brotherhood of Teamsters v US 240 F.2d 387, where ‘revenue agents … had burden to show that demand was reasonable under all circumstances and to prove that books and records were relevant or material to tax liability of taxpayer…’; May v Davis 7 F Supp 596.
34 Supra footnote 1 at s 46(7).
35 Ibid. s 40.
36 Act 2 of 2000.
37 Sections 33 of the Constitution. Section 195(1)(b) and (f) requires SARS to use its resources efficiently and cost effectively, and requires SARS to be accountable for its decisions. Any arbitrary decision unsupported by underlying research analysis or a reason, would be conduct that is contrary to the provisions of the Constitution, and invalid conduct as stated in s 2 of the Constitution.
38 In Investigating Directorate: Serious Economic Offences and Others v Hyundai Motor Distributors (Pty) Ltd and Others: In re Hyundai Motor Distributors (Pty) Ltd and Others v Smit NO and Others 2001 (1) SA 545 (CC); 2000 (10) BCLR 1079, Langa DP stated (with reference to Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC); 1996 (4) BCLR 449 at para ) that the right to privacy lies along a continuum, where the more a person interrelates with the world, the more the right to privacy becomes attenuated (at para ). The right, however, does not relate solely to the individual within his intimate space, and when people are in their offices, in their cars or on mobile telephones, they still retain a right to be left alone by the state unless certain conditions are satisfied. See M. Dendy, Protection of Privacy, de Rebus, August 2009, Lexis Nexis. http://www.mylexisnexis.co.za (last accessed 31 March 2012). S 14 of the Constitution, 1996. Silke on Tax Administration, at para. 8.19, Lexis Nexis. http://www.mylexisnexis.co.za (last accessed 31 March 2013). Stricter enforcement of the privacy provisions on the Consttution, 1996 are enforced at the dwelling of the person concerned.
39 Drafted by Prof. H Vorster, and first submitted to SARS in June 2009, and again on 5 March 2010 by the LSSA Kris Devan, the PA: Manager Professional Affairs.
40 Comment on the Draft Tax Administration Bill, The Taxpayer Journal, February 2010, at page 24.
41 Heiman Maasdorp & Barker v SIR 1968 (4) SA 160 (W).