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 7 – CONCLUSION
7.4 ADMINISTRATIVE ACTION, THE RULE OF LAW AND THE PRINCIPLE OF LEGALITY
The rule of law concept in the words of Neil MacCormick is as follows: ‘[t]he very idea of the “rule of law” or Rechtsstaat is that of a state in which determinate and pre-determined rules govern and restrict the exercise of power and regulate the affairs of citizens.’13 Primarily, the rule of law principle requires that the legal system comply with minimum standards of certainty, generality and equality. The rule of law is a fundamental ideological principle of modern Western democracies, and as such, we are often asked to believe in it with unquestioning acceptance, even though Western states often honour the principle in the breach.’14
To exercise its discretion under ss 74A or 74B, SARS is exercising public power that is conduct. If that conduct is contrary to the rule of law as set out in s 1(c) of the Constitution, and the constitutional principle of legality, because it does not complywith, inter alia, the basic jurisdictional facts of the provisions of ss 74A and 74B, read with s 74 of the Income Tax Act, or the constitutional obligations in ss 33, 41(1), 195(1) (read with s 4(2) of the SARS Act) and 237 of the Constitution (including lawfulness, reasonableness, procedural fairness, and reasons), the conduct will be invalid.
The jurisdictional facts require that the inquiry and audit is in respect of a specific taxpayer.15 One or more of the jurisdictional facts in the definition of ‘the administration of this Act’ in s 74 must be present and substantiated with rational reasons that connect the provision in the definition in question in s 74 to a specific fact driving the necessity to conduct the inquiry and audit, or to an inference drawn from a specific fact.
Here the Code of Conduct and the SARS Internal Audit Manual serve an important purpose as a guide to what to expect as proper administrative governance where SARS exercises this discretion and makes a valid decision. In essence a legitimate expectation is created in favour of taxpayers as to what they can expect in ss 74A and 74B interactions with SARS from the Code of Conduct with the unpublished SARS Internal Audit Manual serving an important purpose by informing the taxpayer what can be expected of SARS in complying with its constitutional obligations when inquiring and auditing the tax affairs of a taxpayer – where the taxpayer can expect fairness, equal treatment, impartiality, accountability and transparency. It is for this reason that the unpublished SARS Internal Audit Manual should be made available to the public, as the approach by SARS to taxpayers’ tax affairs are directly affected by its content.16
The discretion, as indicated by the use of the word ‘may’, must be exercised lawfully, reasonably and procedurally fairly.17 The SARS official must not, inter alia, be driven in pursuing the inquiry and audit by the ulterior motive of fulfilling his or her internal management goals or budget at SARS, or be using this administrative process as a means to obtain evidence to penalise the taxpayer, contrary to the provisions of s 35(3)(j) of the Constitution, or to follow a discretion fettered by a SARS management directive, without considering its proper application to the facts of the taxpayer in question. The official cannot exercise power arbitrarily or merely in good faith in the belief that a decision is rationally18 related to the purpose for which the power was given, albeit mistakenly. This would give credence to form over substance, undermining the applicable constitutional principles.
Lawfulness embraces the administrative law concepts of authority, jurisdictional facts and abuse of discretion (including improper or ulterior purpose or motive, mala fides,19 failure to apply minds or relevant and irrelevant considerations, unlawful fettering, and arbitrary and capricious decision making) in limiting the ability of SARS to act in terms of its powers under ss 74A and 74B.
These concepts of administrative law relate to SARS’ duty to attend to the following
points regarding inquiries and investigations in relation to ss 74A and 74B:
a) the inquiry and investigation must relate to a taxpayer as defined;
b) the SARS official must hold a valid letter of authorisation;
c) the discretion of SARS must be exercised lawfully subject to its guidelines;20 d) the inquiry or investigation must relate to the facts relevant to the definition of ‘the administration of this act’ contained in s 74.
In addition to the satisfaction of the above requirements, SARS must ensure that invoking ss 74A and 74B is reasonable (rational and proportional)21 and
procedurally fair(no bias, adherence to the audi principle and any legitimate expectation22 created).23
Reasonableness24 deals with the administrative law concepts of rationality and proportionality where SARS seeks to invoke its powers under ss 74A and 74B. SARS must show a rational connection between the decision to invoke ss 74A and 74B and the inquiry and audit of a named taxpayer, who has not already undergone an inquiry and audit in respect of the same tax issue, in the absence of new information not previously considered. This approach is in line with the methodology promoted by SARS to its assessors in terms of the Code of Conduct and the SARS Internal Audit Manual.
In terms of the concept of proportionality, when SARS conducts an inquiry and audit pursuing a legitimate aim, where the means adopted to achieve the aim are appropriate, the least restrictive means should be adopted to achieve that aim, and SARS must be able to demonstrate that the exercise of its powers in terms of ss 74A and 74B is justified,25 and is the least intrusive26 means of achieving this legitimate aim. SARS must show that the information can only be obtained from the taxpayer and not by some other, less intrusive means, or that it does not already have the information from tax return filings made by the taxpayer, or from information previously submitted by the taxpayer or third parties.27
The concept of procedural fairness28 in relation to ss 74A and 74B concerns the question of bias and the audi alteram partem principle. Where a SARS official has the smallest pecuniary interest in the outcome of a decision taken in terms of ss 74A and 74B, a reasonable suspicion of financial bias will exist. The taxpayer has to prove merely the appearance of partiality, rather than its actual existence. If these elements are present the procedural fairness of SARS’ conduct will be in question.
The audi principle gives taxpayers an opportunity to participate in any decisions that affect them, and allows them to influence the outcome of those decisions. The difficulty in the audi principle is that the courts have held that there is no single set of principles for giving effect to the rules of natural justice which will apply to all investigations, inquiries and exercises of power, regardless of their nature. There are instances where SARS will argue that the audi principle would not be fair to it in its exercising of its duty to conduct inquiries and investigations, as the taxpayer will be given ample opportunity to object as part of the statutory dispute process under objections and appeals in the Income Tax Act. SARS will argue that the application of the audi principle to inquiries and investigations would be disruptive to this process and would create unnecessary hardship for SARS in exercising its duties. The counter argument to this is that a matter is right for adjudication under administrative law when, although the right that may be transgressed in future is not yet available to the taxpayer, it is clear that the preliminary steps taken by SARS will eventually prejudice that right in the future, giving the taxpayer the right to challenge and review any unlawful, unreasonable, or procedurally unfair (and unconstitutional and ‘invalid’) conduct by SARS in making the decision.29
Apart from the right to lawful, reasonable and procedurally fair administrative action, taxpayers may also have a legitimate expectation30 that SARS will invoke its powers under ss 74A and 74B in a particular manner. Here taxpayers may expect SARS to have complied with its Code of Conduct and to have taken the appropriate steps as detailed in the guidelines provided to assessors in the SARS Internal Audit Manual.
SARS’ Code of Conduct states that SARS : ‘…[will be] loyal to the Republic, honour the Constitution and abide by it in the execution of daily tasks; put the public’s interest first …; … serve the public in an unbiased and impartial manner …; … treating members of the public as valued clients who are entitled to receive the highest standards of service; … recognises the public’s right of access to information …; strives to achieve the objectives … cost-effectively and cost efficiently without compromising the legitimate expectations of the public; … recuses … (itself) … from any … action or decision-making process which may result in improper personal gain … (and) … promotes sound, efficient, effective, transparent and accountable administration …’.
These extracts from SARS’ Code of Conduct also reiterate the constitutional obligations of SARS. Furthermore, the publication by SARS of this document on its website creates the legitimate expectations stated in the document that SARS will ‘… strive … to achieve the objective … cost effectively and cost efficiently without comprising the legitimate expectations of the public …’ and in accordance with its constitutional obligations set out in ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution.
In addition, by virtue of the provisions of ss 3(2), 5(1) and 5(3) of PAJA the taxpayer may require SARS to issue the taxpayer with adequate reasons31on making the decision to inquire and audit in terms of ss 74A and 74B, before embarking on any such inquiries or audit.
As part of the justification or defence raised by SARS against a challenge from a taxpayer that ss 74A and 74B is being unlawfully, unreasonably and procedurally unfairly (and unconstitutionally) invoked, and that SARS is not required to give adequate reasons at this stage of the process, SARS may argue that the inquiry and investigation process is part of a multi-staged decision-making process which will culminate in a final administrative act to which the taxpayer can object in accordance with the statutory procedures in the Income Tax Act. On this basis, SARS may argue that it is premature for the taxpayer to raise any objection at the inquiry and investigation stage. The counter argument by the taxpayer would be that an inquiry or investigation may lead to the serious consequence of an additional assessment being raised unlawfully if proper administrative procedures leading up to that revised assessment are not followed. In this regard, administrative law has developed in terms of the Constitution as analysed in this thesis to ensure that administrators such as SARS follow a prescribed set of rules in executing every part of its duties so as to ensure that the final decision reached is lawful, reasonable and arrived at in a procedurally fair manner.
The constitutional obligations that the taxpayer can expect SARS to obey and fulfil as quickly as possible in terms of ss 1(c), 33, 41(1), 195(1) and 237 of the
Constitution strengthens the taxpayer’s position in demanding lawful, reasonable and procedurally fair conduct by SARS when invoking ss 74A and 74B. Public administration duties, as set out in ss 41(1) and 195(1) of the Constitution are constitutional obligations that SARS must adhere to.
In exercising a discretion under ss 74A and 74B, all constitutional obligations imposed on SARS must be performed diligently and without delay.32
The enforcement of these constitutional obligations should also now be easier after the Constitutional Court Glenister v President of the Republic of South Africa and Others33 judgment. These constitutional obligations include the duties imposed on government and public administrators (including organs of state such as SARS), in terms of ss 41(1)(d) (which states ‘… all organs of state … must … be loyal to the Constitution …’) and 195(1) of the Constitution. These constitutional obligations help to inform the fundamental rights set out in s 33 of the Constitution, read with PAJA. Failure to adhere diligently to these duties and without delay would result in conduct inconsistent with the Constitution and invalid, which would immediately be reviewable in terms of s 172(1) of the Constitution in terms of PAJA, or the principle of legality,34 as set out in Chapter 5 above.
13 MacCormick N Legal Reasoning and Legal Theory (1995) at page xi.
14 Stewart C The Rule Of Law And The Tinker bell Effect: Theoretical Considerations, Criticisms And Justifications For The Rule Of Law. MacQuarie Law Journal at page 7.
15 See section 3.3.2: Jurisdictional facts supra.
16 Relying on the Promotion of Access to Information Act 2 of 2000 has been unsuccesful to compel SARS to produce the SARS Internal Audit Manual to show the guidelines created by SARS in its directions to officials making an inquiry or doing an audit. In Scherer v Kelley (1978) 584 F.2d 170 (quoted from the headnote): 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. See 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  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).
17 See sections 3.3: Lawfulness, 3.4: Reasonableness and 3.5: Procedural Fairness, supra.
18 University of Cape Town v Ministers of Education & Culture (House of Assembly & House of Representatives) 1988 3 SA 203 (C); See also LAWSA Volume 1 2nd ed Administrative Law Lexis Nexis at para 139 footnote 6; See also s 6(2)(f) of PAJA.
19 See section 3.3.3: Abuse of discretion supra; See also US v Roundtree 420 F.2d 845 where a ‘(t)axpayer against whom government was attempting to enforce summons and who claimed harassment was entitled to take deposition of internal revenue agent in charge of case in order to investigate Internal Revenue Service’s purpose.’
20 Code of Conduct and the SARS Internal Audit Manual.
21 See section 3.4: Reasonableness supra.
22 See section 3.6: Legitimate Expectations supra. See also Currie I & Klaaren J Promotion of Administrative Justice Act Benchbook (2001) SiberInk at 80. See also Williams R C et al Silke on Tax Administration (April 2009) Lexis Nexis at para 3.25 generally.
23 See section 3.5: Procedural Fairness supra.
24 See section 3.4: Reasonableness supra; LAWSA Volume 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 38; 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.
25 Nyambirai v Nssa & Another 1995 (2) ZLR 1 (S) and De Freitas v Permanent Secretary of Agriculture, Fisheries, Lands and Housing 1998 3 LRC 62; See also Law Society of Zimbabwe and Another v Minister of Finance 61 SATC 458; Ferucci and Others v Commissioner for South African Revenue Service and Another 65 SATC 47 at pages 54-55; US v McCarthy 514 F 2d 368.
26 R v McKinlay Transport  1 S.C.R. 627; cf.US v McKay 372 F.2d 174 where the court held the ‘(p)ower of Commissioner of Internal Revenue to investigate records and affairs of taxpayers is greater than that of a party in civil litigation; such power may be characterized as an inquisitorial power…which should be liberally construed, in context of which the criteria of relevancy and materiality have broader connotations than in context of trial evidence.’
27 Supra footnote 25.
28 See section 3.5: Procedural Fairness supra.
29 Hoexter(2012) at page 229 footnote 438 – Du Preez v Truth and Reconciliation Commission 1997(3) SA 204 (A); Director: Mineral Development, Gauteng Region v Save the Vaal Environment 1999(2) SA 709 (SCA); Ferreira v Levin NO and Others; Vryenhoek and Others V Powell NO and Others1996 (1) BCLR 1 (CC) at para’s  – ; See also Croome B Taxpayers’ Rights in South Africa Juta 2010 page 207; Wheelright K Taxpayer’ Rights in Australia in Bentley D Taxpayers’ Rights: An International Perspective Revenue Law Journal Bond University: Queensland 1998 at page 49; Park-Ross and Another v Director: Office for Serious Economic Offences1995 (2) SA 148 (C) at paras [1641-165A; Nomala v Permanent Secretary, Department of Welfare and Another 2001 (8) BCLR 844 (E); Transvaal Coal Owners Association and Others v Board of Control 1921 TPD 447 at 452; Gool v Minister of Justice 1995 (2) SA 682 (C); Afdelings-Raad van Swartland v Administrateur, Kaap 1983 (3) SA 469 (C).
30 See section 3.6: Legitimate Expectations supra; See also Currie I & Klaaren J Promotion of Administrative Justice Act Benchbook (2001) SiberInk at 80. See also Williams R C et al Silke on Tax Administration (April 2009) Lexis Nexis at para 3.25 generally
31 See section 2.5: Adequate Reasons supra; In this regard, the taxpayer would be entitled to request ‘adequate reasons’ in terms of section 5(1) and (2) of PAJA for the decision taken by SARS to invoke the provisions of ss 74A and 74B; See also CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA) at para’s  and ; Ansett Transport Industries (Operations) Pty Ltd and Another v Wraith and Others (1983) 48 ALR 500; Minister of Environmental Affairs & Tourism & others v Phambili Fisheries (Pty) Ltd & another  2 All SA 616 SCA at para ; Gumede v Minister of Law and Order 1984 (4) SA 915 (N); Van Dorsten J L The Right to reasons for Decisions in Taxation Matters The Taxpayer October (2005) at 186-190 before CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA). As to reason in tax matters generally in the United States Supreme Court in US v Powell 379 US 48 (quoted from the headnote): the court held that where the ‘(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)
32 Section 237 of the Constitution; See also Minister of Health and Others v Treatment Action Campaign and Others (1) 2002 (10) BCLR 1033 (CC) at para .
33 2011 (3) SA 347 (CC) at para’s  and  held that the High Court had jurisdiction to hear applications challenging the non fulfilment of constitutional obligations such as ‘to act reasonably and accountably; to cultivate good human resource management; to respect international treaty obligations; … and to respect values enshrined in the Bill of Rights.’; See section 2.4 supra.
34 Through a Rule 53 application to the High Court – Uniform Rules of Court, GNR 48 of 12 January 1965, made under s 43(2)(a) of the Supreme Court Act 59 of 1959, hereinafter referred to as ‘Rule 53’.