Section 80A(c)(ii) of the Income Tax Act 58 of 1962, as amended, introduced a new concept to the South African income tax environment: misuse or abuse of the provisions of the Act. For tax avoidance, sections 80 and 103 of the Income Tax Act must be considered and understood.
Consider the following from SARS:
Tax crime manifests in many forms. Here are some key examples:
- People don’t declare income to evade paying tax on that income.
- People lie about their expenses to reduce the tax they pay or to obtain an undue refund. For example, they may lie about their business mileage, business expenses or even medical contributions.
- People just don’t submit a tax return to SARS or fail to truthfully respond to our questions.
- Employers sometimes deduct tax from employees and never pay it over to SARS.
- Vendors, whether registered for VAT or not, sometimes charge VAT and never pay it over to SARS.
- Entities submit fraudulent invoices in an attempt to pay less tax or obtain undue (fraudulent) refunds (Income Tax and VAT).
- Individuals do not register for tax purposes to evade paying their dues.
- People do not submit returns as and when required to evade paying taxes due to SARS.
- Employers withhold employees’ tax (PAYE) and do not pay it over to the SARS.
When enforcing tax and customs legislation, SARS plays a particular role within the Criminal Justice System. SARS is statutorily mandated through its legislation to conduct criminal investigation into tax offences. Once the criminal investigation of the alleged tax offence is finalised, a formal complaint is registered with the South African Police Service to give effect to commencing the criminal justice process. The case docket is referred to the National Prosecuting Authority (Special Tax Unit prosecutors) to decide whether to institute a criminal prosecution.
SARS has a role in administering laws not necessarily related to tax and customs but are essential to protect the South African economy. For example, Customs must prevent harmful goods from entering South Africa, such as alien species which may endanger our natural resources or residents.
For these reasons, SARS supports other government agencies in the investigation of money laundering and corruption activities. We are active participants in the Multi-Agency Working Group (MAWG) and the Anti-Corruption Task Team charged with combating government corruption. Working through these forums has enabled SARS to confront complex international schemes that we could not have achieved independently.
Laws such as the Financial Intelligence Centre Act (FICA), the Prevention of Organised Crime Act (POCA), and Prevention and Combating of Corrupt Activities Act (PRECCA), Drugs and Drug Trafficking Act, oblige us to support the Police, the Financial Intelligence Centre (FIC) and other agencies in criminal investigations.
To facilitate collaboration between different agencies SARS has entered into Memoranda of understanding (MOU’s) with various government agencies. A MOU between the NPA and SARS is aimed at increasing our collaborative efforts to ensure that those who must be brought to book – whether it’s tax offence or a crime – are brought to book.
SARS has partnered with the US’s Internal Revenue Service Criminal Investigation (IRS-CI) division to detect and fight tax and economic crimes affecting both countries. SARS and the IRS-CI said they would work together to identify and investigate crimes such as international public corruption, cyber fraud, and money laundering. The newly formed partnership has already uncovered emerging schemes perpetrated by promoters, professional enablers, and financial institutions.
GAAR (general anti-avoidance rule)
The general anti-avoidance rule was enacted in section 103(1) of the Income Tax Act 58 of 1962, as amended (the Act). This section was repealed by section 36(1)(a) of the Revenue Laws Amendment Act 2006 and replaced by a new general anti-avoidance rule enacted in Part IIA of the Act.
Part IIA contains sections 80A to 80L, which target impermissible tax avoidance arrangements. These provisions apply to any arrangement (or any steps therein or parts thereof) entered into on or after 2 November 2006.
Part IIA defines an “impermissible avoidance arrangement” as any avoidance arrangement described in section 80A.
Section 80A has four requirements to determine whether an arrangement is an impermissible tax avoidance arrangement. In short, the four requirements are as follows:
(1) An avoidance arrangement (as defined) is entered into or carried out.
(2) It results in a tax benefit (as defined).
(3) Any one of the following “tainted elements” is present:
- abnormality regarding means, manner, rights or obligations;
- a lack of commercial substance (as defined) in whole or in part; and
- misuse or abuse of the provisions of this Act (including Part IIA).
(4) The sole or main purpose is to obtain a tax benefit.
The misuse or abuse requirement is contained in section 80A(c)(ii) of the Act read in conjunction with Section 103 of the Income Tax Act 58 of 1962.
Back in 2006, the Explanatory Memorandum to the Revenue Laws Amendment Bill of 2006 (Explanatory Memorandum) stated that the legislature has relied on, amongst others, the Canadian precedent in introducing the “misuse or abuse” concept. Section 80A(c)(ii) of the Act has its roots in the Canadian general anti-avoidance rule, which is contained in section 245 of the Canadian Federal Income Tax Act (Canadian Act).
The OECD has defined “tax evasion” as encompassing “illegal arrangements through or by means of which liability to tax is hidden or ignored,” that is, arrangements in which “the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities”.
In an income tax context, it typically involves the non-payment of a tax that would properly be chargeable if the taxpayer made a full and true disclosure of income and allowable deductions. Common examples of tax evasion include a deliberate failure by a “cash” business to report the full amount of revenue received or the deliberate claiming of a deduction by a business for an expenditure it has neither incurred nor paid.
Impermissible Tax Avoidance
Another term to note is that of impermissible tax avoidance. Arising from a tax-related court case in Australia, a definition of this term is of use to the reader.
“Income tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had”.
The impact of these global forces on the problem in South Africa has been exacerbated by local factors as well. These include the major changes that have been made to the South African income tax system over the past few years, including the shift from source to residency based taxation, the concomitant enactment of new “controlled foreign company” rules, the introduction of a new tax on capital gains, and the adoption of new company restructuring rules. At its worst, the very complexity of some of these new provisions can interfere with legitimate business transactions, while in some cases actually creating new opportunities for illegal “creative accounting”.
The Harms Caused by Impermissible Tax Avoidance
The harms caused by impermissible tax avoidance are varied and pervasive. They include short-term revenue loss, growing disrespect for the tax system and the law, increasingly complex tax legislation, the uneconomic allocation of resources, an
unfair shifting of the tax burden, and a weakening of the ability of Parliament and National Treasury to set and implement economic policy.
In closing note the difference between evasion, planning and avoidance.
Tax Evasion: using unlawful methods to pay less or no tax. Usually, this constitutes fraud, i.e. falsifying statements or presenting false information to the South African Revenue Service (SARS) with penalties including imprisonment.
Tax Planning: legally, you may arrange your financial affairs in such a way as to reduce your tax liability; a commonly used approach would be to make contributions into a retirement annuity to receive a tax refund and, by doing so, you can use the funds to build long-term wealth whilst deferring an income tax liability until the point of receiving a benefit.
Tax avoidance: is everything in between which constitutes you paying less tax than SARS would like.