Tax laws

Unilateral tax laws violate taxpayers’ rights to fair administration

Problematic tax legislation is causing irreparable damage to exporters’ cash flow and the local economy, as one-sided anti-taxpayer laws continue to stifle growth and deter foreign investors.

Shortcomings in the country’s Value Added Tax (VAT) law regarding VAT audits have resulted in the endless withholding of VAT refunds, violating taxpayers’ constitutional rights to fair administration.

In terms of VAT law, exports are zero-rated, which means that exporting companies generally find themselves in a net position of VAT refund. These VAT refunds are an important factor in the operational cash flows of exporters.

Various industry representative bodies and I have expressed concern that Sars is not legally required to finalize VAT audits by any time frame. This results in interminable delays in the payment of refunds, causing companies significant financial difficulties, including insolvency.

During the VAT audit period, there are no legal deadlines for completion. In effect, this means that the taxpayer is often placed in limbo, while all their VAT refunds – current and future – are withheld.

The VAT law is silent on this issue, and Sars maintains that he is free to pursue a VAT audit for one, two, three years or even longer. It cannot be held to any deadline.

Sars may continually extend the audit scope and periods without limitation, and without uncovering concrete evidence of wrongdoing or finalizing the first audit period. And as long as Sars submits successive requests for additional information within 21 days, no interest can accrue on the refund amounts due to the taxpayer.

To make matters worse, no partial refunds are possible during the audit. Unless companies provide a guarantee or surety of 100% of the amount of disputed VAT, they cannot ask Sars for any relief. As a result, business cash flows are severely compromised until insolvency.

Sars also argued that since the VAT refund withholding is an automatic blocking of the system rather than a deliberate decision, taxpayers cannot make the withholding decision on judicial review.

A revised VAT assessment is only issued upon finalization of the VAT audit. It is only after the revised VAT assessment has been issued that a formal dispute resolution process can take place, which has a schedule of specified timelines and deadlines.

Until then, however, taxpayers are left entirely at the mercy of the Sars audit team – a process that very few companies can survive.

In the absence of a formal dispute resolution mechanism, taxpayers’ only legal recourse in a VAT audit is the courts. For many companies, this option is not only financially prohibitive, but also very time-consuming, as the final outcome is only likely after five to six years, once all appeal procedures have run their course.

During Commissioner Moyane’s time, for example, Sars withheld a total of around R20 billion in VAT refunds owed to taxpayers, causing significant harm to businesses.

In a recent Gauteng High Court judgment, the court noted that Sars should not be allowed to continue to request information in an effort to delay the completion of VAT audits. Further, the court emphasized that Sars cannot be given an indefinite period of time to complete the audits and that all audits must be completed within a reasonable time.

But although the seriousness of these problems has been recognized by the tax ombudsman, the Nugent Commission, senior Sars officials and the former finance minister, there is still no cure.

This has significant implications for South Africa’s investment attractiveness and global competitiveness, limiting the growth of the export industry.

The export industry is crucial for supporting the local currency, generating income and creating jobs. Foreign direct investors have specifically raised this concern as a basis for neglecting South Africa and establishing businesses and creating jobs elsewhere in Africa.

No one is remotely suggesting that the Sars cannot perform audits. Its right to carry out audits is indisputable.

Under the Constitution, however, every South African has the right to reasonable and procedurally fair administrative action. Yet the structure of our tax laws allows Sars to act as judge, jury and executioner in VAT audits and investigations, able to punish innocent taxpayers without any concrete evidence of wrongdoing.

The government must urgently make the necessary legislative changes to set deadlines for Sars to carry out VAT audits, limit the number of periods during which VAT can be withheld and allow taxpayers with good compliance records to apply for release. VAT refunds, without providing any guarantee. Businesses are expected to pay VAT in due time. Sars should also pay VAT refunds in a timely manner.

Ernest Lai King is Managing Director of 1 Road Consulting.