The recent Constitutional Court judgment handed down in South African Revenue Service v Medtronic International Trading S.A.R.L,[1] has significant implications for taxpayers navigating the South African tax compliance landscape. At its core, the decision confirmed that once an agreement in terms of the Voluntary Disclosure Programme (“VDP”) has been concluded, interest on outstanding tax liabilities cannot be remitted. This ruling has sparked a debate on whether the VDP remains the most financially beneficial route for taxpayers seeking to address historic non-compliance.
Background
Medtronic International Trading S.A.R.L. (“Medtronic”) was defrauded by a former employee who embezzled funds and submitted fraudulent VAT returns to SARS over several years.[2] Upon discovering the fraud, Medtronic applied for relief under VDP and disclosed the VAT underpayments.[3] During VDP negotiations Medtronic requested SARS to waive the interest in relation to the default. SARS subsequently informed Medtronic that it lacked authority to waive interest under VDP and presented them with the following two options:[4]
- Proceed with the conclusion of the VDP process and pay the full agreed amount (including interest); or
- Withdraw the VDP application, following which the ordinary statutory enforcement processes would ensue.
Medtronic elected to proceed under the VDP, entering into a written agreement (“VDA”) with SARS. However, after the conclusion of the VDA, Medtronic submitted a request for remission of interest, citing section 39(7) of the Value-Added Tax Act 89 of 1991 (the “VAT Act”)[5] which request SARS declined to consider.
The question whether the Tax Administration Act[6] (“TAA”) allows for the remission of interest post conclusion of the VDA, was settled by the Constitutional Court where it was unanimously held that the conclusion of a VDA precludes any further negotiation or adjustment of interest.[7]
It follows that while the VDP offers significant benefits, such as reduced penalties and immunity from criminal prosecution, it also locks taxpayers into the terms agreed upon during the application process. This rigidity, particularly regarding interest, may reduce the overall attractiveness of the VDP for some taxpayers.
This begs the question, whether it could potentially be more beneficial for taxpayers to address historic non-compliance outside the VDP (i.e filing corrected or outstanding returns)?
Disclosure outside VDP
Naturally, if a taxpayer declares historic non-compliance in the ordinary course, they will fall subject to understatement penalties, administrative non-compliance penalties as well as interest, of which the understatement penalties would arguably be the most difficult to dispute. Or would they?
- Understatement penalties
- Understatement penalties are imposed under Chapter 16 of the TAA in circumstances where a taxpayer has made an “understatement” as defined which is not the result of a “bona fide inadvertent error”. In other words, there can be no understatement penalty levied if the taxpayer’s “understatement” is the result of a “bona fide inadvertent error”.
- The term “bona fide inadvertent error” is not defined in the TAA and there is a large degree of uncertainty regarding its meaning. This uncertainty is compounded by the divergence between SARS interpretation of the phrase and the interpretation which appears to be adopted by the courts.
While SARS adopts a very narrow view, which is that an error can never be inadvertent if the taxpayer consciously adopted a tax position, the courts have adopted a much more lenient interpretation, as summarised below –
- In ITC 1890 the Tax Court held that the term referred to “an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive.”[8]
- In ITC 1788 the court found that the fact that VAT returns prepared by personnel, were scrutinised by various levels of management together with the fact that the taxpayer’s external auditors did not raise any concerns regarding the input VAT claimed, meant that any understatement must be the result o fa bona fide inadvertent error and that the understatement was not done with the intention to deceive.[9]
- In C: SARS v The Thistle Trust[10] (“Thistle”) the SCA held that the taxpayer had made a bona fide inadvertent error since it relied on a tax opinion, and it made a mistake in good faith without acting intentionally.[11]
- In C: SARS v Coronation Investment Management SA (Pty) Ltd (“Coronation”), with reference to the judgment handed down in Thistle, the SCA also concluded that the taxpayer’s reliance on a tax opinion together with the fact that it submitted its tax returns under the guidance of an audit firm were indicative of a “bona fide error”. Furthermore, the court noted that the mere fact that the taxpayer did not disclose the opinion was not sufficient to indicate “mala fides”.[12]
- Thistle was taken on appeal to the Constitutional Court, where it was held that the issue of what constitutes a “bona fide inadvertent error” does not engage its jurisdiction. However, the court made several important observations, including that SARS had no sustainable grounds to impose understatement penalties based on either “no reasonable grounds for tax position taken” or “reasonable care not taken in completing return”. The court explained that SARS bears the onus of proving the fact that would bring the understatement of the taxpayer within either of these categories and in the circumstances where the taxpayer was in procession of a well-reasoned legal opinion, SARS had no reasonable prospects of discharging this onus.[13]
- Therefore, if a taxpayer’s position is supported by a legal opinion or if the taxpayer engaged a suitable professional to assist in filing their returns, the understatement penalties could still be disputed (outside VDP) by way of objection on the basis that the understatement is the result of a “bona fide inadvertent error” or, alternatively, that it does not fall under the specified categories of behaviours.
- In C: SARS v The Thistle Trust[10] (“Thistle”) the SCA held that the taxpayer had made a bona fide inadvertent error since it relied on a tax opinion, and it made a mistake in good faith without acting intentionally.[11]
- Although we don’t have the facts, it is not inconceivable that a company of Medtronic’s magnitude might have the necessary checks and balances in place to prevent non-compliance and ensure accuracy of returns and certainly had external auditors. On this basis could be argued that it was a bone fide inadvertent error.
- Absent a VDA, the taxpayer will also be free to dispute any administrative penalties which may have been imposed as well as request the remission of interest in terms of the applicable section of the relevant underlying tax Act (i.e section 39(7) of the VAT Act or section 89quat of the Income Tax Act[14]).
- Remission of Interest
- Section 39(7) of the VAT Act, for example, provides that the Commissioner may remit the interest if he is satisfied that the taxpayer’s failure to make timeous payment was due to circumstances beyond the control of the taxpayer.
- Section 187(7) of the TAA limits the type of circumstances that would qualify as “beyond the taxpayer’s control” to natural or human-made disasters, civil disturbance, or disruption of services; or a serious illness or accident.
- In the case of Medtronic, the embezzlement by the employee of the taxpayer would likely not fall within one of these categories, however, that is not to say that the possibility to make out an argument for remittance of interest may exist for other taxpayers with historic tax defaults.
- Remission of Administrative Penalties
- Administrative penalties may be remitted in terms of section 217(3) of the TAA, if SARS is satisfied that the following requirements are satisfied
- The penalty has been imposed in respect of a “first incidence” of non-compliance, or involved an amount of less than R2 000;
- Reasonable grounds for the relevant non-compliance exist; and
- The non-compliance in question has since been remedied.
- In the above context “first incidence” of non-compliance means that no administrative penalties have been imposed on the same taxpayer in terms of a penalty assessment during the preceding 36 months. The second requirement imposes the standard of reasonableness, which tests whether the default occurred notwithstanding that the taxpayer acted reasonably. The question of what is considered “reasonable” in any particular circumstances must be assessed on a case-by-case basis.[15] The last requirement simply means that the taxpayer has rectified the default in question in other words the underestimation and late payment have been remedied.
- We don’t have the necessary facts to conclude on Medtronic’s prospect of success in remitting the administrative penalties outside VDP, however, the point remains that not following the VDP route could end up being more beneficial for taxpayers.
- Takeaway
The judgment handed down in Medtronic unequivocally confirms that taxpayers effectively forfeit the possibility to remit interest when historic non-compliance is disclosed to SARS under the VDP. The reason being that SARS is not empowered to waive interest under VDP and once the VDA is concluded, the agreement must be honoured.
In light of this judgment, it may be worthwhile for taxpayers to consider the true benefit of the VDP and whether they would not perhaps be able to achieve a better result by disclosing non-compliance outside the VDP and disputing the penalties and in interest separately. Granted, this avenue potentially carries a greater risk for the taxpayer and must be considered on a case-by-case basis, but it may be a risk worth taking in the appropriate circumstances.
[1] CCT 79/23 [2024] ZACC 26.
[2] Medtronic at para 3.
[3] Medtronic at para 5.
[4] Medtronic at para 6.
[5] Medtronic at para 8.
[6] Act 28 of 2011.
[7] Medtronic at para 49.
[8] ITC 1860 79 SATC 62 at para 45.
[9] ITC 1788 [2023] at para 44 – 48.
[10] (516/2021) [2022] ZASCA 153 (7 November 2022) at para 28 – 29.
[11] Whilst we are aware that the decision reached by the SCA in Thistle was partly based on a concession made by counsel for SARS, which was not ventilated further in the Constitutional Court, the SCA still held that counsel for SARS “correctly conceded”. This could be interpreted to mean the court agreed with the perceived concession and as such this judgment still carries persuasive value.
[12] Coronation at para 60 – 64. Indeed, the conclusion in Coronation was based on the earlier judgment in Thistle, which in turn was based on the incorrect understanding SARS conceded, the court in Coronation nevertheless also pointed out that the taxpayer relied in professional advice.
[13] CCT 337/22 [2024] ZACC 19 at 87-90. Also refer to note 11 above.
[14] Act 58 of 1962.
[15] In the case of Peri Framework Scaffolding Engineering (Pty) Ltd v CSARS (A67/2020) [2021] ZAWWCHC 153 (23 August 2021) the court held that the taxpayer, who in that case, made every effort to comply but nevertheless failed to comply acted reasonably.