Gain and Pain

SARS Gain, Taxpayers Pain.

The North Gauteng High Court recently dismissed constitutional arguments raised by a taxpayer, where the taxpayer was issued with a large interest assessment. The raising of the assessment was due to the taxpayer’s own oversight. Factually, taxpayer owed less than the amount to which it was assessed.

Thwarted in its attempts to have the robust interest amount remitted, taxpayer had sought to rely on constitutional points.

The case is Pricewaterhousecoopers Inc and Another v Minister of Finance and Another (25705/2019) [2021] ZAGPPHC 51 (2 February 2021).

The facts and rationale of the Court are discussed below.

Section 39(7) of the Value- Added Tax Act No 89 of 1991 (the Vat Act) provides the circumstances under which the Commissioner SARS is empowered and authorised to effect a remittal of interest levied and paid in terms of that Act.

The Applicants in the matter are professional firms that provide services, which are taxable under the VAT Act. The Applicants are related parties. 2nd Applicant provides invoices, based on estimates of work done by it, to 1st Applicant at the end of each month.

At year end, the parties reconcile the invoices to actual work done, to determine whether the 2nd Applicant has over or under invoiced the 1st Applicant.

For the years 2009 to 2013, the exercise was undertaken and it was found that the 2nd Applicant had over-invoiced the 1st Applicant for services rendered by it to the 1st Applicant.

For tax purposes, the returns were then processed to reflect the true position. However, due to an oversight, the VAT position was not processed in accordance with the reconciliation.

The result was that 1st Applicant, relying on the lower invoiced amount, had not paid the requisite amount of VAT, whilst 2nd Applicant had overpaid.

2nd Applicant should have issued credit notes to 1st Applicant, but had not done so.

The overpayment and underpayment of the parties, matched each other. Thus, the Commissioner of the SA Revenue Services (CSARS) suffered no real prejudice.

SARS duly imposed late payment penalties and interest upon the 1st Applicant, when it made the payment upon the erroneous Vat amount that was due, as a result of the oversight relating to credit notes.

The VAT act makes it mandatory for SARS to charge interest on late payments of VAT. The peremptory language of Section 39(1) provides no discretion to SARS on whether or not to levy interest. It is required in all cases where there is a late payment.

The gross penalties and interest assessed by CSARS upon the 1st Applicant amounted to some R 27 Million.

1st Applicant requested that SARS remit the penalties and interest. The request was partially granted as SARS remitted the penalties in full and the interest in terms of the 2009 year, but the interest for years 2010 to 2013 remained in place.

SARS relied upon Section 39(7) of the VAT Act in remitting the interest for 2009.

However, the Section was amended in the year 2010.

Before the 1 April 2010 amendment, Section 39(7) provided for a remitting of interest by SARS under Section 39(1), if SARS was satisfied that the failure to pay VAT within the prescribed period did “not result in any financial loss (including any loss of interest) to the State” or if the taxpayer “did not benefit financially (taking interest into account) by not making such payment” within the prescribed period. The prior rule at Section 39(7)(a) is set out below:

"To the extent that the Commissioner is satisfied that the failure on the part of the person concerned or any other person under the control or acting on behalf of that person to make payment of the tax within the period for payment contemplated in subsection (1) (a), (2), (3), (4), (6) or (6A) or on the date referred to in subsection (5), as the case may be-

(a) (i) did, having regard to the output tax and in respect of which interest is payable, not result in any financial loss (including any loss of interest) to the State; or

(ii) such person did not benefit financially (taking interest into account) by not making such payment within the said period or on the said date,

He may remit, in whole or in part, the interest payable in terms of this section.. . "

After 1 April 2010 the Section provides that SARS could remit the interest, in whole or in part, if it was satisfied that the failure to pay the VAT in the prescribed period “was due to circumstances beyond the control” of the taxpayer.

The rule as amended at Section 39(7)(a) after 1 April 2010 is set out below:

"Where the Commissioner is satisfied that the failure on the part of the person concerned or any other person under the control or acting on behalf of that person to make payment of the tax within the period for payment contemplated in subsection (1) (a), (2), (3), (4), (6), (6A) or (8) or on the date referred to in subsection (6), as the case may be-

(a) Was due to circumstances beyond the control of the said person, he or she may remit, in whole or in part, the interest payable in terms of this section ... "

The amendment to Section 39(7)(a) removed the possibility of remitting interest when there was no loss to the fiscus.

The parties objected to the assessments and the remaining interest amount, but SARS rejected the objection in August 2018. Thus, the Applicants applied to the Gauteng North High Court on 11 April 2019.

The Applicants sought relief in the form of a declaratory order that Section 39(7) of the Value-Added Tax Act be declared unconstitutional and invalid. The order of invalidity and unconstitutionality was to operate to the extent that the section fails to provide for the remittal of interest on late VAT payments, in circumstances as set out in the Section prior to the amendment of 2010. Thus, where, having regard to the output tax and input tax relating to the supply in respect of which interest is payable, the failure to make payment within the prescribed period did not result in any financial loss (including any loss of interest) to the fiscus and/ or the State;

They sought that appropriate reading-in of the version of the Section that they put forward take place for so long as the Section remains in operation with regard to interest.

The order prayed for was not to operate retrospectively where claims under the new section has already been finally determined.

They also sought an order to the effect that the First Applicant be entitled to a full remittal of the interest in dispute.

Alternatively, they sought an order that Second Respondent (CSARS) should consider and determine, within 30 days of the date of the order, the First Applicant's application for remittal of interest in accordance with the wording put forward.

The wording that was put forward corresponded to Section 39(7)(c) prior to the 2010 amendment.

The Applicants thus wanted the amendment declared unconstitutional. They averred that Section 39(7) is irrational and arbitrary in that it permits the charging of interest without any right of remittance in the absence of loss to the fiscus. They further averred that Section 39(7) permits the arbitrary deprivation of property and is in conflict with Section 25 (1) of the Constitution.

The application was opposed by the two Respondents, those being the Minister of Finance and the Commissioner, SARS.

The learned Judge, Kollapen J analysed the provisions of Section 39 in light of the averments made.

The Judge held that the provisions of Section 39 distinguish between:

a.        the circumstances under which interest is charged; and

b.        the remittal of interest.

On the one hand, the charging of interest is mandatory, but remittal is possible if the provisions relating thereto in the section are met.

The Applicants argued that their challenge, in context, was in relation to both the levying and the remittal of interest.

Relying upon the case authority of South African Transport and Allied Workers Union and Another v Garvas and Others 2012(8) BCLR 840 CC the Applicants urged the Court to look at the Section as a whole.

The Court held that this was not possible. The two parts of the Section stand distinct and separate and apart from each other in structure. They are also separated by the policy and legal basis upon which they rest. The Court stated that the Applicant’s papers as drafted did not support a challenge to Section 39(1), the imposition of the interest.

In its consideration of the irrationality argument, the Court looked at the mechanics of the VAT Act. The case of Masango v The Road Accident Fund 2016 (6) SA 508 (GJ) was considered by the Court. In light thereof it stated that the liability for VAT is, as has been held in several cases, a tax that rests upon a supplier of goods or services, and is not a tax on the recipient.

The Court held that the Act looks at the registered vendor as individual entity. It contains no grouping rules or any set-off rules across separate entities. Furthermore, the Act does not require a 'look through' principle to determine the tax treatment of transactions.

The Applicants using the case authority of Bellairs v Hodnett and another 1978(1) SA 1109(A) argued that the Courts have generally accepted that one of the purposes of interest is to compensate the creditor for the lost opportunity of productively using the money if it had been paid timeously. The argument was that the imposition of interest was not to deter.

The Court considered the rationale in Metcash Trading Limited v Commissioner for the South African Revenue Service and Another 2001 (1) SA 1109 (CC) (Metcash) where it had been recognised that SARS has the power to levy interest, which is aimed at compliance of vendors for the keeping of proper records making timeous payments.

This was part of the package available to SARS to deter errant tax conduct and to incentivize taxpayers to act in compliance with the law.

Reason for amending Section 39(7)

The Respondents argued that the among the reasons for the amendment to Section 39(7) were the difficulties faced by taxpayers in obtaining records that related to counter parties in an output-vat input Vat matching challenge.

These difficulties led to disparate outcomes for different taxpayers. Inter related parties had such access to counterparties financial records, whereas others did not.

Respondent argued further that fairness required that a vendor’s liability to pay should not depend upon whether the recipient vendor charged input vat upon the same transaction.

Post 1 April 2010, the policy of the Section shifted from -loss to the fiscus, to -the conduct of the taxpayer.

In a nutshell, remittance was available under the amended Section 39(7) only where the failure to pay timeously was due to circumstances beyond the control of the taxpayer.

The Rationality Argument

The Court considered the argument that the amendment was irrational and arbitrary. Per case authority of Law Society of South Africa and Others v Minister of Transport and Another (201) ZACC the Court held that the enquiry into rationality is objective, not subjective.

The requirement of rationality is not so much that legislation is fair or reasonable or appropriate, or if better means could have been employed. The threshold question to which the rationality argument is restricted is whether the measures adopted by the lawgiver are properly related to the public good that it sought to realise.

With regard to fairness and proportionality, the Court stated that fairness is not a requirement of the rationality enquiry.

The Court held that, if the substance of the complaint is about the deprivation of fundamental rights, it would be subject to the proportionality requirements of s 36 of the Constitution. Mere rationality is not subject to these requirements.

The Court carefully considered the precise nature of the test that such an enquiry contemplates.

Referring to the case authority of Ronald Bobroff & Partners inc v De La Guerre; South African Association of Personal Injury Lawyers v Minister of Justice and Constitutional Development 2014 (3) SA 134 (CC), the learned Judge stated that the Court should not unduly interfere with the formulation or implementation of policy.

It is so that the principle of legality demands that laws passed by Legislature must pass a legally defined test of rationality. This enquiry however is not grounded or based upon the infringement of fundamental rights.

The enquiry is based on a threshold test, which is to ensure that the means chosen by the legislator are rationally connected to the ends that it seeks to achieve.

The test for rationality is less stringent than the test for reasonableness.

Reasonableness comes into play when fundamental rights under the bill of rights are limited by legislation.

In such cases Courts have a more active role in safeguarding the rights.

Thus, the question that arises is whether the means chosen through the agency of Section 39(7) in regulating the remittal of interest are rationally connected to the outcome sought. The outcome sought is that of achieving an efficient VAT system that requires the prompt settlement of tax debts, as envisaged in the Metcash case authority.

The question, further, is not whether the Section prior to amendment was fairer, but whether the scheme can be said to be rational.

The rationality spoken of is in the sense of whether the measure introduced by the impugned Section 39(7) is properly related to the public good it seeks to realise.

The Court held that the Applicants’ argument that it is irrational for the fiscus to retain interest levied where there was no loss to the fiscus, ignores the other legitimate reason to impose interest.

This other reason is the provision of an incentive and a deterrent for taxpayers to comply with their obligations.

The Court held that, the view of SARS that the new system was intended to introduce a fairer regime for the remittal of interest, cannot be gainsaid and that the low threshold for the test of rationality had been met.

Simply put, if the failure to pay VAT timeously was within the control of the taxpayer, the right to seek a remittal is excluded.

The rationality challenge thus failed.

The Argument in respect of Arbitrariness

Regarding the second constitutional point of the Applicants, relating to the arbitrary deprivation of property, the Court considered the arguments thus:

In terms of the case authority of Chevron SA (Pty) Limited v Wilson t/a Wilson's Transport and Others [2015] ZACC 15; 2015 (10) BCLR 1158, the Constitutional Court affirmed the view that money in hand constitutes a property interest. Such interest is protected by section 25 of the Constitution.'

The Court held that it can hardly be contended that the interest in question is not property for the purpose of Section 25 (1).

Whether taxation and interest thereon constitutes a deprivation of property and connected to that whether the failure to remit such interest levied constitutes a deprivation is the question that required attention.

The Applicants argued that both taxation as well as interest related to that taxation would constitute a deprivation of property in the circumstances.

The Court, considering the Applicants’ arguments held that very few rights can be regarded as absolute or constitutionally insulated from interference or limitation.

The essence of a rights framework is the recognition that rights are indivisible, interconnected and interrelated and the limitation or interference with one right is necessary to advance another right.

Thus in the context of deprivation as contemplated in Section 25(1) of the Constitution our Courts have been clear that not all interference with property rights constitute a deprivation of property. In Mkontwana v Nelson Mandela Metropolitan Municipality 2005 (1) SA 530 (CC) The majority of the Judges in that matter held that deprivation amounts to substantial interference or limitation that goes beyond the normal restrictions on property use or enjoyment found in an open and democratic society. Whether there has been a deprivation depends on the extent of the interference with or limitation of use, enjoyment or exploitation.

The imposition of the interest under Section 39(1) had not been challenged by the Applicants and thus, it was not open to them to advance an argument that interest (whatever its rationale) constitutes a deprivation when the legal basis for the imposition had not been challenged.

The Court held that the attempt to distinguish between the obligation to pay tax and the obligation to pay interest upon the failure to pay tax was not appropriate.

The Court in Pienaar Brothers Pty (Ltd) v Commissioner for the South African Revenue Service and Another 2017 ZAGPPH 231; [2017] 4 All SA 175(GP); 2017 (6) SA 435 GP at par 110 held, in the context of taxes as follows:-

"ln my view it cannot be argued that all taxes involve a "deprivation" of property, in the context of Section 25(1 ). A State cannot exist without taxes. Society receives benefit from them. Taxes are not penalties. Neither can they be, without any qualification, be regarded as unjust deprivation of property use.. "

The Court, thus held:

“..the issue before this Court is squarely the constitutionality of Section 39(7) I must conclude that the creation of an obligation to pay tax coupled with an obligation to pay interest when the primary tax obligation is not fulfilled does not constitute a deprivation of property in terms of Section 25 (1) of the Constitution.

If the payment of interest does not constitute a deprivation of property it is even more onerous to suggest that a provision such as Section 39(7) that allows for a remittal of interest under defined circumstances would result in a deprivation of property when a taxpayer is unable to bring its claim within those defined circumstances. This is precisely the case here.

The framework that allows for a remittal of interest can also be characterized as part of the normal restrictions on the use of property, creating as it does a system that circumscribes the circumstances under which an errant taxpayer may trigger a claim for remittal. Beyond having found that the scheme is rational, it does not constitute a substantial interference that goes beyond restrictions on property use that may be described as normal”.  

The learned Judge’s view was thus that the provisions of Section 39(7) does not lead to a deprivation of property as contemplated in Section 25(1) of the Constitution.  

Arbitrariness

The learned Judge went on to examine the arbitrariness argument, whilst assuming for the moment that his conclusion on deprivation was incorrect and that it can be said that Section 39(1) leads to a deprivation of property.

In First National Bank of SA Limited tla Wesbank v Commissioner for the South African Revenue Services and Another, First National Bank of SA Limited tla Wesbank v Minister of Finance [2002] ZACC 5; 2002 (4) SA 768; 2002 (7) BCLR 702 (CC) at par 37 the Constitutional Court said that a deprivation of property will be arbitrary if it takes place 'without sufficient reason '.

Section 39(1) and 39(7) creates a framework that provides that a vendor who fails to pay VAT timeously is liable to have interest levied on the amount concerned and then further provides that such interest may only be remitted where the late payment was due to circumstances beyond the control of the vendor.

It is a scheme that is sufficiently reasoned and the rationale that an errant taxpayer who made a late payment under circumstances that were within his/her control cannot have interest remitted is far from being an arbitrary provision.

The challenge located in Section 25(1) of the Constitution thus also failed.

The Question of Costs

Regarding costs, the Court ruled that, the points raised being constitutional ones, on the basis of the case authority of Biowatch Trust v Registrar, Genetic Resources 2009 (6) SA 232 (CC) no order as to costs should be made.

 Conclusion

Whether or not the ruling will be appealed against is not known. What can be said with certainty and which averment is well supported, is that, when bringing constitutional arguments, the different threshold requirements for whatever challenge is brought, should be carefully considered.

The reader will no doubt correctly infer that the bar that must be scaled to succeed in a constitutional challenge in a tax matter, is a high one.

As the learned Judge himself held, fairness is not a factor to be taken into account in a challenge to the rationality of a statute, tax or otherwise.

Peter O’Halloran