South Africa: The Extensive Powers Of SARS In Requesting "Relevant Material"

The South African Revenue Service ("SARS") has extensive powers in terms of the Tax Administration Act No. 28 of 2011 ("the TAA"). In terms of section 46(1) of the TAA, SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer ("Taxpayer"), require such taxpayer or another person ("Third Party") to submit relevant material that SARS requires within a reasonable period. SARS may require such relevant material to be submitted orally or in writing.

In accordance with section 46(3) of the TAA, should SARS request relevant material from a Third Party for the purposes of the administration of a tax Act in relation to a Taxpayer, such a request is to be limited to relevant information related to the records maintained or that should reasonably be maintained by the Third Party in relation to the Taxpayer.

An important issue for consideration and one over which debate arises is whether a Third Party has any obligation to maintain any information in relation to the Taxpayer. The obligation to retain information in relation to the Taxpayer should, in our view, not be confused with the obligation of the Third Party to retain documentation or information for its own purposes which may also contain information relevant to the Taxpayer. In this regard, it is not clear whether such information may be said to be "in relation to" the Taxpayer and is an issue which needs to be decided on the facts. For example, it may be difficult to argue that the financial records of the Third Party are "in relation to" the Taxpayer to the extent that same contains information pertaining to the query of SARS.

In addition, SARS may only request relevant material and before a person is able to assess whether the information sought is relevant, it would seem reasonable to us that SARS would need to advise the relevant person of the nature and purpose of the enquiry. SARS will need to balance the provision of this information with its obligations to retain confidential information in relation to taxpayers as set out in Chapter 6 of the TAA.

In terms of section 234(h) of the TAA, should a person wilfully and without just cause, most relevantly, refuse or neglect to:

• furnish, produce or make available any information, document or thing; or
• reply to or answer truly and fully any questions put to the person by a SARS official, as and when required by the TAA, such will constitute a criminal offence and, upon conviction, such person will be subject to a fine or to imprisonment for a period not exceeding two years.

During the legislative process of the TAA, a concern was raised on the basis of the wide powers granted to SARS in terms of section 46 of the TAA and that such would be used by SARS for purposes of "fishing expeditions" for purposes of SARS formulating a case against a taxpayer. The Standing Committee on Finance ("the SCoF") dismissed this comment and stated that the function of the revenue authority is to ascertain a taxpayer's taxable income and for such purposes it may need to make wide-ranging enquiries – possibly long before any issue of fact arises between the revenue authority and the taxpayer. It was stated that this was established law internationally.

In addition, the SCoF indicated that the ambit of the information gathering powers of SARS as contemplated in section 46 of the TAA must be seen in the context of the following principles established in international case law:

• information is vital to the audit activity of a tax authority and the burden of taxation would fall only on diligent and honest taxpayers if a revenue authority had no power to obtain confidential information about taxpayers who may be negligent or dishonest;
• comprehensive information gathering powers are critical to a revenue authority's effective operation – particularly in an environment of increasing self-assessment;
• the aim of taxpayers' rights should not be to undermine a revenue authority's duty and ability to obtain information in order to collect tax that is legally due;
• the need for broad information gathering powers has been recognised internationally.

In our view, it is important for the Third Party to establish either from SARS or from the Taxpayer whether the Taxpayer has been requested to furnish the information and documentation and whether the Taxpayer refused to co-operate in this regard. We would not recommend that a Third Party not provide the information without, inter alia, enquiring as to whether such information is relevant to the SARS enquiry and without first establishing, if relevant, the reasons as to why the Taxpayer has not provided the information. If the Taxpayer suffers a loss as a result of the information being provided by the Third Party and the Third Party was not legally obliged to provide the information then the Third Party may expose itself to a damages claim, especially in instances where the Third Party may have contracted with the Taxpayer and such contract includes provisions relating to the confidentiality of information – which is normal in circumstances such as a due diligence or sale agreement.

Notwithstanding the above, it is imperative that a person requested to provide relevant material in relation to a taxpayer cooperates with SARS and accedes to any request by SARS for the provision of relevant material in relation to a taxpayer.

Sometimes the question of whether the Third Party is obligated to provide the information to SARS is clear cut. Most often though, it is not clear cut and given the potential exposure of Third Parties to the Taxpayer or to a fine or imprisonment, Third Parties should carefully consider their position before deciding whether to provide the information or not.

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