COVID-19: A STRATEGY FOR COMPLIANCE AHEAD OF THE EXPECTED COLLECTIONS DRIVE BY SARS
In view of the ever-increasing compliance burden on companies and the collection challenges that the South African Revenue Service (SARS) is facing in this difficult COVID-19-induced environment, it is vital that taxpayers carefully consider their approach to taking tax positions when filing their annual or provisional returns.
Against the backdrop of the ZAR 35 billion tax deficit for April 2020 and the tabling of the Finance Minister’s emergency budget on 24 June, SARS is likely to take an aggressive stance towards tax collections. There will probably be an increase, not only in challenges by SARS, but in the penalties levied on understatements.
What makes the situation more challenging is the difficulties provisional taxpayers are likely to have in forecasting their revenues given the COVID-19 pandemic. This is because the full financial and economic impact of the pandemic is not yet clear, making it harder to put together reasonable and realistic revenue estimates. This could prove particularly challenging for businesses whose financial year ends in December, but have to provide their first revenue estimates now, in June.
We have an experienced, multi-disciplinary team (consisting of both Chartered Accountants and tax lawyers) available to assist taxpayers with these challenges. Our services include:
- Strategic reviews of financial information (to assist clients and their auditors with the preparation and disclosure of tax information in the financial statements).
- Annual reviews and tax advice with respect to tax returns to be submitted to SARS.
- Preparation of tax opinions to support the tax positions taken in either financial statements or tax returns, which can be prepared on the basis that they will be disclosed to SARS in accordance with section 223(3) of the TAA.*
- The issuance of confidential opinions and advice to taxpayers which are subject to legal professional privilege.*
- Preparation and/ or review of IT10B schedules for submission to SARS or as part of the external audit process together with tax advice thereon.
- Strategic tax compliance assistance and advice, such as:
- the preparation/ review of provisional tax submissions;
- VAT, PAYE and Customs registrations with SARS;
- application of tax directives from SARS; and
- IT14SD reconciliations.
For further information please contact a member of our South African Tax Practice.
* Over the past few years, certain measures have been introduced to enhance and strengthen auditor independence. This includes mandatory audit firm rotation as well as imposing restrictions on the provision of non-audit services by audit firms to their clients. With regard to tax consulting, most companies have applied a general rule that these would not be regarded as causing independence issues, if the company’s audit committee approved the assignments.
Auditors and their clients need to take into account provisions in the Companies Act which prohibit an auditor from being appointed where certain services have been rendered to the company by the auditor. These could include the provision of tax services, although the preparation of tax information for the purposes of preparing the financial statements is permitted in addition to the approved tax consulting services.
In addition to having to comply with these rules, companies have also in recent years encountered challenges around obtaining tax opinions from audit firms where certainty that legal professional privilege will apply is required. Legal professional privilege is essentially the right of a client to the confidentiality of communications between a client and a legal advisor, given in a professional capacity. Importantly, the information provided in the communications or opinions must be given by a legal advisor in order to be privileged.
In addition to its right to request relevant information and materials from taxpayers the rules of discovery also require the disclosure of pertinent documentation during tax litigation proceedings. In both of these situations, a taxpayer can object to having to disclose such information or documents to SARS on the basis that they are protected by legal professional privilege.
Since the dawn of democracy in South Africa the right to legal professional privilege has become regarded as an integral part of taxpayers’ constitutional rights. However, this does not mean that the right is unlimited and it has been held in other jurisdictions that in certain circumstances, tax advice or information obtained from accountants or tax practitioners, who are not legal advisors, may not be subject to legal professional privilege. Accordingly, it is possible that our courts would on the same basis find that such information and documentation will have to be disclosed and provided to SARS, should SARS request this information.
Section 223 of the Tax Administration Act, no 28 of 2011 (TAA) also entitles taxpayers who obtained tax advice to protection from understatement penalties in respect of a tax position taken in a return. Where such an opinion is required to be disclosed to SARS so as to safeguard the taxpayer against the imposition of understatement penalties, legal professional privilege will need to be waived and the consequences of this together with other the other requirements of Section 223 need to be thoroughly considered and taken into account when the opinion is drafted