Personal Liability: Tax Ethics. Elle-Sarah Rossato KPMG: Dispute Resolution & Tax Controversy 9 September 2016

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2 Personal Liability: Tax Ethics Elle-Sarah Rossato KPMG: Dispute Resolution & Tax Controversy 9 September 2016

3 Content: 1. Personal liability: What & When? 2. Alternatives to TAA: Personal Liability 3. Types of personal liability 4. Criminal Liability : Section 234 of TAA 5. Risks: Section 185 Foreign Assistance 6. Taxpayer remedies

4 Personal Liability

5 What is Personal Liability? Personal liability provisions came into force with introduction of the Tax Administration Act 28 of 2011 ( TAA ) (Part D: Collection of Tax Debts from Third Parties) on 1 October 2012 TAA adopted from Australian and Canadian law; Prior to TAA : IT & VAT Act had its own provisions dealing with recovery processes led to inconsistent treatment Developed to deal with recalcitrant taxpayers Applicable provisions: Section Who hold liable: Directors, shareholders, public officers, a transferee, person assisting a client to dissipate assets Purpose: quick process to hold above persons liable for tax debts of legal entities without having to institute action

6 What to expect from SARS? SARS Modus Operandi: Letter transmit to a representative taxpayer/financial manager/shareholder/public officer of a company stating that they intend to hold that person liable for the tax debts of the company; SARS to grant the above person/s an opportunity to make representations in mitigation of its view; SARS will consider the representations and will escalate matter within own internal governance structures; A Senior SARS official (Section 180) must decide on the matter and make final decision

7 When to expect action from SARS? Provisions regarded to be enforcement action/s Process forms part of the Debt Management function SARS will act when: Directors/members/shareholders commence to sell assets whilst being aware of an assessment alternatively aware of an ongoing investigation/audit A company/closed corporation voluntarily wound up whilst directors/members or shareholders are aware of a tax debt; or After all normal collections strategies have been exhausted alternatively after SARS has sold all moveable and immoveable assets - could proceed to attempt to hold directors/members/shareholders liable.

8 Alternatives to TAA: Personal Liability

9 Alternatives to TAA Personal Liability A legal entity has a separate legal persona which SARS must respect Courts will only assist in the case where fraud, dishonesty, misuse of corporate entity or grounds for actio pauliana exist Remedies available to SARS other than in TAA: Piercing the corporate veil has been synonymous with the Companies Act and reckless trading or intend to defraud creditors (Section 20 (9) of 2008 Company Act). Usually tax debts would rest with the legal entity and directors/shareholders/members or trustees would not be regarded as liable Normal common law principles applicable to fraud: Section 73 of the VAT Act SARS will have to institute civil action Actio pauliana: person who receives assets from person for purpose of making it impossible for creditors to collect their debt Section 26 of the Insolvency Act: disposition of property not made for value within 2 years of sequestration of estate

10 Types of Personal Liability

11 Types of Personal Liability Section 180: Financial Manageme nt Section 179: liability of 3 rd party to satisfy tax debts Section 181: Liability of shareholders (voluntary liquidation) Section 183: Liability of transferee for tax debts Section 182: Liability of transferee for tax debts Section 184: Liability of person assisting in dissipation of assets KEY CONSIDERATIONS Nexus/link important Negligence or fraud Audi alteram partem-rule SARS/SSO makes decision Proceed with collection steps

12 Section 179: Third Party Liability Adopted from the Income Tax Act (now repealed) and is colloquially referred to as an agents appointment ; SARS will use this provision post letter of demand (post 10 day notice) when no reaction received from a taxpayer; SARS to serve a notice on a third party such as: Banks; Employers or Debtors: instructing them to pay any credit amounts/s owing to SARS; Can however implement this instruction repeatedly and to various third parties at various stages of the debt management process; Risks: face having bank account depleted

13 Section 180: Liability of Financial Manager Provision came into force with TAA in 2012 Who: Person who controls or regularly involved in management & overall financial affairs of taxpayer Judicial requirements: Negligence or fraud resulting in failure to pay SSO must be satisfied that person was negligent/fraudulent Must be a nexus/causal link between the designation of the person and the purported fraud/negligence Risks: SARS regarding taking collection actions against financial manager of taxpayer

14 Section 181: Liability of Shareholders Provision came into force with TAA in 2012 Who: Shareholders of a company where voluntary liquidation steps have been taken whilst aware of tax debt. Persons who are shareholders 1 year before winding up, to extent that: They receive assets from company, 1 year before winding up Tax debts existed at time of receipt of assets Not applicable to: Shareholders of listed companies Risks: winding up a company will not necessarily cause a blind alley for SARS

15 Section 182: Liability of transferee Provision came into force with TAA in 2012 Who: Person who receives an asset from a taxpayer (connected person) without consideration or below fair market value is liable for tax debt of taxpayer Usually recalcitrant taxpayers Determination - Liability limited to lesser of: Tax debt existed at time of transfer Fair market value of asset at time of transfer Applied to asset received within 1 year of SARS notifying the taxpayer of liability Uncertainties: determine time of transfer and calculation of value of assets at time of transaction Risks: transfer of assets will not necessarily deter collections

16 Section 183: Liability of person assisting in dissipation of assets Provision came into force with TAA in 2012 Who: Person knowingly assists in dissipation of taxpayer assets to obstruct tax collection recalcitrant taxpayer Determination: Person jointly and or severally liable with taxpayer to extent that person assisted in reducing value of assets for tax collection Uncertainties/Risks: Taxpayer s transferring assets to family/spouse/friends/business partners How SARS would calculated the extent (apportion) Assets not necessarily safe from collection

17 Section 184: Recovery of Tax debts from others Provision came into force with TAA in 2012 Who: SARS same powers against person liable under Section 155/157 (representative taxpayer) or Part D as against assets of taxpayer Determination: SARS must before/after finding person liable allow person to make representation (audi alterum partem) Uncertainties/Risks: Representative taxpayer can be held liable for tax debts of taxpayer

18 Criminal Liability: Section 234 TAA

19 Section 234: Criminal Liability Provision came into force with TAA in 2012 Who: Person fails to comply with provisions of section of TAA Person dissipating assets or assisting in dissipating assets Fails/neglects to withhold/pay SARS an amount of tax as and when required under TAA Risks: Guilty of an offence, fine or imprisonment not exceeding 2 years

20 Risks Section 185: Foreign Assistance

21 Risks Associated: Foreign Collection Section 185 of the TAA came into force on 1 October 2012 Requirement: In accordance with foreign tax agreement (DTA) Conservancy of assets by foreign country (risk of dissipation); or Collection of tax debts due by taxpayer in foreign country Senior SARS official to call on taxpayer whether they admit liability of taxes Request to be in prescribed form Taxpayer fails to comply SARS may collect amount due (based on certificate) Steps taken for collection/judgement in that country does not affect rights of taxpayer to challenge Authority: Krok v CSARS [2015] 4 All SA 131 (SCA)

22 Krok v CSARS: inter-governmental tax collection Implementation of Section 163, 184 of the TAA Mr Krok relocated to SA in 2002 left Australia and in 2008 relocated to the UK; Jucool Trust (BVI) as discretionary trust was set up to house the assets and the beneficiaries are Mr Krok and his children. Assets sold assets for R290m, i.e. rights in SA assets and purchase price remained outstanding in terms of interest free loans. Mr Krok assigned all his rights to the assets to the Nova Trust. ATO assessed Mr Krok (resident from ) retained legal & beneficial interest in assets in SA. ATO issued a request to SARS to conserve assets of taxpayer in SA for Australian tax debt in terms of Article 25A of the DTA and protocol (2009); SARS obtained preservation order (Section 163 of TAA) with curator bonis appointment and conserved R255million of assets; Taxpayer and BVI structure opposed preservation order and SCA confirmed the order; Taxpayer still had right to challenge assessments in Australia but assets frozen in RSA

23 Taxpayer Remedies

24 Taxpayer Remedies Be aware of provisions Transferring assets to family/friends/business partners or even abroad does not render them safe from revenue collection Nexus/proof remain on SARS Make full representation to SARS of all facts/circumstances Recourse if taxpayer found liable: PAJA review application Be aware of criminal provision Seek professional advice.

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26 Elle-Sarah Rossato Associate Director: Dispute Resolution & Tax Controversy, KPMG SA kpmg.com/socialmedia kpmg.com/app The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Inc, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG and the KPMG logo are registered trademarks of KPMG International. Document Classification: KPMG Confidential