Synopsis Tax today May 2015 A monthly journal published by PwC South Africa providing informed commentary on current developments in the tax arena, both locally and internationally. Through analysis and comment on new law and judicial decisions of interest, it assists business executives to identify developments and trends in tax law and revenue practice that might impact their business. 1
Contents Getting the facts straight.......................................... 2 Developing computer programs eligibility for R & D tax relief.................... 5 SARS Watch................................................. 8 Editor: Ian Wilson Contributors to this issue: RC (Bob) Williams, Ian WIlson and Zarene Viljoen Dis tri bu tion: Elizabeth Ndlangamandla lizzy.ndlangamandla@za.pwc.com Getting the facts straight It is well-known and often said that it does not matter how good your case may look in law; if the evidence is weak, your prospects of success are limited. Litigants must therefore be astute to ensure that evidence that they lead relating to events or occurrences is direct evidence given by persons who can attest to the events because they witnessed them at first hand. Failure in this regard proved fatal to SARS in a matter in the Tax Court. In the Tax Court, SARS bears the onus of proving that additional tax was appropriately imposed. It is well established that the Tax Court is not a court of appeal in the ordinary sense, but is a tribunal of review and revision (Bailey v CIR (2933( AD 204) at 220). An appeal to the Tax Court against an assessment by the Commissioner involves a re-hearing, de novo, in contrast to an appeal in the ordinary courts which is decided on the written record of the proceedings in the court below, without any further evidence being led or witnesses called in the course of the appeal. (Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (A) at 485E - F); Metcash Trading Ltd v Commissioner, South African Revenue Service 2001 (1) SA 1109 (CC) footnote 49). From this it follows that the Tax Court can consider the entire matter afresh and substitute its own decision for that of the Commissioner. An appeal to the Tax Court The principle that an appeal to the Tax Court involves a reconsideration de novo of the disputed issues is equally applicable to an appeal to the Tax Court against a discretionary decision of the Commissioner. The decision of the Johannesburg Tax Court in AB (Pty) Ltd v CSARS [2014] ZATC 1 concerned the question whether the taxpayer was liable for additional tax (some R32 million), penalties (some R1.6 million), and interest (some R5.2 million), imposed by SARS in terms of section 60 of the Value-Added Tax Act 89 of 1991 in revised additional assessments spanning a four year period. Prior to the hearing, the taxpayer abandoned its appeal against the capital amount of tax that had been assessed. 2
Getting the facts straight The factual background to the hearing The background to the hearing in the Tax Court was that, following an audit of the taxpayer s affairs, SARS asserted that the taxpayer had under-declared its VAT output tax, and requested the taxpayer, in writing, to provide an explanation and supporting documents. The taxpayer (whose business involved the rendering of security services to its customers) did not provide SARS with any of the requested supporting documents but, by way of explanation, said that in terms of its contract with a particular customer, the customer would be entitled to a commission, and that the customer would provide the taxpayer with VAT-inclusive monthly invoices. SARS requested the taxpayer to provide copies of all such invoices and proof of payment, but the taxpayer did not do so. The judgment recounts that SARS thereupon due to the failure of the [taxpayer] to furnish it with any of the documentation mentioned above, raised additional tax of 200% as it rightly concluded that such failure on the part of the [taxpayer] constituted an intent by the [taxpayer] to obtain an improper VAT refund with a view of defrauding the fiscus [and further] as a result of the non-payment of VAT timeously by the [taxpayer], imposed a 10% penalty on the capital amounts owed to it [and], further, as a result of the non-payment of VAT timeously by the [taxpayer] levied interest on the capital amounts owed to it. In a letter to SARS, the taxpayer denied any intention to defraud the fiscus and said that all its tax affairs had been handled by an auditor whose judgment they trusted. The question before the Tax Court was whether the taxpayer was liable for additional tax in terms of section 60 of the Value-Added Tax Act. The onus of proof The judgment recounts (at para [3]) that Counsel appearing before this court were in agreement that the Commissioner had the duty to begin and has the onus to prove that the imposition of the additional tax of 200% was correctly imposed. SARS called only one witness, an auditor in its employ, who testified as to why he had recommended to the relevant SARS committee that additional tax should be May 2015 3
Getting the facts straight imposed and at the rate of 200%. That recommendation was then referred to a more senior committee which took the decision to impose additional tax of 200%. The court observed (at para [4]) that No witness was called to explain the decision of the senior committee. This failure results in this court being unable to assess the correctness of the decision of the committee to impose the penalty. The judgment of the Tax Court then goes on to say that [5] Where the correctness of a discretionary decision, which is subject to objection and appeal, is contested in a tax court, there is a re-hearing of the whole matter, including the additional tax, by the tax court. Accordingly, the tax court can consider the issue afresh and substitute the respondent s decision in that regard. [6] The Commissioner, having failed to place any evidence before the court as to how and why the senior committee arrived at a decision to impose the 200% additional tax, failed to prove that the imposition of the additional tax was justified and the imposition thereof cannot be upheld. This is more so by virtue of the fact that the Commissioner, at least impliedly, conceded that the imposition of the 200% additional tax was not justified by advising the court at the outset of the hearing that it no longer sought 200% additional tax but additional tax at the rate of 100%. Having made this concession, it was incumbent upon the Commissioner to lead evidence to show how this figure was arrived at. There is nothing before this court to determine the issue. In the circumstances, the Commissioner, who accepted the onus of proving that the penalty was correctly imposed, failed to discharge that onus. [Footnotes omitted.] The Tax Court concluded its brief judgment by issuing an order that the additional tax be set aside, and that the matter be referred back to the Commissioner with the direction that the additional tax be remitted to nil. Commentary and reflections This is an extraordinary case. The amount of additional tax claimed by SARS was substantial in excess of R32 million. Prior to the hearing, the taxpayer had not responded to SARS s requests for explanations and supporting documentation. Presumably, the taxpayer came to the Tax Court with some plan of action for arguing that additional tax should not have been imposed, or had been imposed at too high a rate. In the event, it seems that the taxpayer led no evidence and tabled no documents, and simply closed its case after the single witness for SARS had testified. Did SARS think that the testimony of its single witness would suffice to support its assessment to additional tax? Did SARS not realise that the cardinal issue was the reason why SARS had decided to impose additional tax, and to impose it at a particular rate? Clearly, its witness had decided that additional tax of 200% was appropriate and no doubt he had his reasons. However, the operative decision in regard to the imposition of additional tax had been made, not by that witness, but by a SARS committee of which the witness was not a member. It may be inferred that even if the witness had been informed of the reasons why the committee had decided on additional tax of 200%, he would not have been allowed to testify to those reasons in the Tax Court because he was not party to the committee s deliberations and decision. Even if he had been told what the committee s reasons were, he would not have been permitted to recount those reasons in court this would have been hearsay evidence, which is inadmissible in a court of law. A witness must testify to facts that are within his personal knowledge, not to the opinions held by other people. So this hearing in the Tax Court ended not with a bang, but a whimper. The taxpayer emerged into the sunshine, a burden of R32 million having been lifted off its shoulders without, it seems, having had to say a word. 4
Developing computer programs eligibility for R & D tax relief One of the issues facing taxpayers who carry on research and development in order to enhance their products is whether the costs incurred in this respect will be eligible for the enhanced deductions allowed under section 11D of the Income Tax Act. The enhanced deduction is equivalent to an additional deduction of 50% of the qualifying expenditure over and above the expenditure that would normally be allowed as a deduction. One of the areas that may qualify for the enhanced deduction is the development of computer programs, and the Tax Court in Cape Town was recently called upon to adjudicate in a matter relating to the claim for enhanced deduction by a taxpayer (Case No. IT13541, judgment given on 20 April 2015). The facts A company (ABC) developed and distributed computer programs for freight forwarding, customs clearing and cargo transporting companies, to control the clearance of consignments of goods from point of origin to final destination. Use of the programs enables customers to comply with the statutory requirements of a variety of regulatory agencies for the importation or export of goods into or from the Republic, interfacing with the SARS customs operating systems to verify data relating to the import or export of goods. The programs are designed to meet the specific needs of the customer and each customer is invoiced monthly based upon that customer s utilization of the program applicable to that customer. Research and development are an integral part of the business of ABC and is a major contributor to its licensing fee revenue. The process commences where it is found that existing programs are unable to meet a customer s specific requirements. The project is then allocated to a developer, who will develop a solution that addresses the customer s requirements. After further evaluation and quality control checking, the program is released. In the 2010 year of assessment, ABC submitted information of its research and development activities to the Minister of Science and Technology, as required under section 11D. It also claimed the actual expenditure incurred in research and development in its return of income for that year, but did not at that time claim the enhanced allowance. Then in 2011, after having been assessed to income tax for 2010, ABC requested that the assessment be reopened and claimed an additional allowance equal to 50% of the research and development expenditure, to which, it asserted, it was entitled under section 11D. SARS disallowed the deduction, and following disallowance of an objection, ABC appealed the decision to the Tax Court. The issues In the Tax Court, SARS readily accepted that ABC had incurred the costs in respect of research and development, however, it contended that the nature of the research and development was such that deduction was specifically denied by reason of section 11D(5)(b). Section 11D(5) provides: Notwithstanding any other provision of this section, no deduction shall be allowed in terms of subsection (1) or (2) in respect of expenditure or costs relating to (a) exploration or prospecting; (b) management or internal business processes; (c) trade marks; (d) the social sciences or humanities; or (e) market research, sales or marketing promotion. May 2015 5
Developing computer programs eligibility for R & D tax relief The purpose of the programs developed by ABC was for use in the management and internal processes of its customers. Therefore, SARS contended, the amount incurred was not eligible for the enhanced deduction. ABC argued strenuously that the term management and internal business processes referred to the development of computer programs for the developer's own internal or management processes and not for programs intended for sale to third parties. SARS took a further technical issue that it was incorrect to claim an allowance equal to 50% of expenditure in terms of section 11D, but that section 11D allowed a deduction of 150% of qualifying expenditure, in which case section 23B(2) denies a deduction of the actual expenditure that would otherwise be claimed under section 11(a). The decision Considering first the technical issue raised by SARS, Ndita J confirmed that SARS was correct in asserting that, if a claim lay under section 11D, such claim should be for 150% of the expenditure and it was not correct to claim 50% of the expenditure under that section. However, since the real point at issue was the deductibility of any amount under section 11D, he was not inclined to dismiss the claim of ABC. In deciding the matter Ndita J had regard to the principles of interpretation that should be followed in interpreting the provisions of a statute, and that a phrase must take its colour, like a chameleon from its settings and surrounds in the Act. What was really to be decided was whether the research and development expenditure was expenditure relating to management or internal business processes. After finding that the term relating to was synonymous with in connection with, Ndita J then proceeded to examine whether the expenditure was connected with management or internal processes. The basis for the findings is set out in paragraphs [17] and [18] of the judgment: [17] According to the interpretation the Appellant proffers, it is the nature of the expenditure that is excluded in section 11D(5) and not the capacity of the software. [18] If this interpretation is correct, the relevant words must be read to mean expenditure relating to the management or internal business processes of the taxpayer. But that is not what the words say. In my view, a proper interpretation is to be found in the words expenditure... relating to. To my mind this make sense because what is prohibited is the expenditure which is connected with any of the items listed in paragraphs (a) to (e) thereof. On this score, I agree with submissions made by Counsel for the Respondent, the connectedness arising from relation to must be determined with reference to the use for which the computer program resulting in the expenditure incurred by the developer was developed. To my mind, this [is] a sensible approach. The judgment also affirmed the principle that where the taxpayer may be regarded as privileged, the provisions of the law should be construed strictly, stating (at paragraph [21]): In the matter at hand, I am satisfied the intention of the legislature is discernable (sic) from the setting and surrounds in the Act. I am fortified in this view by the dictum in Western Platinum Limited v Commissioner for the South African Revenue Service 67 SATC 1 (SCA) para [1] at 6B-C: The fiscus favours miners and farmers. Miners are permitted to deduct certain categories of capital expenditure from income derived from mining operations. Farmers are permitted to deduct certain defined items of capital expenditure from income derived from farming operations. These are class privileges. In determining their extent, one adopts a strict construction of the empowering legislation. That is the golden rule laid down in Ernst v Commissioner for Inland Revenue 1954 (1) SA 318 (A) at 323 C-E and approved in Commissioner for Inland Revenue v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A) at 305 A-B. By parity of reasoning, it must be accepted that section 11D creates 6
Developing computer programs eligibility for R & D tax relief a class privilege for certain categories of research and development expenditure, by permitting the deduction of 150% thereof, whereas the norm is that only the actual amount of qualifying expenditure can be deducted. I see no reason why in principle such an approach should not be applied in a matter such as the present. Section 11D(5) places a curb on the class privilege available to such categories of research and development expenditure. In my judgment, section 11D(5) must be interpreted as I have done, in the manner set out by Conradie J (sic), in D & N Promotions, supra." The takeaways The judgment provides confirmation of the approach to be made in principle where a claim for a deduction is made under section 11D, namely that the deduction to be claimed must be for 150% of qualifying expenditure. In cases where a deduction is claimed, the usual deduction for expenditure incurred in the production of income under section 11(a) may not also be claimed. Secondly, this is yet another example of the purposive approach to the interpretation of statutes, and confirmation of the approach that, where the extent of a class privilege is at issue, the golden rule is that the law should be interpreted strictly. 7
SARS Watch 21 April to 20 May 2015 Legislation 23 Apr Notice of Regulations in terms of paragraph (e) of the definition of "research and development" in section 11D(1) on the criteria for clinical trials in respect of deductions 28 Apr Notice of Regulations in terms of items (a) and (c) of the definition of "determined value" in paragraph 7(1) of the Seventh Schedule to the Income Tax Act, on retail market value in respect of right of use of motor vehicle 15 May Notice of Tariff Amendment on imposition of provisional payment in relation to the alleged dumping of Portland cement The notice published in Government Gazette No. 38730 and is in force from 1 October 2012. The notice published in Government Gazette No. 38744 and is in force from 1 March 2015. The notice published in Government Gazette No. 38783 and is in force up to and including 13 November 2015. Case law 22 Apr Clive Boustred The High Court ordered in favour the Commissioner as the provisions of the Customs and Excise Act are legally binding as the taxpayer failed to pay customs duties and taxes on importation within a specified time period. 24 Apr Auto Haus Car Hire and Tours (PVT) Ltd The High Court ordered in favour of the Commissioner as the applicants could not prove the true value of the vehicle nor could they prove the true ownership thereof. SARS publications 30 Apr Finance Minister withdraws implementation of UIF proposal This media statement was announced to allow more time for the consultation process. 8 May Draft Customs Duty Rules - First Batch The Draft Rules were published for comment which must be submitted no later than 5 June 2015. 20 May Proposed changes to the deferment of payment of customs duties is in terms of section 39(1) of the Customs and Excise Act, 1964, and the deferment arrangement applies equally to value-added tax levied upon importation in terms of section 13(6) of the Value-Added Tax Act, 1991 Proposed changes to the Deferment Scheme postponed until further notice. PwC publications 5 May PwC Tax Alert - Withdrawal of proposed reduction in UIF remuneration threshold The Tax Alert deals with the withdrawal of the proposed decrease in UIF contribution thresholds This publication is provided by PricewaterhouseCoopers Inc. for information only, and does not constitute the provision of professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all the pertinent facts relevant to your particular situation. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, copyright owner or publisher. 2015 PricewaterhouseCoopers Inc. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. 8