SARS double-blow for tax evaders in South Africa
A recent case highlighted by law firm Cliffe Dekker Hofmeyr (CDH) shows that tax evaders in South Africa can be hit with double penalties for the same crime – and that the defence of double jeopardy won’t help them.
In the case – Motloung and Another v SARS – the court had to determine whether or not a taxpayer found to have committed tax evasion could be charged an understatement penalty by SARS and also be held criminally liable in terms of the provisions of the Tax Administration Act (TAA).
The companies involved raised double jeopardy as a defence in the case, arguing that the penalty and criminal charges were two punishments for the same crime and were thus invalid and unconstitutional.
The court, however, ruled otherwise.
Double jeopardy is prohibited in section 35(3)(m) of the South African Constitution. The section states that every person has the right to a fair trial, including the right not to be tried for a crime in which a person was already found guilty or acquitted.
In its ruling, the court noted that the section in question relates specifically to accused persons and the protection of their right to freedom – where the right to a fair trial could be threatened by repeated (criminal) charges for the same act.
The court held that imposing sections of the Tax Administration Act does not offend the accused right to a fair trial.
The imposition of the law – even if two penalties are closely related – does not amount to double jeopardy, it said. Therefore, the sections are neither invalid nor unconstitutional.
What this means for taxpayers
CDH said that this case should serve as a valuable lesson for non-compliant taxpayers and an opportunity to respond to findings made by SARS in the context of an audit.
This is especially true where SARS makes allegations pertaining to understatement penalties – where the taxman bears the burden of proving the facts on which the understatement penalty is imposed.
Section 221 of the TAA defines an “understatement” as:
“Any prejudice to SARS or the fiscus as a result of:
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- a default in rendering a return;
- an omission from a return;
- an incorrect statement in a return or;
- if no return is required, the failure to pay the correct amount of ‘tax’.”
“Section 222 of the TAA details the penalty which will be levied in relation to an understatement made by a taxpayer, providing that an understatement penalty will be payable by the taxpayer, over and above the outstanding tax payable,” said CDH.
Facts of the case
The second applicant (Reatlehise Development CC) submitted zero returns for value-added tax (VAT) to SARS and submitted zero returns for corporate income tax (CIT) for multiple years of assessment.
By submitting zero returns, the second applicant purported to have generated no income and incurred no expenses for these periods. SARS included the second applicant in a full-scope audit.
SARS sent an audit findings letter to the second applicant indicating that it had understated its tax liability and that it would be levying understatement penalties for the relevant periods, which the applicants did not dispute.
The applicants did not respond to SARS with reasons as to why the understatement penalties should not be levied, said CDH.
SARS imposed a 150% understatement penalty in respect of the understated CIT and VAT, for intentional tax evasion.
The applicants admitted that SARS suffered prejudice in relation to VAT and CIT.
“The applicants were subsequently criminally charged for intentional tax evasion,” CDH said.
The applicants complained that they could not tender a plea contrary to SARS’ finding, that is, that they were guilty of intentional tax evasion and liable for an understatement penalty on the basis of intentional tax evasion.
According to the applicants, their right to a fair trial had been infringed due to their inability to plead to the contrary, which meant that they had fallen victim to the concept of double jeopardy, said CDH.
Decision
Nobody can be punished for the same offence twice – known as the double jeopardy defence.
The applicants, in this case, argued that the understatement penalty in terms of section 222 of the TAA constituted a criminal punishment.
“Essentially, their argument was that understatement penalties could only be imposed pursuant to an enquiry, and therefore, the process followed in levying understatement penalties is the same as the process in the criminal court,” said CDH.
However, the court said that previous case law showed that if one proceeding is criminal in nature and the other non-criminal or administrative in nature, then the issue of double jeopardy will not arise.
The court stressed that administrative penalties and criminal proceedings do not serve the same purpose.
The one is aimed at strengthening internal controls of the administrative authority and promoting compliance, while the other is aimed at correcting behaviour that caused harm to society, said the court.
The court stated that the main purpose of a penalty is “to deter impermissible conduct that results in violation of the TAA and to enforce compliance” and, of course, to address the shortfall owed to SARS.
An understatement penalty is not imposed to punish criminal conduct in the form of tax evasion but rather serves as a regulatory function to assist SARS in respect of its obligations prescribed by the enabling legislation, said CDH.
Commentary provided by Cliffe Dekker Hofmeyr
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