Major issues with Sars’s voluntary disclosure programme

The South African Revenue Service (Sars) published a draft guide on its Voluntary Disclosure Programme (VDP) at the end of last year.

The programme aims to assist taxpayers who voluntarily disclose defaults in order to regularise their tax affairs.

However, tax experts say the narrow interpretation of the qualifying provisions is not conducive to its objective and practical problems “strongly disincentivise” taxpayers from making any disclosures whatsoever.

The South African Institute of Taxation (Sait), in its comments on the draft guide, says the current uncertainty or perceived inequity in relation to the VDP has led to a situation where taxpayers frequently adopt a “catch me if you can” approach.

The definition of ‘voluntary’

In Purveyors v Sars, the Supreme Court of Appeal had to determine the meaning of “voluntary” and “disclosure”.

Following its judgment, the word voluntary has been defined to mean “performed or done of one’s own free will, impulse or choice, not constrained, prompted, or suggested by another”.

Elle-Sarah Rossato, member of Sait’s tax administration work group, says it follows that if an errant taxpayer received advice from professional service firms or tax practitioners to disclose any non-compliance their application will not be voluntary.

She also notes that Sars often issues media statements in which taxpayers are reminded that they face penalties if their non-compliance is not corrected (through the VDP).

It is unclear whether applications submitted by taxpayers in response to Sars media releases can be said to be made without any prompting and out of a taxpayer’s own volition.

Rossato suggests that the VDP guide be updated to include Sars’s view or interpretation of the judgment to limit potential disputes about the correct interpretation of the court’s finding.

She also suggests that “voluntary” be properly defined in the Tax Administration Act to ensure clarity.

“Failing that, it is suspected that advisors may be reluctant to suggest [to their clients that they make use of the] VDP as, in doing so, advisors may inadvertently be the cause of a VDP application being rejected.”

Read: Sars surges ahead with voluntary disclosure overhaul, but is it enough?

The VDP process also excludes taxpayers who have been notified of an audit, verification or a criminal investigation. Sars says a disclosure will be regarded as voluntary when the notice does not relate to the default for which the taxpayer seeks VDP relief.

Rejections are bad news – and hard to avoid

According to Sait applications have been rejected when the taxpayer has received a request for relevant material even if there was no actual audit underway.

It has also rejected applications where a tax return was outstanding, or where a taxpayer approached a Sars official to clarify a tax position.

This is against the spirit of the VDP programme and has a negative impact on tax morale.

Instead of encouraging taxpayers to regulate their tax affairs, they are deterred from doing so and eventually Sars will not have the full picture of taxpayers’ affairs, says Rossato.

Read: Sars hones its relationship with the rich and the super-rich

Full and complete disclosure

Another major issue with the current process is that there is no limitation on the period in relation to a disclosure.

The Tax Administration Act requires taxpayers to keep their tax records for five years from the date of a tax return submission.

In practice, Sars has required taxpayers to estimate their tax liability for earlier periods (beyond the five years). Failure to declare tax liabilities for these earlier periods resulted in Sars rejecting the application because the disclosure was not “full and correct in all material respects”.

Sait says the limitation of five years in terms of the period for disclosure is applied “inconsistently” by the VDP unit.

It suggess that the period for disclosure of information and documentation be limited to the record-keeping period, or three years for a Sars assessment and five years for self-assessments in accordance with the statute of limitations.

Read: Corporate taxpayers on their experiences with Sars

Costs and risks

The institute also commented on the legal nature of the fact that taxpayers cannot object or appeal the decision to reject their applications if it is not voluntary and full and correct.

Currently the taxpayer can take the decision on an internal review and, if unsuccessful, on judicial review to a high court. “Because of the cost and delay involved in such a process, few taxpayers are willing or able to do so,” says Rossato.

Sait proposes that decisions concerning qualification for VDP relief should be subject to objection and appeal, similar to a tax assessment.

It adds that the commercial and reputational risks associated with challenging the rejection in a public court is a “material disincentive” for taxpayers.

This can, in certain instances, result in taxpayers adopting a “find me first” attitude to past tax non-compliance.

Rossato is hopeful that the uncertainties will be clarified when the final VDP guide is published.