The Constitutional Court has been asked to decide whether the South African Revenue Service (SARS) may refuse a request to remit interest once it has concluded a Voluntary Disclosure Programme (VDP) agreement with a taxpayer.
SARS approached the apex court for leave to appeal a decision by the Supreme Court of Appeal (SCA), which essentially found that SARS has a statutory duty to consider the request.
This is the latest twist in Medtronic International’s tax nightmare that started in 2017 when it realised that an accountant, Hildegard Steenkamp, meticulously orchestrated a scheme to steal more than R537 million from it for more than a decade.
Between 2005 and 2015 she falsified value-added tax returns for input tax claims totalling R287m, to which Medtronic was not entitled. Medtronic disclosed the fraud to SARS and successfully applied for the VDP in December 2017. Steenkamp was arrested, found guilty, and sentenced to 50 years’ imprisonment.
The penalties and interest
The VDP Unit was prepared to waive the administrative non-compliance penalty of R29m and the understatement penalty of R143m. It did not have the authority to waive the interest arising from the underpayment of VAT.
In terms of the VDP agreement, Medtronic agreed to pay SARS a “total post relief amount” of about R457.6m, which comprised capital tax of R288.5m and interest of R171.2m.
At the time that Medtronic submitted the request for the remission of interest, the total amount due had already been paid. SARS refused to consider the request for remission.
SARS contended that the provisions in the VAT Act for the remission of interest do not apply where a VDP agreement has been concluded.
Medtronic disagreed. “What was at stake at that stage was no longer VDP. Medtronic’s request was a standard request for remission of interest to which all vendors, including Medtronic, are entitled,” it argued.
“It would be inherently unfair if Medtronic is precluded altogether to apply for a remission of interest just because it entered into a VDP agreement.”
The judgments
Medtronic approached the High Court in Pretoria to review SARS’s refusal to consider a request for the remission of the interest. The court found in its favour and referred the matter back to SARS for consideration.
SARS appealed the High Court’s decision to the SCA, which, in a majority judgment, upheld the High Court’s decision. SARS is asking the Constitutional Court for leave to appeal the SCA’s judgment.
Joon Chong, a partner in Webber Wentzel’s tax practice, says the SCA’s majority judgment was clear that neither the VAT Act nor the Tax Administration Act (TAA) provides expressly or by necessary implication that a taxpayer who has entered an agreement under the VDP is excluded from the benefit for which section 39(7) provides and, in particular, when such an agreement has been discharged through performance of the contractual obligations undertaken in terms of the contract”.
Chong explains that section 39(7) of the VAT Act provides for the SARS Commissioner to remit interest due by the taxpayer where the non-payment of VAT was because of circumstances beyond the control of the VAT vendor. The failure to declare and pay VAT timeously was because of circumstances beyond Medtronic’s control after being embezzled by an employee.
In its notice of motion before the Constitutional Court, SARS says Medtronic effectively sought permission to amend the VDP agreement so that it was refunded the interest of more than R170m that it had previously agreed to pay. This was after the company had already been absolved of the obligation to pay more than R172m (R143m plus R29m) in penalties.
The VDP process
SARS argues that the TAA’s framework for voluntary disclosure “by design” excludes any relief in respect of accrued interest. It notes that the obligation to pay R171m in interest flows directly from the binding and enforceable provisions of the VDP agreement and is not interest payable in terms of the VAT Act.
Medtronic argues that a taxpayer cannot simply lose a remedy available in terms of the VAT Act because it decided to make a voluntary disclosure to SARS of a default.
Chong says a taxpayer who has entered a VDP agreement with SARS and has been issued with VAT assessments with interest can request for remission of such interest due under section 39(7) of the VAT Act.
She advises taxpayers to apply for relief under the VDP, and in the VDP application letter, reserve their right to request for remission of interest. Once the dust has settled on the VDP agreement and the tax due has been paid, the taxpayer must initiate the normal processes to request remission of the interest due on the VDP assessments.
According to Chong, it can be a challenge to request remission of interest from SARS. However, where the tax due arose from circumstances beyond the taxpayer’s control (such as in Medtronic’s circumstances), the taxpayer should motivate for the remission of interest.
“In my view, although the Medtronic decision dealt with VAT, the same principles would apply for all other taxes, such as income tax and payroll taxes,” Chong adds.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
