Value Added Tax: Whether the provisions of the voluntary disclosure agreement prohibit a request for remission of interest under section 39(7) of the VAT Act 89 of 1991 (“VAT Act”)

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In brief

Medtronic International Trading S.A.R.L (“Medtronic”) sought to review South African Revenue Services (“SARS”) refusal to remit interest in terms of section 39(7)(a) of the VAT Act. Medtronic contends that the existence of a voluntary disclosure agreement does not preclude them from seeking remittance of interest.

SARS’s position is that the request for remission of interest was not valid because section 39(7) of the VAT Act and section 187(6) of the Tax Administration Act No. 28 of 2011 (“TAA”) does not apply to voluntary disclosure agreements.

The Gauteng High Court held that the provisions in the TAA relating to voluntary disclosure programs (“VDP”) do not prohibit a request for remission of interest in terms of section 39(7)(a) of the VAT Act notwithstanding a VDP having been entered into.

Background

During the course of June 2004 and May 2017, an employee of Medtronic embezzled an amount of R537,236,176.00 from Medtronic and achieved this by submitting false VAT 201 returns to SARS. The employee sought reimbursements from SARS in order to conceal the embezzlement. As a result, Medtronic suffered a VAT understatement and was liable for understatement, interest, and late payment penalties.

Medtronic applied to SARS for VDP relief in terms of sections 225 and 233 of the TAA on 13 December 2013.  On 14 and 18 June, 2018 two VDP agreements were concluded between SARS and Medtronic. According to these VDP agreements Medtronic was liable for the payment of the capital VAT amount of R286,464,756.62 and interest of R171,205,356.12.

Subsequent to entering into the VDP agreements, Medtronic applied to SARS for the remission of interest as provided for in Section 39(7)(a) of the VAT Act as read with SARS Interpretation Note 61 dated 29 March 2011 (”IN47”) to which SARS responded and denied the request. Medtronic objected to the SARS decision on 10 December 2018. The objection was also rejected on the basis that Medtronic had entered into a VDP agreement with SARS. 

As a consequence of the aforesaid refusals by SARS, Medtronic launched review proceedings in terms of sections 6(2)(d), 6(2)(e)(iii), 6(2)(f)(ii), 6(2)(g) and 6(3) of the Promotion of Access to Justice Act 7, alternatively the principle of legality, the common law and section 33 of the Constitution of the Republic of South Africa as read with Rule 53 of the Uniform Rules of Court.

Medtronic’s case

Medtronic contends that the manner in which its remission in terms of section 39(7)(a) of the VAT Act is sought ought to be dealt with in terms of IN61. Medtronic argues that as such it is not prohibited from seeking remission of interest. Medtronic further argued that nowhere in the sections relating to the VDP agreement in the TAA does it prohibit a request in terms of section 39(7)(a) of the VAT Act.

Ultimately, Medtronic argued that SARS has a statutory duty to consider, adjudicate and make a decision as regards their request for remission.

SARS’ case

SARS submitted that Medtronic was attempting to renegade on the VDP agreements reached in the face of having been granted a reprieve of the R172million in penalties. Hence, SARS concluded that the request made by Medtronic was not valid. In fact, SARS stated that Medtronic ought to have submitted a notice of objection for the remittance of the interest. SARS went so far as to state that section 39(7)(a) of the VAT Act and to the extent of section 187(6) of the TAA do not apply to VDP agreements.

To further qualify the above SARS advised Medtronic that section 232 of the TAA specifically excluded assessments pursuant to a VDP agreement from being subject to an objection and appeal. Hence, in the instance of an assessment pursuant to a VDP, sections 39(7)(a) of the VAT Act and 187(6) of the TAA likewise do not apply. Medtronic was told to proceed by way of an objection to the decision taken by SARS not to accede to the request for the remission, by completing the prescribed Notice of Objection form.

The law

Section 39(7)(a) of the VAT Act deals with remittance of interest imposed under the VAT Act, in whole or in part, where a taxpayer fails to make payment of tax within the specified period due to circumstances beyond the control of the taxpayer.

Section 187(6) of the TAA deals with the remittance of interest where the interest payable in terms of section 187(1) of the TAA is payable as a result of circumstances beyond the taxpayer’s control.

Section 229 of the TAA provides that upon concluding a voluntary disclosure agreement under section 230 of the TAA, SARS must –

  1. not pursue criminal prosecution for a tax offence arising from the ‘default’;
  2. grant the relief in respect of any understatement penalty to the extent referred to in column 5 or 6 of the understatement penalty percentage table in section 223 of the TAA; and
  3. grant 100% relief in respect of an administrative non-compliance penalty that was or maybe imposed under Chapter 15 or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter or in terms of a tax Act for the late submission of a return.

Section 232 of the TAA provides that if a voluntary disclosure agreement has been concluded, SARS may, despite anything to the contrary contained in a tax Act, issue an assessment or make a determination for purposes of giving effect to the agreement. The section further provides that the assessment or determination is not subject to objection and appeal.

 

The judgement and court reasoning

SARS’ decision to refuse to consider Medtronic’s request for remission of interest in terms of section 39(7)(a) of the VAT Act was set aside by the Gauteng High Court in terms of the Promotion of Administrative Justice Act, Act 3 of 2000, alternatively the principle of legality, and remitted back to SARS for reconsideration.

The Gauteng High Court held that ‘it is evident that the interest and penalties were added to the eventual amount attained in the VDP agreement by virtue of the application of section 39(1) of the VAT Act.

Hughes J expressed the view that ‘if remission requests of interest were not intended to be sought in situations where there was a VDP agreement, either by way of section 187 of the [TAA] or section 39(7) of the VAT Act, the legislature would have set this out succinctly in the provisions regulating the VDP agreement and procedure.’

On this basis, the Court held that ‘the notion adopted by [SARS] that the Applicant seeks to vary the VDP agreement through the back door by seeking the remission cannot stand muster.

 

 

This is so because it is common cause that the applicant has already complied with the VDP agreement as it has paid the interest sought’ and went on to state that ‘The entire purpose of the VDP process pertains to taxes and is regulated by Acts which are tax related with the Tax Act being the default position if there is conflict or confusion. How then does one exclude that which is a self-prevailing Act when dealing with a process borne out in that same Act. Hence, the analogy being that if section 187(6) can be applied then the equivalent that being section 39(7) of the VAT Act, most certainly is applicable.’

Accordingly, the Gauteng High Court held that the provisions in the TAA relating to VDPs do not prohibit a request for remission of interest in terms of section 39(7)(a) of the VAT Act notwithstanding a VDP having been entered into.  Notwithstanding a prior VDP agreement having been entered into, SARS has a statutory duty to consider, adjudicate and decide on a request for the remission of interest in terms of section 39(7)(a) of the VAT Act.

 

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