Corporate and provisional taxpayers should brace themselves for more pushbacks than usual from the South African Revenue Service (SARS) in the coming months. Against the backdrop of the ZAR 35-billion tax deficit for April 2020 and the tabling of the Finance Minister’s emergency budget on 24 June, SARS is likely to take an aggressive stance towards tax collections.

‘As a result of the deficit in collections for the year to date, we are expecting closer SARS scrutiny and more queries and disputes over taxpayers’ annual and provisional returns,’ says Adèle de Jager, Executive: Tax in the Johannesburg office of leading African law firm Bowmans.

Corporate taxpayers preparing to file their annual or provisional returns this month should take extra care to ensure they are confident in the tax positions they take. ‘We foresee an increase not only in challenges by SARS but in the penalties levied,’ says de Jager, pointing out that understatement penalties range from 10% to 200% of any understated amounts.

Pandemic adds to peril

What makes the present time perilous for corporate taxpayers is the difficulties many are likely to have in forecasting their revenues given the COVID-19 pandemic.

‘The full financial and economic impact of the pandemic is not yet clear, making it harder to put together reasonable and realistic revenue estimates,’ she says. This could prove particularly challenging for businesses whose financial year ends in December but have to provide their first revenue estimates now, in June.

De Jager warns that SARS will almost certainly not be satisfied with simplistic explanations that revenue decreases and fluctuations can be ascribed to the two months of hard lockdown in South Africa. ‘SARS will want to know on what basis revenue calculations are made and what documentation the taxpayer has provided in support of these.’

These hurdles are not insurmountable, especially if taxpayers draw on a combination of legal and accounting advice.

De Jager recommends a multidisciplinary tax and accounting team and outlines the approach that she recommends corporate taxpayers take to ensure that the tax position taken can withstand the scrutiny of SARS.

Practical steps for plausible tax positions

‘Once a company has a revenue estimate it believes is defendable, I recommend a reasonability check to see if the forecast makes sense and that the provisions of the Income Tax Act, 58 of 2961 have been correctly and consistently applied and that such can be defended.’

‘The forecast should then be compared with the prior year’s, checking particularly for instances where variations would not be expected and looking for items that could potentially be challenged.’

She says that if the estimate makes sense and taxpayers have applied the provisions of the Income Tax Act and they can support the basis for calculating the estimate, then corporate taxpayers should feel more confident about the tax positions they are taking. On the other hand, where this legal scrutiny reveals a tax position that could be challenged or is subject to a different interpretation, she believes that it would be ‘prudent’ to prepare a legal opinion to support the position.

She explains, ‘We are talking here about a tax position that could be open to interpretation because the law is not clear. If the law were clear, we wouldn’t have tax disputes in the court.’

Legal opinions and professional privilege

The benefit of requesting a legal tax opinion is that it is subject to legal professional privilege when issued by attorneys/law firms. This is important if a company is struggling with an issue of interpretation and does not want to draw the attention of SARS to the issue.

De Jager continues, ‘Having a legal opinion also entitles the taxpayer to protection from understatement penalties in respect of a tax position taken in a return. This protection is provided under Section 223 of the Tax Administration Act.

‘However, where such an opinion is required to be disclosed to SARS so as to safeguard the taxpayer against the imposition of understatement penalties, legal professional privilege will need to be waived or is not necessary when the opinion is issued. The consequences of this, together with the other requirements of Section 223, need to be thoroughly considered and taken into account when the opinion is drafted.’

In conclusion, de Jager says she anticipates considerable emphasis from SARS on the submission of annual and provisional tax returns by the end of June. ‘All eyes will be on the Minister of Finance’s emergency budget on 24 June, but one thing is for sure: now more than ever, taxpayers need to be certain about their tax positions.’

Written by Adèle de Jager, Executive: Tax in the Johannesburg office of leading African law firm Bowmans.