Problematic tax legislation is causing irreparable damage to exporter cash flows and the local economy, as one-sided laws balanced against taxpayers continue to impede growth and deter foreign investors.
Deficiencies in the country’s Value-Added Tax (VAT) Act regarding VAT audits has resulted in the endless withholding of VAT refunds, violating taxpayers’ constitutional rights to fair administration.
In terms of VAT law, exports are zero-rated, which means that export businesses usually fall into a net VAT refund position. These VAT refunds are an important factor in exporters’ operational cash flows.
Various industry representative bodies have raised the concern that the South African Revenue Service (SARS) is not statutorily required to finalise VAT audits within any deadline.
This results in endless delays in the payment of refunds, causing companies significant financial difficulties to the point of insolvency.
During the VAT audit period, there are no statutory time frames for finalisation.
In effect, this means that the taxpayer is often placed in limbo, while all its VAT refunds – both current and future – are withheld.
The VAT Act is silent on this issue, and SARS holds that it is free to continue a VAT audit for one, two, three or even more years. It may not be held to any deadline.
SARS may continually extend the audit scope and periods without limitation, and without uncovering any concrete proof of wrongdoing or finalising the first audit period.
And as long as SARS submits successive requests for additional information within 21 days of each other, no interest may accrue on the refund amounts due to the taxpayer.
Compounding the issue, no partial refunds are possible during the audit.
Unless companies provide a guarantee or security for 100% of the amount of the VAT under dispute, they are not able to apply to SARS for any relief.
As a result, companies’ cash flows are severely compromised to the point of insolvency.
SARS has also argued that as the VAT refund withholding is an automatic system stopper rather than a deliberate decision, taxpayers may not take the withholding decision on court review.
A revised VAT assessment is only issued on finalisation of the VAT audit.
Only once the revised VAT assessment has been issued, may a formal dispute resolution process take place, which does have a schedule of specified deadlines and time frames.
Until then, however, taxpayers are left completely at the mercy of the SARS audit team – a process which very few businesses can survive.
In the absence of a formal dispute resolution mechanism, the taxpayers’ only legal recourse during a VAT audit is to the courts.
For many businesses, this option is not only financially prohibitive but also very time-consuming, as a final result is only likely after five to six years once all the appeal processes have run their course.
During Commissioner Moyane’s era, for example, SARS withheld a total of about R20 billion of VAT refunds owed to taxpayers, causing significant harm to businesses.
In a recent Gauteng High Court judgment, the court noted that SARS must not be allowed to continue requesting information in a bid to delay the finalisation of VAT audits.
Additionally, the court emphasised that SARS cannot be allowed an indefinite time to complete audits and that all audits should be completed within a reasonable time.
But although the seriousness of these issues has been acknowledged by the Tax Ombud, the Nugent Commission, senior members of SARS, and the previous Minister of Finance, there is still no remedy.
This has significant implications for South Africa’s investment attractiveness and global competitiveness, limiting the growth of the export industry.
The export industry is crucial to supporting the local currency, generating revenue, and creating jobs.
Foreign direct investors have specifically raised this concern as the basis for overlooking South Africa and establishing businesses and creating jobs elsewhere in Africa.
No one is remotely suggesting that the SARS cannot conduct audits. Its right to conduct audits is indisputable.
In terms of the Constitution, however, every South African has the right to administrative action that is reasonable and procedurally fair.
Yet the structure of our tax laws allows SARS to act as judge, juror, and executioner on VAT audits and investigations, capable of punishing innocent taxpayers without any concrete evidence of wrongdoing.
The government urgently needs to make the necessary legislative amendments to set deadlines for SARS to complete VAT audits, limit the number of periods for which VAT may be withheld, and allow taxpayers with good compliance records to apply for the release of VAT refunds, without providing security.
Companies are expected to pay VAT timeously.
SARS should pay VAT refunds timeously as well.
* Ernest Lai King is the Managing Director of 1 Road Consulting and a consultant at law firms