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[2021] ZAGPPHC 127
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Absa Bank Limited and Another v Commissioner for the South African Revenue Service (2019/21825) [2021] ZAGPPHC 127; 2021 (3) SA 513 (GP); 83 SATC 401 (11 March 2021)
REPUBLIC OF SOUTH
AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
(GAUTENG
DIVISION, PRETORIA)
(1)
REPORTABLE:
NO
(2)
OF
INTEREST TO OTHER JUDGES: YES
(3)
REVISED.
11
March 2021
Case
No: 2019/21825 [P]
ABSA
BANK LIMITED
First Applicant
UNITED
TOWERS PROPRIETARY LIMITED
Second
Applicant
and
COMMISSIONER,
SOUTH AFRICAN REVENUE
Respondent
SERVICE
JUDGMENT
Headnote
Tax
anti-avoidance (GAAR) provisions of Income Tax Act 58 of 1962,
sections 80A – 80L – whether taxpayer participated
as a
“party” in an “arrangement” to avoid a tax
liability -
The
applicant sought to review a refusal by respondent to withdraw a
section 80J notice and the consequent letters of assessment
in terms
of section 80B by invoking
section 9
of the
Tax Administration Act 28
of 2011
Whether
taxpayer entitled to seek a review in the High court and bypass the
internal procedure of objection, appeal and trial in
the special tax
court:
Held:
a taxpayer may do so in exceptional circumstances, such special
circumstances including a case where the only point of dispute
is a
question of law; in this case that point of law being the
interpretation of
section 80L
as to “party” and
“arrangement” in relation to a set of facts.
Held:
On the facts, the applicant’s review in the high Court was
appropriate.
Whether
the applicant, who had invested in shares in a SA company in the
belief that the company had a back-to-back deal with a
parent company
to defray debt, and unbeknown to the applicant, several intermediary
transactions with other entities both local
and foreign took place
which transactions were aimed at tax advantages, was thereby a
“party” to an “arrangement”
as defined in
section 80L
and as a result was culpable in “participating”
in a tax avoidance “scheme”:
Held,
on the facts and on a proper interpretation of
section 80L
–
the applicant was not a party to any arrangement.
Ordered:
the refusal to withdraw the
section 80J
notice was reviewed and set
aside; the letters of assessment based on the premise of the
section
80J
notice also set aside, the respondent to bear the costs.
SUTHERLAND
ADJP:
Introduction
[1]
The applicants, Absa Bank Ltd and its wholly owned subsidiary Absa
Towers (Pty) Ltd
hereafter referred to, collectively, as Absa, seek
to review two decisions of the respondent, the Commissioner, South
African Revenue
Service (SARS).
[2]
The origin of this case lies in a controversy about whether or not an
impermissible
tax avoidance arrangement was conceived to evade a tax
liability. It involves the application of the general anti-avoidance
regime
(GAAR) provisions
(sections 80A
–
80
-L) of the Income
Tax Act 58 of 1962, (ITA). Section 80B empowers SARS to impose tax
liability in circumstances where a liability
is impermissibly
avoided.
[2]
An impermissible tax avoidance arrangement is described in section
80A.
“
An
avoidance arrangement is an impermissible avoidance arrangement if
its sole or main purpose was to obtain a tax benefit and-
(a)
in
the context of business-
(i) it
was entered into or carried out by means or in a manner which would
not normally be employed for
bona fide
business
purposes, other than obtaining a tax benefit; or
(ii) it
lacks commercial substance, in whole or in part, taking into account
the provisions of section 80C;
(b)
in
a context other than business, it was entered into or carried out by
means or in a manner which would not normally be employed
for a
bona
fide
purpose,
other than obtaining a tax benefit; or
(c)
in
any context-
(i) it
has created rights or obligations that would not normally be created
between persons dealing at arm's length;
or
(ii) it
would result directly or indirectly in the misuse or abuse of the
provisions of this Act (including the
provisions of this Part).”
The
terms used in section 80A are further defined in Section 80L:
For
purposes of this Part-
'arrangement'
means
any transaction, operation, scheme, agreement or understanding
(whether enforceable or not), including all steps therein or
parts
thereof, and includes any of the foregoing involving the alienation
of property;
'avoidance
arrangement'
means
any arrangement that, but for this Part, results in a tax benefit;
'impermissible
avoidance arrangement'
means
any avoidance arrangement described in section 80A;
'party'
means
any-
(a)
person;
(b)
permanent
establishment in the Republic of a person who is not a resident;
(c)
permanent
establishment outside the Republic of a person who is a resident;
(d)
partnership;
or
(e)
joint
venture,
who
participates or takes part in an arrangement;”
[3]
When SARS believes an impermissible tax avoidance arrangement has
been implemented,
it must issue a section 80J notice to the
taxpayers:
“
(1)
The Commissioner must, prior to determining any liability of a party
for tax under section 80B, give the party notice that he
or she
believes that the provisions of this Part may apply in respect of an
arrangement and must set out in the notice his or her
reasons
therefor.
(2) A party
who receives notice in terms of subsection (1) may, within 60 days
after the date of that notice or such longer period
as the
Commissioner may allow, submit reasons to the Commissioner why the
provisions of this Part should not be applied.
(3) The
Commissioner must within 180 days of receipt of the reasons or the
expiry of the period contemplated in subsection (2)-
(a)
request
additional information in order to determine whether or not this Part
applies in respect of an arrangement;
(b)
give
notice to the party that the notice in terms of subsection (1) has
been withdrawn; or
(c)
determine
the liability of that party for tax in terms of this Part.
(4) If at
any stage after giving notice to the party in terms of subsection
(1), additional information comes to the knowledge of
the
Commissioner, he or she may revise or modify his or her reasons for
applying this Part or, if the notice has been withdrawn,
give notice
in terms of subsection (1)”
[4]
The first decision of SARS sought to be reviewed is a refusal to
comply with a request
by Absa to withdraw section 80J notices in
respect of each applicant about a specific transaction. Section
80J(3)(b) contemplates
a withdrawal of the notice upon consideration
of a taxpayer’s response to the notice. SARS did not comply
with the request.
Instead, it determined a tax liability for Absa as
contemplated in section 80J(3)(c).
[5]
Section 9 of the Tax Administration Act 28 of 2011 (TAA) was invoked
by Absa to demand
the withdrawal. Section 9 provides:
“
(1)
A decision made by a SARS official or a notice to a specific person
issued by SARS under a tax Act, excluding a decision given
effect to
in an assessment or a notice of assessment that is subject to
objection and appeal, may in the discretion of a SARS official
described in paragraph
(a)
,
(b)
or
(c)
or
at the request of the relevant person, be withdrawn or amended by-
(a)
the
SARS official;
(b)
a
SARS official to whom the SARS official reports; or
(c)
a
senior SARS official.
(2) If all
the material facts were known to the SARS official at the time the
decision was made, a decision or notice referred to
in subsection (1)
may not be withdrawn or amended with retrospective effect, after
three years from the later of the-
(a)
date
of the written notice of that decision; or
(b)
date
of assessment or the notice of assessment giving effect to the
decision (if applicable).
(3)
A decision made by a SARS official or a notice to a specific person
issued by SARS under a tax Act is regarded as made by a
SARS official
authorised to do so or duly issued by SARS, until proven to the
contrary.”
[6]
The second decision by SARS sought to be reviewed is the issue of
letters of assessment
to each of the applicants in respect of a tax
liability imposed in terms of section 80B on Absa in respect of the
alleged arrangement.
The letters of assessment were issued while the
review on the first decision was pending. The two section 80J notices
are identical.
The two letters of assessment are identical. The basis
for the assessments is identical to the section 80J notices.
[7]
The two review applications are inextricably linked. Had the first
decision to issue
the section 80J notices been withdrawn no letters
of assessment could have followed. Because the rationale for the
assessments
is also the rationale in the section 80J notices, should
the notices be set aside the letters of assessment must, logically,
be
set aside too.
[8]
The section 80J notice addressed a specific, alleged, ‘arrangement’
the
details of which addressed hereafter.
[9]
The critical questions before the court that arise for decision are
these:
9.1
Is a
refusal to withdraw a section 80J notice reviewable, at all, and if
so, on what jurisprudential basis?
9.2
Is
Absa a “party” to an impermissible “arrangement”
as contemplated by GAAR?
9.3
Did
Absa procure a “tax benefit” as contemplated by GAAR?
The
transactions alleged to be an “arrangement”
[10]
Absa bought, on four occasions, tranches of preference shares in a
South African company, PSIC
3. This entitled Absa to dividends when
declared. The various tranches of shares were held for various
periods during tax years
2014 to 2018.
[11]
PSIC 3 thereupon bought preference shares in another South African
company, PSIC4. Axiomatically,
when it declared a dividend PSIC 3
would receive revenue and in turn be able itself to declare a
dividend to its shareholders.
It is unknown whether there were any
other shareholders than those mentioned herein.
[12]
PSIC4 invested in an offshore trust, DI Trust. This investment was a
capital outlay. The
DI Trust then lent money to MSSA, a South
African Company, by means of subscribing for floating rate notes.
This company was a
subsidiary of the Macquarie Group of companies,
domiciled in Australia.
[13]
The DI Trust made investments by way of the purchase of Brazilian
Government bonds. It then derived
interest thereon. In turn, PSIC4
received from DI Trust interest on its capital investment in DI
Trust.
[14]
Axiomatically, PSIC 4 was able, in turn, to declare a dividend
payable to PSIC3 and, in turn,
PSIC 3 declared a dividend payable to
Absa.
[15]
The dividends received by Absa from PSIC 3 were free of tax.
The
contending perspectives of these transactions
[16]
The critical aspect of this series of transactions that provoked the
belief by SARS that a tax
avoidance arrangement had been constructed
was the Brazilian investment by DI Trust. Unravelling the series of
transactions led
to the view that Absa was a party, as defined in
section 80L, to an arrangement comprising all these transactions and
that ABSA
had received an impermissible tax benefit in the form of a
tax-free dividend. The proper result, so it was determined, ought to
have been that interest was received by Absa which would attract tax.
Hence the section 80J notice and the consequent letter of
assessment
premised on that view.
[17]
Absa however states that it bought the preference shares in PSIC 3 on
the understanding that
PSIC 3 and MSSA had a back-to-back
relationship and that the funds would flow directly to MSSA to repay
debt to its parent the
Macquarie Group. Absa was unaware of the
intermediation of PSIC 4 and the DI Trust, and of the DI Trust’s
Brazilian transaction.
Thus, ran the argument, Absa could not, in a
state of ignorance, have participated in an impermissible tax
avoidance arrangement,
nor did it have a tax avoidance motive in
mind, and nor did it procure a tax benefit to which it was not
entitled.
The
Controversy about the reviewability of the decisions
[18]
The rival contentions proceed from opposite points of departure. At
the level of generality,
they are thus:
18.1
SARS’s
view is that it is anathema to the dispute resolution scheme crafted
by the tax legislation to be able to opt out of
the internal remedies
and evade a progression through a process of objections, appeals and
eventually, a trial in the special tax
court, by approaching,
directly, a court of law at the inception of a dispute about tax
liability. The section 80J notice is manifestly
an integral step in a
multi-step process, the integrity of which process is violated by a
parallel process. In any event, so it
is argued, Section 9 of TAA,
properly interpreted, is not a valid nor legitimate hook upon which
to hang a review of a decision
in an anti-tax-avoidance dispute.
18.2
Absa’s
standpoint to refute this stance is founded on two bases. First, the
scope of the dispute is a pure point of law, an
attribute which lends
itself to broader considerations that those that dominate the stance
taken by SARS. Second, allied to the
first point, the guarantee in
section 34 of the Constitution of access by a person to a court
resolve a dispute has not been compromised
by the provision of a
system of internal remedies leading to the Special Tax Court.
[1]
This is demonstrated by the abundant precedent for the courts’
dealing with tax disputes on points of law. Insofar as a court
has a
discretion to deal with a tax dispute or insist that internal
remedies be exhausted, it is argued that a court would regard
a pure
point-of-law-dispute as an appropriate rationale to hear and dispose
of the controversy, in preference to condemning the
parties to a
protracted slog through all the internal steps towards the Special
Tax Court and then, if necessary, to a court of
law to which the
parties could have approached directly at the outset. In my view this
general proposition as advanced on behalf
of Absa is correct.
[19]
Getting to grips with the jurisprudential bristles involves dealing
with several further aspects
to which I now turn.
Section
9 of the TAA – what is it used for?
[20]
Can you invoke section 9 of TAA in a review of a section 80J process?
SARS’ view is that
section 9 of TAA addresses concerns
completely unrelated to section 80J matters. The argument runs that
section 9 contemplates
a single official, who, vested with a
discretion, may entertain a request to withdraw a notice. Whatever
category of decisions
or notices section 9 might apply to, it is
expressly provided that it does not apply to:
“
…
a decision given effect
to in an assessment or notice of assessment that is subject to
objection and appeal…”
It follows therefore, it is
argued, that by extracting from the purview of section 9 such issues,
which enjoy a dispute resolution
route through objections, appeals
and the special tax court, to a final resolution, it would be
anomalous to suppose that an alternative
“section 9 route”
has been created for an aggrieved taxpayer. Moreover, the discretion
conferred on the official implies
that a degree of expertise peculiar
to a SARS official is a component of the decision-making which should
enjoy due deference in
making a section 9-type decision.
[21]
The rebuttal to this thesis is that the passages addressing
exclusions of types of disputes in
the text refers to assessments
already
given
effect
to
not to assessments
not
yet given effect
to. Thus, it addresses cases where - eg, tax is paid and the
objections and appeals process is pending. That is not the case
in this matter. Further, so it is argued, the right question to ask
is not whether the tax regime offers two routes but whether
the
court’s jurisdiction is plainly excluded. In the face of clear
precedents, the court has dealt with tax disputes on points
of law
and have not compelled aggrieved taxpayers to exhaust internal
remedies. (See:
Metcash
Trading Ltd v C, SARS
2001
(1) SA 1109
(CC) at [43] and [46]
[2]
).
[22]
As regards the implication of the officials’ discretion taking
the matter out of the hands
of a court, the argument is advanced that
when the dispute is about a point of law there is no room to debate a
range of options
in making a decision: only a correct view of the law
is rational and lawful, hence there is no room for deference: the
decision
is right or wrong.
[23]
I agree with these contentions advanced by Absa.
The
effect of Section 105 of TAA
[23]
Section 105 of TAA provides:
“
A
taxpayer may only dispute an assessment or 'decision' as described in
section 104 in proceedings under this Chapter,
unless
a High Court otherwise directs
.”
[24]
Section 104(1), referred to therein provides:
(1)
A taxpayer who is aggrieved by an assessment made in respect of the
taxpayer may
object to the assessment.
(2) The
following decisions may be objected to and appealed against in the
same manner as an assessment:
(a)
…
(b)
…
(c)
any
other decision that may be objected to or appealed against under a
tax Act
.
(3) A
taxpayer entitled to object to an assessment or 'decision' must lodge
an objection
in
the manner, under the terms, and within the period prescribed in the
'rules'.
(Emphasis
supplied)
[25]
It was contended that the provisions of section 105 indicate a
confined arena in which to conduct
any disputations over a tax
liability. However, plainly, if a court may ‘…otherwise
direct…’ that results
in an environment for dispute
resolution in which there is more than one process. A court plainly
has a discretion to approve a
deviation from what might fairly be
called the default route. In as much as the section is couched
in terms which imply permission
needs to be procured to do so, there
is no sound reason why such approval cannot be sought simultaneously
in the proceedings seeking
a review, where an appropriate case is
made out. It was common cause that such appropriate
circumstances should be labelled
“exceptional circumstances”.
The court would require a justification to depart from the usual
procedure and,
this, by definition, would be “exceptional”.
However, the quality of exceptionality need not be exotic or rare or
bizarre;
rather it needs simply be, properly construed, circumstances
which sensibly justify an alternative route. When a dispute is
entirely a dispute about a point of law, that attribute. in my view,
would satisfy exceptionably.
[26]
Accordingly, Sections 104 and 105 do not impinge adversely on the
course of action launched by
Absa.
PAJA
[3]
or the Principle of Legality?
[27]
The next debate in relation to the non-reviewability of the refusal
to withdraw a section 80J
notice led to an examination of the
decision in order to determine to what species it belonged. Was
it “administrative
action” or was it merely an exercise
of public power and reviewable under the principle of legality?
The decision to
issue
the
section 80J notice was of course not final – or perhaps, to
belabour the nuance - not fully-final because the notice per
se
placed no immediate adverse burden on Absa and thus had no “external
or legal effect” and was therefore plainly
not administrative
action as contemplated by PAJA.
[4]
[28]
Such a decision can be contrasted with the effect of a letter of
assessment, which it was common
cause was administrative action. The
decision to refuse to withdraw, an option open to the decision-maker
stands in a different
light. Arguably the refusal to withdraw the
notice it could be construed as administrative action too.
[29]
Absa however invoked the principle of legality to review the
decision. Does it really matter
that it might have relied on PAJA? It
is unnecessary, in my view, to decide this question because it seems
to me that it can fairly
be said that the attributes of the decision
to refuse lies in the borderlands of which review-regime should
prevail, ie, PAJA or
Legality. The refusal undoubtedly had an effect
even if it can plausibly be argued that it was not final in effect.
More important,
in my view, is that the decision to refuse was
plainly a decision by an organ of state exercising a statutory power
and its notional
non-final attribute is not a bar, precisely because
it nevertheless had an impact. Similar non-final decisions have
been
held be susceptible to review. (See:
C,SARS v United
Manganese of Kalahari (Pty) Ltd
2020 (4) SA 428
(SCA) at [4];
C,SARS v Langholm Farms (Pty) Ltd
[2019] ZASCA 163
at
[7]
–
[10].
Earthlife Africa (CT) v DG, Dept of Environmental Affairs
and Tourism
[2005] ZAWCHC 7
;
2005 (3) SA 156
(C) at
[35]
to [37]).
[30]
In the result it was appropriate to proceed by way of a legality
review in preference to PAJA.
(See:
Minister of Home Affairs v
Public Protector of RSA
2018 (3) SA 380
(SCA) at [38]).
Is
the controversy a pure point of law?
[31]
The foundation of Absa’s case is that SARS accepts that Absa
was ignorant of the labyrinthine
mechanics of the series of
transactions and in turn therefore accepts that Absa had no knowledge
of PSIC 4 and D1Trust and the
Brazilian transaction. It relies on
several passages in the section 80J notices, and in the letters of
assessment, in which latter
documents SARS relied on the identical
premise evinced in the section 80J notices.
[32]
In the section 80J notices (and in identical terms in the subsequent
letters of assessment) the
core facts relating to Absa’s role
in these transactions was expressed thus:
“
17. The ABSA Group has
provided SARS with internal documentation relating to the four ABSA
arrangements, including credit applications
and related
documentation. In all four cases, ABSA’s understanding of the
arrangement appears to be that the arrangement
consists of a
back-to-back preference share investment into MSSA (via PSIC 3),
which investment would be used to fund mssa’s
broker
operations. None of the Absa documentation makes any reference to
psic 4, the d1 Trust or any of the transactions undertaken
by the
latter. SARS has been advised by ABSA and United that they were
unaware of the unreferenced entities or transactions.
18. ABSA, United and other
parties to the arrangements entered into various security/ancillary
arrangements related to the
preference share investments, including:
18.1 In each case, a
default put option agreement with MSSA in terms of which ABSA could
put the PSIC 3 reference shares to
the MSSA upon the occurrence of
certain specified events/circumstances.
18.2 A guarantee and undertaking
provided by MGL[ Macquarie Group] to ABSA/United (in all cases, PSIC
3 and MSSA were also party
to such agreement) whereby MGL guaranteed
the preference share return and made certain undertakings regarding
the tax treatment
of the amounts involved (including “gross up”
provisions to maintain the level of preference share return should
the
amounts become taxable). The guarantee and undertaking agreements
also contain provisions detailing how disputes with SARS will
be
conducted by the parties.
18.3 The preference share
investments in the A1 and A3 arrangements were also secured via the
cession of certain “collateral
instruments” held by MSSA.
The cession was achieved via the conclusion of security cession and
pledge agreements between
MSSA and United (the investor in each of
the arrangements). The instruments in question were:
18.3.1 In the case of the A1
arrangement, certain negotiable certificates of deposit (NCDs) issued
by SBSA with an aggregate value
of R800 million. The NCDs were issued
by SBSA on 10 December 2013, ie shortly after inception of the A1
arrangement.
18.3.2 In the case of the A3
arrangement, certain NCDs issued by FBL with an aggregate value
of R300 million.
18.4 In the cases were collateral
instruments were ceded as security, the ABSA Group records that it
measured credit risk against
the issuer of the NCDs (ie SBSA or FBL,
as the case may be) and not against MSSA (a so-called “risk
transfer”). This
was in part due to MSSA’s ability to
settle the put option price (should United exercise its put option)
via the transfer
of the collateral instruments.”
[33]
No rebuttal of the facts described herein appears in the section 80J
notice, nor subsequently
in the answering affidavits. No clear
allegation of mendacity appears anywhere.
[34]
The proposition advanced by SARS is that, properly and fairly read,
the passages cited above
do not support any acceptance of Absa’s
say so. SARS says in its answering affidavit that is not convinced of
Absa’s
ignorance. It asserts that a process via objections,
appeals and the Special Tax Court, where employees of Absa can be
subjected
to cross examination and discovery can be demanded is
appropriate in order to test the veracity of Absa’s claim of
ignorance.
In this process the onus is on the taxpayer to satisfy
SARS that tax is not due.
[35]
This might have been a cogent argument had SARS not put its eggs in
one basket by issuing the
letters of assessment on the factual
premise in the section 80J notice. The significance of the letters of
assessment to this specific
analysis is limited to the effect it has
on understanding and interpreting the stance adopted by SARS in the
section 80J notice.
Put bluntly: If you seek to assess and collect
tax on the basis that it is due despite Absa being ignorant, then it
is not open
to claim that you deserve a chance to go behind the
premise of the assessment levied, so you can afterwards attempt to
prove Absa
did have knowledge. In my view, it would be untenable,
having regard to SARS’ conduct, appraised holistically, to
endorse
a reading of the section 80J notice that would allow it to
wriggle out of the premise it chose to rely on to levy an assessment.
[36]
Accordingly, there is no room for a plausible dispute of fact. Absa
was served a section 80J
notice and subsequently served with letters
of assessment on the facts reported by Absa about its role in the
series of transactions.
A semantic gyration cannot turn a Naartjie
into an orange.
The
substantive grounds of review
[37]
The relevant passages in the section 80J notices setting out SARS’
rationale are these:
“
37.
In substance, the D1 Trust utilises the interest from the South
African loans (which is treated as tax-exempt in the hands of
the D1
Trust but would not be in the hands of the South African
beneficiaries should section 25B of the IT Act apply upon
distribution),
to “purchase” an income stream (the
Brazilian bond interest) via short-term Bond purchases and re-sales,
which income
stream is treated as tax-exempt when distributed.
There
is no apparent commercial reason for these transactions, (ie the
return of the Brazilian bonds is not superior compared to
the South
African interest), other than the favourable tax interest for the
parties.
58.
In our view, there is no question that at least one of the main
purposes of the “assignments” between the D1 Trust and
MBL (the purchases and re-sales of the Bonds), is to take advantage
of the tax exemption afforded by sub-article 11(4)(d). There
is, on
the face of it, no other reason for these transactions. As previously
noted, all such transactions lead to commercial/economic
losses in
the hands of the D1 Trust, and by extension its beneficiaries.
59.
We thus conclude that the exception provided for in Article 11(9) of
the Brazilian DTA applies in the present case to the Bond
coupons,
and accordingly South Africa did not (and does not) sacrifice its
taxing rights in respect thereof.
66.
Every party to each of the above arrangements is accordingly a
“party” as defined in section 18L of the IT Act in
relation
to a given arrangement. For the avoidance of doubt, this
would include ABSA and United. This is because, for the purposes of
Part
11A of the IT Act, “party” includes
inter
alia
any person who shares in or partakes of an
arrangement (based on the ordinary meaning of the term “participates
in”).
This would clearly include any person that benefited
financially/economically from the arrangement in question.
67.
Section 1 of the IT Act defines “tax benefit”
inter
alia
for the purposes of section 18L as the “…
avoidance,
postponement or reduction of any liability for tax”
, where
“tax” is “…
any tax, levy, duty or other
liability imposed by
[the]
Act or any other Act administered
by the Commissioner”….
70.
It is, in our view, abundantly clear that mechanism employed by
the D1 Trust, as described above attempted to “swap”
a
taxable income stream (the interest from the collateral instruments
and/or from MSSA, which interest was paid to the D1 Trust
as interest
on the loans made by the latter to MSSA) for an income stream that
was exempt from South African income tax by the
virtue of the
application of the Brazilian DTA. In this manner, the liability for
income tax that would have arisen had the taxable
income stream not
been swapped was (according to the parties) completely avoided.
76.
It is important to note that the “purpose”
consideration relates to the purpose of the arrangement, and not one
or more
participants therein. In other words, the purpose test is an
objective test of the effect of an arrangement, rather than a
subjective
test of the reason for any participant’s involvement
therein (although the latter is one of the factors that must be
considered
when evaluating the former).”
[38]
Absa contends that two substantive errors of law were made in this
analysis. First, it was an
error to suppose that Absa could be a
“party” as defined in section 80L. Second, the
transaction to which Absa was
a party did not result in it escaping
from any tax liability.
Was
Absa a “Party”
[39]
The fundamental issue is whether Absa’s conduct demonstrated
that it was a party to an
“impermissible arrangement”.
The section requires a taxpayer to ‘participate or take part’.
Such
conduct requires volition. A taxpayer has to be, not merely
present, but
participating
in the arrangement. The fact that
it might be the unwitting recipient of a benefit from a share of the
revenue derived from an impermissible
arrangement cannot constitute
“taking part” in such an arrangement. SARS elides the
notion of
sharing
with participation in paragraph 66 of the
section 80J notice, cited above. This is incorrect.
[40]
The “arrangement” contended for must encompass all the
transactions described. An
arrangement which is alleged to comprise
several distinct transactions must therefore be a scheme. It is plain
that the scheme
requires a unity to tie the several transactions into
a deliberate chain. (
CIR v Louw
1983 (3) SA 551
(A) at pp
572ff) A mere series of subsequential events does not constitute a
chain. Without a factual basis to allege Absa
was anything more
than an investor in preference shares, no scheme is established that
reaches Absa, even if it extends to some
or all of the other
entities.
[41]
Moreover, there is no basis to construe the factual basis as
supporting an inference that the
Absa investment was, in the least,
motivated by an intention to obtain relief from an anticipated tax
liability, a necessary attribute
of an arrangement. The expectation
of receiving dividend income which is free of tax is so banal a
transaction that it cannot support
a suspicion of pursing an ulterior
motive and thus cannot serve to broaden the compass of the
participants in a scheme.
Did
Absa receive a tax benefit as required by section 80A?
[42]
Whether a tax liability was evaded is determined by the “but
for” test applied to
a future anticipated tax liability. (
ITC
1625 59 SATC 383
;
Hicklin v CIR
1980 (1) SA 481
(A) at
492fff).
[43]
SARS’ rationale was articulated in the passages cited above. In
my view, there is no plausible
link demonstrated between Absa and the
supposedly nefarious transactions. On the but for test the question
must be posed:
but for the purchase of preference shares in
PSIC 3, how might an anticipated tax liability be evaded? No
foundation is set out
that demonstrates such a result. Thus, the
conclusion is irrational.
Summary
of conclusions
[44]
The decisions by SARS refusing to withdraw the section 80J notice are
appropriately decisions
reviewable under the principle of legality.
[45]
A taxpayer is not obliged to pursue a remedy in respect of a dispute
over a tax liability in
terms of the procedures set out in tax
legislation only and may apply directly to a court of law for relief
in exceptional circumstances.
Absa, insofar as judicial authorisation
is required, it is authorised to do so.
[46]
Exceptional circumstances include a dispute that turns wholly on a
point of law.
[47]
The premise of the section 80J notice was that Absa was liable to be
taxed in respect of an impermissible
arrangement despite its
ignorance of the arrangement.
[48]
That premise was incorrect in law because the factual premise did not
establish that Absa was
a party to such arrangement nor that it had
an intention to escape an anticipated tax liability nor that it
received relief from
a tax liability as result of acquiring
preference shares in PSIC 3.
[49]
The letters of assessment were issued on the factual premise of the
section 80J notice and their
fate is indistinguishable from that of
the section 80J notices.
[50]
The decision to refuse to withdraw the section 80J notices and the
issue of the letters of assessment
is reviewed and set aside.
[51]
It is appropriate that an order be made withdrawing the section 80J
notices.
Costs
[52]
It is appropriate that SARS bears Absa’s costs, including the
costs of two counsel.
The
Order
1.
The
review applications brought by the two applicants have been
appropriately brought before the court without subjecting the
substance
of the grievances to a process of remedies internal to the
procedures applied by the respondent in terms of tax legislation.
2.
The
decisions by the respondent to refuse to withdraw the section 80J
notices issued to the two applicants are reviewed and set
aside.
3.
The
notices referred to in paragraph 2 of this order are withdrawn.
4.
The
decisions of the respondent to issue letters of assessment to the two
applicants are reviewed and set aside.
5.
The
letters of assessment referred to in paragraph 4 of this order are
withdrawn.
6.
The
respondent shall bear the costs, including the costs of two counsel.
ROLAND
SUTHERLAND
Acting
Deputy Judge-President, Johannesburg,
Gauteng
Division of the High Court of South Africa.
Date
of hearing: 25 February 2021
Date
of judgment: 11 March 2021
For
the Applicants:
Adv
Peter Solomon SC,
with
him, Adv Steven Budlender SC and Adv Loyiso Mnqandi
Instructed
by Allan and Ovary.
For
the Respondent:
Adv
Eduard Fagan SC,
with
him, Adv Thembalihle Sidaki.
Instructed
by the State Attorney.
[1]
Section 34 of
the Constitution: “Everyone has the right to have any dispute
that can be resolved by the application of law
decided in a fair
public hearing before a court or, where appropriate, another
independent and impartial tribunal or forum.”
[2]
[43]
Once the Commissioner has disallowed an objection an aggrieved
vendor can appeal such decision. What s 36 clearly does not
do is
place any impediment in the way of such an appeal, either to the
Special Court or from its decision to an ordinary court
of law. The
crucial point, however, is that the section expressly does not
preclude a disgruntled vendor against whom an
assessment has
been made from resorting to a court of law for whatever other relief
that may be appropriate in the circumstances.
Although the Act vests
jurisdiction to vary or set aside assessments - and other decisions
by the Commissioner - in the Special
Court in the first instance
(and prescribes the avenue for further consideration of the
case by the ordinary courts thereafter),
there is nothing in s 36 to
suggest that the inherent jurisdiction of a High Court to grant
appropriate other or ancillary relief
is excluded. The section does
not say so expressly nor is such an ouster necessarily implicit in
its terms, while it is
trite that there is a strong presumption
against such an implication.
…
[46]
It is therefore clear that any decision of the Commissioner to make
a VAT assessment under s 31 and/or to levy additional
tax under s
60, and not only a refusal by the Commissioner to grant relief under
the power to do so vested in the office
by s 36(1) of the Act
('unless the Commissioner so directs'), is subject to judicial
intervention in certain circumstances. The
implacable interpretation
of s 36(1) contended for in argument on behalf of Metcash and
accepted by the learned Judge in
the High Court is not
warranted. Neither the injunction to pay first, regardless of a
resort to the Special Court, nor the non-suspension
provision is
intended or has the effect of prohibiting judicial intervention. Nor
is there any hidden or implicit ouster of the
jurisdiction of the
courts to be found in s 36 as it stands. That section,
therefore, cannot be said to bar the access to
the courts protected
by s 34 of the Constitution.
[3]
Promotion of
Administrative Justice Act 3 of 2000
.
[4]
The
definition of “administrative action” is in
section 1.
The relevant portion reads:
“
administrative
action
”
means
any decision taken, or any failure to take a decision, by-
(a)
an
organ of state, when-
(i) …
(ii) exercising
a public power or performing a public function in terms of any
legislation; or
which adversely
affects the rights of any person and which has a direct, external
legal effect, but does not include ….”