A deal is a deal: Constitutional Court clarifies an interest(ing) VDP issue

By Dewald Pieterse and Louis Botha

In recent years, the South African Revenue Service (SARS) has issued several media releases encouraging taxpayers to voluntarily comply with their tax obligations. As part of this messaging, SARS has often encouraged taxpayers to also declare past undeclared income, using the voluntary disclosure programme (VDP). A recent example was towards the end of 2024, where SARS encouraged crypto asset traders and investors to declare their undeclared investment and trading income under the VDP.

While a successful VDP will result in the remission of understatement penalties (USP), subject to some exceptions, and remission of administrative non-compliance penalties that would normally be imposed, amongst other things, VDP relief does not extend to the remission of interest. In other words, where a taxpayer’s VDP application is approved, it will be liable for tax on the undeclared income, plus interest. Pursuant to the approval of a VDP application, a taxpayer and SARS would conclude a VDP agreement (VDA). As part of the VDP process, SARS would usually also issue additional assessments, to give effect to a VDA, reflecting the additional tax and interest payable. However, as both income tax and value-added tax (VAT) legislation contains separate provisions regarding the remission of interest, an interesting question arose – can the interest imposed pursuant to the granting of VDP approval, be remitted under these separate provisions?

In Commissioner for the South African Revenue Service v Medtronic Trading S.A.R.L. [2024] ZACC 26 (Medtronic), decided by the Constitutional Court (CC) on 20 December 2024, this question was answered in SARS’ favour, in the context of VAT. The central question was whether a taxpayer who had concluded a VDA with SARS could seek remission of interest in terms of section 39(7) of the Value Added Tax Act, 89 of 1991 (VAT Act) after that taxpayer had agreed to pay the interest in terms of the VDA.

Facts

Medtronic Trading S.A.R.L. (Medtronic), a Swiss company, fell victim over the course of many years to a substantial scheme of embezzlement at the hands of an employee. This resulted in significant underpayments of VAT to SARS. Upon discovery of the scheme, Medtronic lodged a VDP application with SARS’ VDP Unit.

During negotiations, Medtronic requested a waiver of interest arising from the VAT underpayments. SARS responded that it lacked the power to waive interest under the VDP, as such power was not provided by the VDP provisions in the Tax Administration Act, 28 of 2011 (TAA). Electing to continue pursuit of the VDP relief, Medtronic agreed to pay approximately R457 million in terms of the VDA concluded with SARS. The amount included interest that was not remitted.

After concluding the VDA with SARS, Medtronic approached SARS requesting remission of the interest under section 39(7) of the VAT Act, which provides for the remission of interest on VAT underpayments in certain circumstances. SARS refused to consider the request, stating that section 39(7) of the VAT Act did not apply to VDAs. The rules of the VDP are set out in sections 225 to 233 of the TAA.

High Court and Supreme Court of Appeal (SCA) decisions

In response to SARS’ decision, Medtronic brought a successful application in the Gauteng Division of the High Court, Pretoria seeking –

• a declarator that sections 225 to 233 of the TAA do not prohibit a request for interest remission in terms of section 39(7) of the VAT Act; and
• an order reviewing and setting aside SARS’ refusal to consider Medtronic’s request.

On appeal to the SCA, the three-to-two majority took the view that it was not called upon to determine “the issue whether section 39(7) finds application in circumstances where SARS and a taxpayer have concluded a [VDA]”, but that “all we are called upon to decide is whether SARS was justified in law to refuse even to consider Medtronic’s request by virtue of such request having been made subsequent to the conclusion and implementation of the [VDA].” The majority held that “SARS was required to entertain the application for remission and to consider and adjudicate it on its merits”, thereby dismissing SARS’ appeal.

The minority judgment of the SCA, however, took a more interpretative approach, which would be subsequently echoed in the unanimous judgment of the Constitutional Court. The SCA’s minority judgment noted, amongst other things, the following three purposes of the VDP:

• The principal purpose of the VDP is to have an agreement whose obligations are enforceable in the ordinary course like any other contractual obligations.
• The second purpose is that the VDA obviates the need for SARS to engage in investigation and auditing processes in order to raise an assessment.
• The third purpose is to incentivise disclosure by taxpayers of defaults otherwise unknown to SARS by assuring taxpayers that SARS will be bound by the outcome of the process.

The SCA minority held that the VDA is the centrepiece of the VDP, and to permit a taxpayer to seek remission of interest which was already incorporated in the tax debt due agreed upon in the VDA would undermine the legal consequences that attach to the conclusion of a VDA.

The Constitutional Court’s judgment

The CC disagreed with and overturned the SCA majority’s decision. It disagreed that the issue for decision was whether SARS could in law not even consider Medtronic’s request for remission after conclusion of a VDA. The CC observed that “[i]f there is no power to decide the request for remission of interest under section 39(7) of the VAT Act post conclusion of a VDA, there is no point in considering the request.” It followed that “the real question can only be whether SARS enjoys the section 39(7) remission power post conclusion of a VDA”.

The CC found that allowing an interest remission after the conclusion of a VDA in terms of which interest is payable would be glaringly absurd, for several reasons, including the following:

• A taxpayer who enters into a VDA does so with full awareness that interest on late VAT payments is mandatory and non-negotiable under section 39(1)(a)(ii) of the VAT Act.
• The TAA’s silence on remission of interest in terms of section 39(7) of the VAT Act does not mean that interest remission post conclusion of the VDA is permitted.
• VDAs are legally binding agreements that must be honoured by both parties thereto in accordance with the trite principle of pacta sunt servanda. As the agreement to pay interest is an integral component of a VDA, permitting a remission of interest after a VDA has been concluded would undermine the legal consequences attaching to the VDA as a whole.
• Examining the legislative history of the VDP, and with specific reference to the Memorandum on the Objects of the Tax Administration Bill (2011), the CC contrasted the previous and current VDP dispensations. The current dispensation’s silence on interest remission as opposed to the prior dispensation does not necessarily mean that interest remission is now governed by section 39(7) of the VAT Act (as contended by Medtronic). Rather, it means that the legislature intentionally and explicitly excluded the possibility of relief in respect of interest within the VDP framework.
• Section 89quat(3) of the Income Tax Act, 58 of 1962 (ITA) relates to the remission of interest in the context of income tax. With reference to this provision, the CC held that if Medtronic’s interpretation was correct, a taxpayer could bypass the finality of a VDA, as laid out in section 232(2) of the TAA, by using section 89quat(3) of the ITA to object or appeal a decision on interest remission for income tax purposes. Section 232(2) of the TAA expressly states that an assessment or determination made to give effect to an agreement under section 230 of the TAA is not subject to objection and appeal. The CC stated that Medtronic’s interpretation would create a disharmonious and contradictory situation where an assessment made under a VDA could not be appealed, but a decision on remission of interest from that assessment could be.

Conclusion

While the CC’s decision is clear and well-reasoned, it highlights the limitations offered by the VDP. The unfortunate outcome is that there is no relief from interest payable, irrespective of the facts. In Medtronic, the amount of approximately R457 million was payable to SARS due to the intentional unlawful conduct of one employee, including a substantial amount of interest that was not remitted. Although the capital VAT would have still been payable were it not for the employee’s conduct, no interest would have been payable. The judgment notes that the amount of R457 million also includes USPs, but does not indicate whether all USPs were remitted or whether some USPs were payable. The prejudice suffered by Medtronic due to one employee’s conduct is thus likely substantial.

The judgment in Medtronic makes it clear that once a VDA is concluded, it constitutes a final agreement, and taxpayers cannot seek to renegotiate the terms thereof through subsequent requests. In coming to its conclusion, the CC provided several reasons. The decision also underscores the importance of harmonious interpretation of tax legislation and reinforces the principle of pacta sunt servanda, that is, agreements must be adhered to.

Taxpayers must carefully consider all aspects of their tax liability, including interest, before applying for VDP relief and entering into a VDA. The ruling serves as a reminder for tax professionals to thoroughly advise their clients on the implications of the VDP.