Transaction Tax Update 2014/03/18

SARS taking aim at invoices issued by tax advisors

Section 46 of the Tax Administration Act No. 28 of 2011 (‘the TAA’) provides the South African Revenue Service (‘SARS’) with the power to request so-called ‘relevant material’ from taxpayers. Since the promulgation of the TAA it has become increasingly common for SARS to invoke the provisions of section 46 of the TAA in order to obtain copies of invoices which were issued to the taxpayer in respect of tax advisory services.

This strategy on the part of SARS certainly has its merits, given the fact than an itemised invoice will often provide a neat summary of tax technical vulnerabilities which were identified by the taxpayer and its advisors in the course of a tax planning assignment. In extreme cases, references to meetings and specific structuring considerations may provide ammunition for an attack in terms of the general anti-avoidance rules.

The TAA limits the powers of SARS in terms of section 46 of the TAA in instances where the information contained in the document is protected by legal privilege. In this regard it is to be expected that many a request by SARS in terms of section 46 of the TAA would have been declined by taxpayers on the basis that the documentation in question contained legally privileged information.

Within the above context, an important judgment was delivered on Monday by Binns-Ward,J in the Western Cape High Court Case no 16360/2013. It appears from the judgment that SARS sought to obtain copies of invoices rendered by the taxpayer’s tax advisors in respect of a particular transaction structure.

The taxpayer approached the court for a declaratory order to the effect that the content of two fee notes which were rendered by the advisors in question were legally privileged and that the taxpayer was not liable to disclose the relevant content to SARS. Following an extensive analysis of the South African and international authorities on the topic of legal privilege, the judge held that legal privilege will only apply to the fee notes in question to the extent that ‘the information contained in the fee note is such that the character of the advice sought by the client may be inferred in the sense of conveying not only that advice was sought, but also the substance of the client’s evident concern in an identifiable legal context’.

It appears from the judgment that, based on the facts of the matter, only a small portion of the fee notes fell within the ambit of the aforementioned requirement and that the remaining items will require disclosure to SARS.

The judgment serves as a cautionary note to taxpayers and their advisors. The case illustrates the importance of maintaining careful control over documentation and written correspondence in the context of tax planning. Although a robust transaction structure should withstand all manner of scrutiny, it is certainly prudent to avoid a debate around technical issues which may otherwise have gone uncontested.

Stephan Zaaiman