Reportable arrangements as an indirect measure against impermissible tax avoidance in South Africa

Abstract

Paying tax is considered a pain for most citizens. These citizens will therefore as far as possible try to avoid tax. Tax avoidance is where a taxpayer’s tax liability is reduced through legal means by using the provisions of the fiscal legislation to his/her advantage. With tax avoidance and tax planning in mind, taxpayers and their advisors frequently come up with clever arrangements that cause transactions to be more tax efficient. However, a number of these arrangements may venture very close to being impermissible tax avoidance schemes. Impermissible tax avoidance is a term said to be difficult to define because of its unpredictability and characteristic to always change. The problem that arises with curbing it is therefore the fact that there is no universally accepted or accurate definition of it. Nevertheless, in an attempt to curb or control it, revenue authorities have various mechanisms at their disposal. These mechanisms include direct legislation in the form of specific anti avoidance rules that are targeted at specific situations and the general anti-avoidance rule (GAAR) that is generally used against any type of tax avoidance. Indirect measures such as the regulation of tax practitioners and the requirement to report transactions that might lead to the avoidance of tax are also at the authority’s disposal. As of October 2012, reportable arrangements are regulated in s 34 to 39 of the Tax Administration Act 28 of 2011 (the TAA). Arrangements are reportable if they either fall into the specifically defined categories of reportable transactions or if they have certain suspicious characteristics or elements. The provisions in the TAA compel taxpayers who have entered into reportable arrangements to report details of these transactions to the South African Revenue Services (SARS). This research analyses the efficacy of the current South African reportable arrangement system in section 34-39 of the TAA. In this analysis, extensive reference is made to section 35 of the TAA, the provision specifically setting out the reportable transactions. A large part of the study also analyses the reportable arrangement system applicable in the United Kingdom, the Disclosure of Tax Avoidance Schemes (DOTAS) regime. Whether the South African reportable arrangement system is in fact an effective measure to indirectly limit impermissible tax avoidance arrangements is a point to ponder. The legislature enacted five types of arrangements that would become reportable in terms of section 35(1) of the TAA. The questions that can be drawn from this is why the legislature only enacted five specific types of reportable arrangements? Does this mean that impermissible tax avoidance is only targeted by reportable arrangements through five different arrangements? Is tax is only avoided impermissibly in five ways? Finally, is this substantial? The analysis of the South African reportable arrangement system in this study demonstrates that the efficacy of the system against impermissible tax avoidance, and in informing taxpayers of the limits of the right to avoid tax is limited to a certain extent. In support of this assertion, it is argued that all the reportable arrangement regime has served to do is to identify a limited number of targeted areas of suspected avoidance and that negativities are incorporated into the effectiveness of the reportable arrangement system against impermissible tax avoidance. On the other hand, most of the reportable arrangement provisions target transactions that lack commercial substance. The argument that transactions that lack commercial substance is a strong indicator of impermissible tax avoidance is thus also made. The focus on transactions that lack commercial substance was possibly mainly due to the fact that these are the arrangements that are actionable. Commercial substance is also primarily focused on in other reportable arrangement regimes like the United States and the insertion of other aspects of impermissible tax avoidance into the reportable arrangement provisions, such as the elements of ‘misuse and abuse’ and ‘abnormality’, seem to create loopholes and it would be difficult for SARS to take legal action on them.