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Principles of Taxation

There are a number of Tax Law principles that have been tested or observed in South Africa. Tax Law principles that have been tested by our Courts are constantly evolving. As the tax system changes, so too do the principles that are used to interpret and apply the law. Some of these principles include:

1.  The principle of legality: This principle states that taxes must be imposed by law and that the law must be clear and unambiguous. This principle is embedded in legislation such as the Income Tax Act and the Administration Act. Further, it ensures that certain procedures to be followed in accordance with laws. For example, taxpayers are entitled to a fair hearing before any penalty is imposed.
In the case of Abbasi v South African Revenue Service, SARS had refused to grant Abbasi, a tax consultant, a certificate of tax clearance. Abbasi argued that SARS' refusal was unlawful because he had not been given a fair hearing. The court's decision ensured that the SARS was held accountable for its actions, and that taxpayers would be given a fair hearing before the SARS could take any action against them.

2. The principle of equity: This principle focuses of taxes being fair and equitable. SARS makes a distinction between individual and corporate income tax. The individual and corporate income tax rates differ depending on the income earned. This principle is reflected in the Income Tax Act 58 of 1962. For example, it provides that taxpayers should be taxed on their "true income," which means that they should not be taxed on income that they have “not actually received.”

According to the International Bureau of Fiscal Documentation, equity can be horizontal or vertical:
Horizontal equity is where taxpayers in a similar situation (they earn the same income), Should be taxed the same way.
Vertical equity is where taxpayers in different situations (one earns more income than the other), should be taxed differently.

3. The principle of intelligibility: This ensures that taxpayers are aware of the reason for a tax investigation, and that they can challenge the legality of the investigation if necessary. This means that tax authorities cannot issue a search warrant for a taxpayer's premises without specifying the tax offence that they suspect the taxpayer of committing.

4. The principle of efficiency: This principle states that taxes should be collected in a way that is efficient, and that they should not be subject to waste or abuse.
In addition, tax assessments should be clear and unambiguous. This was confirmed in the case of Minister of Finance v FirstRand Bank. Minister of Finance made the decision to impose a tax on interest payments made by banks to their customers. FirstRand Bank challenged the decision, arguing that it was unlawful because it was not based on a clear legal basis. The court held that SARS could not impose a tax on interest payments made by banks to their customers without providing a clear legal basis for doing so.

5. The principle of arm's length: Transactions between related parties should be priced as if they were conducted between unrelated parties. The purpose of this principle is to ensure fair market conditions. Related parties are individuals or entities that have a close relationship with each other. This relationship can be financial, familial, or otherwise. Unrelated parties are individuals or entities that do not have a close relationship with each other. Related parties, such as a two subsidiaries in a group of companies, may agree to sell to each other at a significantly reduced price compared to the price of the sale if it were with another third party. This is not arms-length. The subsidiaries would have to make the sale as they would with the other third party.

6. The principle of substance over form: This principle states that the tax treatment of a transaction should be based on its underlying substance, rather than its legal form. For example, although a transaction may look like a standard sale of an asset (its legal form), when its underlying substance is considered, it is actually a donation, for which different tax consequences arise.

It is important for taxpayers to be aware of these principles, so that they can ensure that they are complying with the law and that they are not being unfairly treated.

Latest Global Tax Relief Incentives for Growing Businesses that South Africa can Learn From

Tax avoidance and tax evasion have been issues of growing concern in South Africa. The government loses billions of Rands annually and this has a drastic effect on the economy. Tax contributions play a vital role in the development of the country. 

There are several global relief incentives that South Africa can learn from. These relief incentives may reduce tax avoidance and evasion. 

A. UK's Corporate Tax Relief for Research and Development (R&D): The UK recently introduced a tax incentive that allows businesses to deduct the costs of R&D from their taxable profits. This incentive is aimed at encouraging research and development. It also reduces the costs for businesses, encouraging businesses to invest in making new products or services.

The relief qualifies as an expenditure and can be considered as a deduction thereafter. However, to qualify as a deduction, the research should be:
1. scientific or technological;
2. innovative leading to a new product, process, service or significantly improving an existing one; and 
3. substantive in nature.

B. Double Taxation Treaties: These are agreements between two or more countries. The aim of these agreements is to prevent businesses from being taxed twice on the same income. Businesses can benefit from these treaties by claiming a foreign tax credit on their tax returns.

C. The European Union's (EU) Anti-Tax Avoidance Directive (ATAD) was adopted in 2016 by all EU member states. ATAD aims to prevent multinational companies from avoiding taxes by shifting profits to low-tax jurisdictions.

ATAD’s anti-abuse measure include: 
1. The controlled foreign company rule: Multinational corporations are required to include profits of their controlled foreign companies in their taxable income; and
2. Multinational corporations are prohibited from shifting profits to low-tax jurisdictions when they relocate their assets or operations to avoid tax liability. 

ATAD plays a vital role in ensuring that multinational corporations pay their fair share of taxes and helps to level the playing field for businesses that operate in the EU. ATAD also affects multinational corporations that may be operating in South Africa but are resident in the EU. 

The Relationship between the National Treasury and SARS

The National Treasury and the South African Revenue Service (SARS) are two independent institutes that play a vital role in South Africa's economy.

At the core of the National Treasury’s duties is the responsibility to formulate and implement governments’ fiscal policy. On the other hand, SARS is responsible for collecting taxes and the enforcing tax laws.

However, these institutes work closely together to provide a sound fiscal framework and the efficient collection of taxes. Through the formulation of a fiscal policy, the National Treasury provides SARS with guidance on tax policy. SARS also provides the National Treasury with data on tax collections and tax compliance.

Data collected during a tax year is important for the purposes of developing a fiscal policy. The fiscal policy determines the costs of doing business. For example, if the National Treasury decides to increase taxes, this can lead to higher costs for businesses. The tax policy set by the National Treasury, that is used by SARS in collecting taxes, can have a significant impact on the profitability of businesses.