CHAPTER 12

12.1 INTRODUCTION

12.1.1 When taxes are considered inherently unfair, the remedy lies, politically, in the ballot box. The Commission does not consider it appropriate for any Statement of Taxpayer Rights to seek to interfere with this fundamental principle.

12.1.2 Such a statement should not interfere with the substantive questions of tax policy, but rather should address the procedures and manner in which the State administers taxes. No elections will be called if taxpayers are unfairly treated in the administrative process. Other remedies are therefore required. These other remedies constitute the subject matter of this Chapter.

12.1.3 The most basic protection against unfair administrative practices lies in the provisions of the Constitution. Chapter III of the Constitution contains several provisions which impact on the tax environment, discussed in Chapter 6 of the Commission's first Interim Report. The Constitution prevails not only over the executive, but over all law, including tax legislation.

12.1.4 At the same time it is recognised that the Constitutional provisions, of necessity, are broad and reflect fundamental principles. There are two ways in which this framework can be translated into detailed administrative rights for taxpayers, and they can and should operate jointly. The first, to some extent, is already present in the South African system; the second is almost completely absent.

12.1.5 The fairness of tax administration is promoted, firstly, in that the various tax laws, particularly the Income Tax Act, No 58 of 1962 (as amended) and the Customs & Excise Act, No 71 of 1964 (as amended), contain their own provisions regarding administration, many of which are aimed at fairness towards the taxpayer.

12.1.6 There is, secondly, the desirability of having some form of "contract" between revenue authorities and taxpayers on an administrative level to ensure fair treatment by the one and compliance by the other.

12.1.7 The Commission thus regards the administrative provisions of tax legislation, framed in accordance with the basic administrative rights set out in the Constitution, as the appropriate legislative setting for confirming rights of a more general nature applying specifically to taxpayers. The Commission recommends accordingly that the expression of a "contract" of procedural and administrative fairness as between revenue authorities and taxpayers should not take the form of legislation. It is undesirable for there to be a proliferation of "Bills of Rights" in all spheres where the State interacts with its citizens. The Commission recommends, rather, that taxpayers' rights be recorded in a Statement of Taxpayer Rights. The Commission prefers the term "Statement" to "Bill" to avoid confusion as to its legal status.

12.1.8 From the many written and oral submissions the Commission has received regarding the perceived inadequacies of the administration and the impact thereof on fairness, three general problem areas can be isolated:

1. there are several respects in which South Africa's existing tax legislation falls short of proper legislative protection for the taxpayer;
2. many of the complaints received can be traced to the administrative problems of the revenue authorities; and
3. there is currently a high level of frustration and even mistrust on the part of the taxpaying community; the revenue authorities, on the other hand, have their own misgivings about the tax morality of many taxpayers.

12.1.9 With regard to (a) above, it was noted in the first Interim Report that several of the legislative deficiencies of South African tax administration might be open to Constitutional challenge. This would be a costly and complex route for aggrieved taxpayers, however. The preferred remedy lies in a systematic review of the various tax laws and timeous amendments, where necessary, to ensure that they comply with modern concepts of administrative fairness. Although an analysis of all legislative provisions as regards procedural and administrative fairness falls outside the ambit of this Chapter, some deficiencies which have been brought to the attention of the Commission in various submissions are so widely perceived that the Commission notes them specifically in its recommendations below.

12.1.10 The Commission devoted considerable attention in its first Report to the administrative issues referred to in 12.1.8(b) above. The revenue authorities' ability to administer the tax laws effectively and fairly is directly related to the resources available to the responsible Commissioners and their freedom to use those resources. The remedy for this defect has been set out at length in the first Report.

12.1.11 It is particularly in respect of the absence of mutual trust referred to in 12.1.8(c) that the concept of a Statement of Taxpayer Rights, primarily as it relates to procedure and administration, could make a positive contribution to the South African tax environment. The Commission believes that such a Statement could also play a part in regard to legislative improvement and administrative efficacy, referred to in paragraphs 12.1.9 and 12.1.10 above.

12.1.12 The Commission believes that the role of the Public Protector, as well as a Tax Ombudsman or Adjudicator (see below), will further enhance the effect of such a Statement of Taxpayer Rights. Another mechanism the Commission has considered is the issue by the revenue authorities of Codes of Practice - quite detailed records of the standards to which the authorities consider themselves subject and the remedies available if standards are breached. These concepts are examined in greater detail below.

12.2 THE ROLE, STATUS, AND CONTENT OF A STATEMENT OF TAXPAYER RIGHTS

12.2.1 Notwithstanding the protection of taxpayers' rights through legislative provisions in the various tax Acts or through administrative offices such as the Public Protector or a Tax Ombudsman, the Commission is persuaded that the basic values which need to be protected should be articulated clearly and publicly and should form the subject of a published commitment by the revenue authorities.

12.2.2 The Commission recommends that the Statement of Taxpayer Rights should state the broad principles of fair tax procedure and administration. It is envisaged that details of how these basic principles are interpreted will be set out in legislation, administrative Codes of Practice, and through the activities of the Public Protector and the Tax Ombudsman, as recommended below. This procedure recognises that the formulation of such detailed rules should be effected through an evolutionary process rather than by means of a once-off event, as issues of this nature are inherently dynamic.

12.2.3 The Statement of Taxpayer Rights is therefore envisaged as the standard against which any tax procedure or administrative action should be judged as to fairness and legitimacy. If any action should be found wanting, circumstances will dictate whether the matter should be resolved through mediation, intervention from the Public Protector or Tax Ombudsman, in terms of a Revenue Code of Practice, or even ultimately through legislation.

12.2.4 In arriving at these recommendations, the Commission has been mindful of international experience regarding the protection of the interests of taxpayers. The contrasting approaches of the United States and the United Kingdom are illustrative of two broad alternatives. In the United States a Taxpayer Bill of Rights was passed by Congress in 1988, but many of its provisions have been incorporated in the Internal Revenue Code itself. In the United Kingdom, on the other hand, the revenue authorities have issued a concise "Taxpayer's Charter". This Charter has no justiciable status as such, but it accompanies every tax return and continues to be widely publicised. Over time, the Charter has been amplified by Codes of Practice issued by the revenue authorities in which they bind themselves to certain procedures on specific matters.

12.2.5 The Commission has concluded that the Statement of Taxpayer Rights should not be in the form of a statute. Its preference is for a procedure closer to that adopted by the United Kingdom. The Commission also considers that by issuing such a statement Revenue can strengthen the vital concept of trust between itself and the public. It is interesting that in the United Kingdom the initiative of drafting the Charter as well as the Codes of Practice came from the revenue authorities, but as the process developed, the office of the Tax Adjudicator has assisted in the drafting of further Codes.

12.2.6 Submissions to the Commission relating to the matter of a Taxpayer Bill of Rights included detailed lists of issues and complaints. Some of these represented substantive and policy issues which, as noted, fall outside the ambit of such a document. Others concerned procedural matters of such general import that legislation offers the only remedy. Yet others dealt with procedural and administrative frustrations of considerable specificity. Taken together, these submissions have had the great value of enabling the Commission to discern a few categories of basic fundamental rights upon which the content of a Statement of Taxpayer Rights should be predicated.

12.2.7 The Commission is aware that the Commissioners for Inland Revenue and Customs and Excise and senior staff are very sympathetic to taxpayers in the procedural and administrative difficulties they often experience. This has been one of the important motivations in evidence presented to the Commission by the Commissioners and their senior staff with regard to their needs for greater administrative resources and independence. It is clear that a credible Statement of Taxpayer Rights must express the considered commitments of the revenue authorities, and the Commission does not propose to put forward a draft Statement. However, the Commission has received representative submissions which provide an informed point of departure as to the appropriate content thereof. The Commission recommends below the main areas which might be addressed in a Statement of Taxpayer Rights. In each case suggestions are made for more specific matters which might be dealt with in a Revenue Code of Practice or, where applicable, might receive legislative attention.

Timeousness

12.2.8 The Principle: Taxpayers have a right to expect that their affairs will be dealt with expeditiously.

12.2.9 Code of Practice: Subject to the comments below regarding legislation, the following matters might be dealt with by way of a Code:

1. Correspondence to the revenue will be acknowledged within ____ days of receipt, and will be responded to within _____ days. If the latter becomes impossible for good reason, that reason will be provided to the taxpayer.
2. When responses to queries are received by the revenue, they will, within ____ days/weeks either ask for further information, if applicable, or inform the taxpayer that, barring new developments, no further information will be required on that matter.
3. Additional information will not be required relating to matters with respect to which the relevant prescriptions as to minimum retention of documents no longer apply, except in well-motivated and exceptional circumstances.

12.2.10 Legislation: One of the most repeated complaints is that inordinate delays occur in the assessment process. Such delays are serious for the system in at least two respects: they breed disrespect on the part of taxpayers for the deadlines they have been set for compliance, and they introduce uncertainty as to a taxpayer's tax position to a degree which interferes with business efficacy. The Commission views this matter as being sufficiently serious to merit legislative control. It therefore recommends that legislative time controls be introduced on each of the matters enumerated hereunder. If the recommendation of legislation is not accepted, appropriate undertakings along these lines should be contained in a Code of Practice.

1. If, within twelve months of submission of an income tax return, that return has been given no serious attention by the revenue authorities, any interest which might otherwise have run against the taxpayer shall be suspended as of that anniversary. Serious attention could be measured either by an assessment having been issued, or by there being an active and bona fide process of information gathering or discussion between the taxpayer and the revenue. The Public Protector or Tax Ombudsman referred to below might play a role in evaluating these criteria.
2. In any case, if a specified number of months has elapsed and no assessment has been issued, the return shall be regarded as assessed on that anniversary date on the basis as submitted by the taxpayer.
3. Where a taxpayer has objected to an assessment, the same rules as in paragraph 12.2.10(a) and 12.2.10(b) above should apply, with the date of the objection replacing the date of submission of the return and a confirmation of the original assessment or a revised assessment replacing the first assessment.
4. If, after the expiration of a specified time, after lodging an appeal against an assessment or a revised assessment, and due to no fault of the taxpayer, the matter has not yet been heard by the Special Income Tax Court or another court, the onus in such case will, in all respects, revert to the revenue authorities.
5. If, after the expiration of a further specified time, after lodging such an appeal, and due to no fault of the taxpayer, the matter has still not been heard by a court, it shall be considered finalised in favour of the taxpayer.
6. If in any of the above circumstances interest would be due to the taxpayer on any overpayment, such interest shall accrue from the earlier of the date upon which it would be due under current law or the appropriate deadline missed by the revenue authorities.

If in any of these cases special circumstances warrant a suspension of these rules, it should be possible for the Public Protector or a court to sanction their suspension; in that case, the onus for proving the exceptional circumstances must rest with the revenue authorities.

12.2.11 Comments:

1. The Commission is aware that deadlines such as the foregoing may place severe strains on an administration already overburdened. However, the inadequacies of resources for the revenue should not be made the taxpayer's burden.
2. The Commission concedes that the sudden introduction of these recommendations could exacerbate the present backlogs in the system. Hence the Commission recognises that there could be a need to phase in the implementation of the Statement although such phasing in period should not be extended so as to nullify the objectives of these recommendations, to negate the principle of extension of rights to the taxpayer or to oust any constitutional rights enjoyed by taxpayers.

Fairness and Impartiality

12.2.12 The Principle: Taxpayers shall be entitled to expect the law to be applied fairly, impartially and consistently.

12.2.13 Code of Practice: Some of the matters which the Commission considers should be included in a Code of Practice in this regard are the following.

1. No taxpayer shall be expected to pay more tax than that due under the law. The United Kingdom Charter provides that the revenue "expects you to pay only what is due under the law".
2. All possible effort shall be made to ensure that no taxpayer is allowed to pay any less tax than that due under the law.
3. Where the revenue has made a mistake in the collection of taxes, a fair assessment of the costs to the taxpayer shall be made and refunded (with the Public Protector or Tax Ombudsman playing a role here).
4. The revenue will seek not to take a wholly unreasonable view of the law, or pursue matters which would obviously be trivial; again, a fair assessment of costs should be made to compensate the taxpayer in appropriate circumstances.
5. Revenue officials will not be compensated with reference to taxes or penalties collected. The Commission notes that section 92 of the Customs and Excise Act (as amended by Act 98 of 1993) offends against this recommendation and should be amended accordingly.
6. The taxpayer is entitled to suitable representation in any meeting or other interaction with the revenue authorities.

12.2.14 Legislation:

1. There needs to be enabling legislation to provide for cost refunds.
2. The Commission notes, furthermore, the absence of a satisfactory procedure by which a taxpayer can appeal against a decision of Customs and Excise. Currently there is recourse only to the Supreme Court. Accordingly the Commission recommends that the Customs and Excise Act be harmonised with that of the Income Tax Act in so far as the appeal system to the Special Court is concerned.

12.2.15 Comments:

(a) As regards paragraph 12.2.13(c) above, the United Kingdom has a separate Code of Practice entitled "Mistakes by the Inland Revenue". In it there is an undertaking which provides as follows:

If we make a serious mistake in dealing with your tax affairs, we will pay any reasonable costs you incur as a direct result of our mistake. Examples might be professional fees, incidental personal expenses, wages, or fees which you would have earned and which you lost through having to sort things out. They could also include such items as postage and telephone charges.

The Code also gives guidance as to what might constitute a serious mistake. Under the examples are included a phenomenon which a number of South African taxpayers have experienced:

We would consider a mistake serious if we had taken a wholly unreasonable view of the law - as opposed to a genuine difference of opinion between us about the law - or if we had started or pursued inquiries into matters which were obviously trivial on the basis of the facts available at the time.

Similar undertakings would be appropriate.

1. As regards paragraph 12.2.13(e) above, the Commission notes that several submissions advocated this commitment. Under the United States system, the Internal Revenue Service is prohibited from evaluating IRS agents or their supervisors based on Revenue collections. Quarterly certification is required as to adherence to these rules. The Commission considers that the revenue official requires a particular sense of objectivity towards the public and fully supports such a prohibition against this kind of evaluation or reward.
2. The recommendations against evaluations based on results should not be construed as a rejection of the principle that revenue services be funded partly from a base of revenue collected, advocated in section 3.20 of the Commission's 1994 first Interim Report. Such a proposal does not influence directly the behaviour of individual revenue officials as would an evaluation system described above.

Transparency

12.2.16 The Principle: Taxpayers are entitled to full disclosure, in simple language, of the reasoning behind every adverse decision, whether by way of assessment or otherwise, and whether on a substantial or procedural issue.

12.2.17 Code of Practice: The Commission would expect to see the following principles in a Code of Practice.

1. In every communication to taxpayers revenue will endeavour to be clear and complete in explaining its action. The name and contact details of a person or office where further particulars can be requested if the reasons are not clear to the addressee will be supplied.
2. Every communication which requires or may necessitate some action by the taxpayer shall be accompanied by a clear and simple explanation of the taxpayer's procedural rights, and how and with whom these rights can be pursued.

Respect, Courtesy and Helpfulness

12.2.18 The Principle: The taxpayer is entitled to be treated with respect and courtesy, and to be given reasonable assistance in compliance with his or her obligations under our tax laws.

12.2.19 Code of Practice: The Code of Practice should contain the following.

1. The revenue should confirm its view that, in the words of the Australian Taxation Institute, "taxpayers have the right to exercise their legal and other rights without adverse inferences being made against them". This may also be an appropriate place to reassure taxpayers that, as a matter of policy, bona fide resistance to a revenue position on the taxpayer's affairs will not be the trigger for an audit or any form of "witch-hunt".
2. The revenue should set up help centres, inform the public adequately, and then render the assistance required for basic compliance. The Commission is aware that this is already an objective of the revenue authorities, and appreciates that some of this will have to await the implementation of the administrative restructuring recommended in its first Interim Report. Nevertheless, revenue's intention should be declared, and any interim measures that may be possible should be communicated and implemented, amongst others through the Code of Practice.
3. A reassurance should be given that such searches of business or private premises as may be allowed under the restrictions of the Constitution will be limited further to cases of extreme need, and that in those cases every possible consideration will be extended to the taxpayer in the manner the search is carried out. In all circumstances the taxpayer's rights in such a procedure should be clearly and simply communicated to the taxpayer.

Privacy

12.2.20 The Principle: Taxpayers are entitled to have the information which they supply for purposes of their compliance with tax laws used only for that purpose.

12.2.21 Comment: This right is already explicitly protected by law, but so many submissions have nevertheless emphasised such an assurance that the Commission would suggest it be made a separate principle, as indeed it is in many similar international listings of basic taxpayer rights. No further legislation or reference in a Code of Practice would seem to be warranted.

12.3 PUBLIC PROTECTOR AND TAX OMBUDSMAN

12.3.1 In the absence of some intermediate protector, the only remedies available to the taxpayer regarding perceived infringements of basic rights or of Revenue Codes of Practice, are fruitless protest or costly litigation. Two institutions might assist in this regard.

12.3.2 The Interim Constitution makes provision for a Public Protector (sections 110 et seq.), who has been appointed. In terms of the Constitution the powers and function of the Public Protector, who is independent of the Executive and reports directly to Parliament, include the following:

1. the power to investigate any alleged "abuse or unjustifiable exercise of power or unfair, capricious, discourteous or other improper conduct or undue delay by a person performing a public function" (section 112(1)(a)(ii)); or
2. the power to investigate any alleged "act or omission by a person in the employ of government at any level, or a person performing a public function, which results in unlawful or improper prejudice to any other person" (section 112(1)(a)(v)).

12.3.3 The Public Protector is given wide powers to report to appropriate bodies, and to make recommendations for redress or other action.

12.3.4 Although the final Constitution is presently being negotiated, it seems likely that the Public Protection will remain, with powers and functions similar to the present provisions.

12.3.5 Clearly the office of the Public Protector provides powerful assistance to any taxpayer who considers that his or her basic rights have been infringed. The Commission has nonetheless examined whether any other institutional protection would be helpful. The following considerations featured in the Commission's deliberations.

1. The authority of the Public Protector is a powerful weapon towards administrative fairness and justice.
2. In the constitutional debate most parties agreed that "sub-Protectors" for each of the various functions of Government would not be beneficial, not only for reasons of practicality and cost, but also because these might detract from the general independence and authority of the function. It is therefore unlikely that a dedicated protector regarding tax matters will become a prescription of the Constitution.
3. The Commission looked closely at the structure in the United Kingdom, where an independent Parliamentary Ombudsman has a similar role to that of our Public Protector. The UK authorities have, in addition, appointed a tax ombudsman, referred to as the Tax Adjudicator, who acts independently of the Parliamentary Ombudsman. The Adjudicator is engaged on contract, and is independent of the revenue although her staff is drawn from its ranks. In its first two years of operation, the office of the Tax Adjudicator has been remarkably successful in mediating procedural conflict between taxpayers and the authorities. The revenue authorities have quickly appreciated its contribution towards a smooth tax administration, while statistics show that taxpayers, including corporate taxpayers and their advisors, are increasingly making use of the new facility. The revenue authorities have contracted with the Office of the Tax Adjudicator that they will, except in rare circumstances, abide by the recommendations of the Adjudicator in any matter between themselves and a taxpayer. In the first two years of operation of the office, the authorities have in every instance acted on the recommendations of the Adjudicator. Where a taxpayer cannot gain satisfaction through the Adjudicator, recourse to the Parliamentary Ombudsman remains open.
4. To the extent that the concept of a Statement of Taxpayer Rights has as an important objective the re-establishment and maintenance of trust between tax administration and taxpayer, the office of the Public Protector may be somewhat remote. Some might see it as an adversarial situation rather than one of mediation.

12.3.6 The Commission recommends that, while the role of the Public Protector as ultimate watchdog over taxpayer and other rights should be recognised and strongly encouraged, the underlying foundation of trust between taxpayers and authorities would be better served by the more direct mediatory role of a Tax Ombudsman or Adjudicator along the lines of the United Kingdom example.

12.3.7 To achieve the greatest benefit from this recommendation, the following are suggested:

1. the Tax Ombudsman should be appointed from outside of the revenue authorities, and should function independently;
2. appropriate separate funding should be provided, although the staff complement may be drawn from the revenue;
3. the Ombudsman should at all times be accessible to taxpayers, and have unfettered access to the revenue authorities;
4. the revenue authorities should in advance declare themselves to be bound by the Ombudsman's recommendations save in rare circumstances, the nature of which should be set down.

12.3.8 The Ombudsman's function would mainly be to deal with specific matters brought to its attention by the taxpaying public. It should also have the capacity to initiate suggestions to the revenue authorities regarding Codes of Practice, or to refer general problems in the administration of tax laws to the Public Protector or other authorities, as appropriate.

12.4 RECOMMENDATIONS

12.4.1 The basic rights of taxpayers should be articulated in a clear public Statement of Taxpayer Rights. The principles to be encoded in this statement should include:

1. expeditious and timeous tax administration;
2. fair, impartial and consistent application of the law;
3. full disclosure, in simple language, of the reasoning behind adverse decisions;
4. respectful, courteous and helpful treatment of taxpayers; and
5. privacy of information. [paras. 12.1.7; 12.2.1-2; 12.2.8-21]

12.4.2 In addition to recognising the role of the Public Protector in this regard, an independent Tax Ombudsman should be appointed to protect taxpayers' rights and mediate between taxpayers and the revenue authorities. [para. 12.3.6-8]