In the matter of Medtronic International v CSARS (33400-19) ZAGPPHC, Medtronic (“the taxpayer”) brought a review application against the Commissioner of SARS (“the Commissioner”). This was due to the taxpayer being a victim of fraud, perpetuated by a Medtronic employee, to the tune of approximately R460 000 000,00. This ultimately placed the taxpayer in non-compliance with SARS. The taxpayer thus applied for and was granted relief in terms of the Voluntary Disclosure Programme (“VDP”) as provided for in Section 225 to Section 233 of the TAA. From there, the parties entered into a VDP agreement, recording the terms of the relief granted. 

Subsequently, the taxpayer applied for a remission of interest as provided for in Section 39(7)(a) of the Value Added Tax Act, 89 of 1991 (“the VAT Act”).  This application was refused on the basis that “as the agreements entered into between the Commissioner and the respective taxpayer remains in force, the Commissioner cannot consider the request for the remission of the interest levied”. As a result, the taxpayer brought a review application against the Commissioner. 

Upon the launching of the review application, the Commissioner's attorneys informed the taxpayer's attorneys that the Commissioner had dispatched the record of proceedings ("the record") to the Registrar of the Court as contemplated by Rule 53(1)(b) of the Uniform Rules of Court. The taxpayer and its legal representatives, after having perused the record, formed the opinion that the record did not comply with Rule 53(1)(b) of the Rules in that it "failed to contain the record of the proceedings relevant to the Commissioner’s decision sought to be reviewed and set aside by the taxpayer in the main application, such as internal memoranda, directives, policy documents, records of deliberations and minutes of meetings."

The Commissioner’s attorneys informed the taxpayer’s attorneys that the Commissioner is only "in possession of emails and other internal correspondence with its legal advisors relating to the issue of remission of interest. The purpose served by such emails and other internal correspondence was to provide legal advice to our client on the disputed issue.” As a result, the Commissioner asserted its right to claim legal professional privilege in relation to the advice it received from its legal advisors.

The issues in dispute

The issue was what should be contained in a record regarding review proceedings. The taxpayer’s contention was that the Commissioner must comply with the Uniform Rules of Court and supply the information which led to the decision being taken. The Commissioner asserted the fact that no decision had been considered, adjudicated upon or decided on the taxpayer’s request for remission of interest.

The Commissioner and his legal representatives further raised the issue of whether the Commissioner may even consider a request for the remission of interest in terms of Section 39(7)(a) of the VAT Act once a taxpayer has agreed to pay such interest in terms of a VDP agreement as contemplated by Section 230 of the TAA.

The High Court decision

The High Court found the taxpayer’s approach misguided, stating that it is trite law that the usual grounds on which information is excluded from the record in review proceedings are an irrelevance and legal privilege. Furthermore, they claimed that what is relevant is not to be determined from the pleaded case, but rather from the decision sought to be reviewed. 

Ultimately, a Court remains guided by what is relevant, as only relevant evidence is admissible. 

The Court further held that the Commissioner unequivocally stated that "under the circumstances as the agreements entered into between the Commissioner and the respective taxpayer remains in force, the Commissioner cannot consider the request for the remission of interest levied.” 

After receipt of this letter, the taxpayer’s legal representatives were fully aware that the refusal to consider the remission of interest request was based on a question of law The taxpayer’s legal representatives, in their request for a withdrawal of the Commissioner’s decision, entered upon a discussion that, in their opinion, the Commissioner may consider, and even permit, a request for remission of interest. 

The Court dismissed the taxpayer’s application and costs were awarded in favour of the Commissioner.

The Supreme Court of Appeal

Thereafter, the taxpayer launched an appeal in the Supreme Court of Appeal. The Supreme Court of Appeal only considered the issue of whether the Commissioner had a duty to consider the taxpayer’s request for remission of interest. 

The Court found that the Commissioner’s refusal to consider and determine the taxpayer’s request altogether, undermines the fundamental right entrenched in section 33 of the Bill of Rights, the right to Just Administrative Action. 

Accordingly, it was held that SARS bears a statutory duty buttressed by the Constitution to, at the very least, to consider the request for remission of interest and decide it on its own merits. 

Analysis

The question of why the taxpayer brought their review application arises when one considers the fact that the taxpayer was aware that the Commissioner’s refusal to consider the remission of interest application was based on a legal issue, or otherwise stated, on the interpretation of a legislative provision contained in Section 39 of the VAT Act. The taxpayer, on its own version, was aware that the respondent did not base the refusal to consider the remission of interest on facts whereby discretion was used. This resulted in the taxpayer attempting to review a decision that the Commissioner had not actually taken. 

While the Supreme Court of Appeal has decided in the taxpayer’s favour and ordered that the Commissioner must consider the taxpayer’s request, the outcome of this matter will likely remain unchanged. The facts upon which the Commissioner relied in his refusal of the request, will be the same facts which inform his decision upon consideration of the taxpayer’s request for remission of interest. As there is a binding agreement between the parties, and SARS are unwilling to amend the agreement, the interest will, in all probability, remain payable by the taxpayer. 

The taxpayer, in our opinion, should have rather applied for the remission of interest informing SARS of the fraud that it fell victim to. There is no doubt that this would have been interpreted as extenuating circumstances and this could have been used as a mitigating factor in the application. Simultaneously applying for the remission of interest, the taxpayer should have applied for relief under the VDP, outlining in the VDP application that they were a victim of fraud and that an application for remission of interest has been simultaneously brought. 

Where does this leave taxpayers?

Taxpayers should be extremely cautious when entering into agreements under the VDP, as can be seen from the above, SARS and more importantly the Court’s interpretation is that once these agreements are entered into, they are binding and cannot be amended. Furthermore, taxpayers should ensure that they apply for the remission of interest simultaneously with a VDP application in order to avoid a situation suffered by the above taxpayer.

Written by Andre Daniels, Legal Manager: Tax Controversy & Dispute Resolution; and Bronwin Human, Tax Attorney; Tax Consulting SA