The South African Revenue Service (SARS) has published the process that businesses operating in South Africa should follow to request instalment payment arrangements without incurring penalties due to the COVID-19 pandemic. The aim of deferring tax payments without incurring penalties is to alleviate the cash flow burden of tax compliant businesses during the pandemic economic crisis.  This option applies to both small and larger businesses, as well as multinationals operating in South Africa. Taxpayers making use of this relief scheme must be able to prove substantial and material financial hardships as a result of COVID-19. Penalties will only be remitted if taxpayers are able to successfully prove the serious impact of COVID-19 on their business.

Direct Taxes

According to SARS, requests should be sent to dedicated SARS email addresses and should be made on a per entity basis. The email must contain a letter requesting deferral of payments, stating the reasons and specific tax periods applicable. Further information to be included are the business’s latest financial statements and management accounts, a list of debtors and creditors, and cash flow projections for the next three months. Larger businesses with a gross income of more than ZAR100 million, who can’t make a tax payment because of issues relating to the pandemic, can apply to defer tax payments without incurring penalties by emailing COVID19IPAaboveR100m@sars.gov.za.

In April 2020, it was announced that tax compliant Small, Medium and Micro Enterprises (SMMEs) with a turnover of up to ZAR100 million, would be able to defer 35% of their employees' tax payment for the months of April to July without incurring penalties and interest. Further to this, smaller businesses with a gross income below ZAR 100 million are now able to apply for an additional deferral of payments without incurring penalties, by emailing COVID19IPAbelowR100m@sars.gov.za.

Taxpayers should be aware that this is simply a deferment process and does not absolve them of their obligations towards SARS. If approved, the tax due will be paid in instalments, the upside being that penalties will not be levied on a successful application. However, no mention is made of interest being deferred and it must be accepted that interest will continue to run on any outstanding debt. Further, there is no mention of which taxes would apply. It can therefore be assumed that it would apply to any taxes due, which will be welcomed by all taxpayers.

Customs

From a customs perspective, in a letter to all stakeholders dated 17 April 2020, SARS communicated its position and decision relating to the extension of the customs deferment payment as guided by the Disaster Management Tax Relief Bill 2020. SARS has acknowledged that it is mindful of the economic hardships that businesses in South Africa and around the globe are facing during this time of the COVID- 19 pandemic and indicated that it will continue to work with all stakeholders and government to ensure a reduction of the impact of the virus on civil societies and business. SARS also informed companies and traders with payments due in terms of the Customs Act, including customs deferment payments, that they may apply to make payment in instalments. Applications may be submitted to osc@sars.gov.za for the attention of Vonani Ntlhabyane.

Taxpayers may use the framework of draft rule 105.01 that is currently out for public comment to structure their applications. In summary, the proposed draft rule under the Customs Act  provides as follows: an outstanding amount payable in terms of the Customs Act may be paid in instalments if the person liable for payment of the amount has, after obtaining permission in terms of rule 105.03, entered into an instalment payment agreement with the Commissioner. The instalment payment agreement must be signed by the parties and supporting documents, as may be required by the Commissioner, must be submitted on request.  Only persons that are tax compliant and that satisfy certain qualifying criteria may apply for the payment of outstanding amounts in instalments. The term “tax compliant” means that a person has no outstanding taxes, interest, penalties or other amounts due and payable to SARS for which he or she is liable in terms of the Customs Act; or accounts, returns or other documents that must be submitted for tax purposes to SARS in terms of the Act. If the application is approved, SARS may still require the applicant to provide security in such form and amount as may be determined by the Commissioner. Importantly, the proposed customs deferment payment rules are silent on the accrual of penalties and interest.

Given the current state of lockdown in South Africa and the likelihood of it continuing for the foreseeable future, taxpayers should seriously consider these options, but only if they are in a precarious financial situation due to the COVID-19 pandemic.

Written By Virusha Subban, Partner and Denny da Silva, Senior Tax Advisor, Baker McKenzie Johannesburg