Commissioner for the South African Revenue Service v Medtronic International Trading S.A.R.L  ZASCA 20 (“Medtronic case”)
On 18 June 2017, Medtronic International Trading (“the Taxpayer”) concluded a Voluntary Disclosure Programme (“VDP”) with the South African Revenue Services (“SARS”) as the result of fraudulent transactions of a former employee. The capital amount of the VDP amounted to R 311, 602, 431.49 and the total interest thereon amounted to R201, 185, 012.59. After the conclusion of the VDP agreement, the Taxpayer requested a remission of interest levied on the late payment of Value Added Tax (“VAT”).
It must be borne in mind that the relief any Taxpayer could qualify for in terms of a VDP is encapsulated in terms of section 229 of the Tax Administration Act, No. 28 of 2011 (“TAA”). The said relief provides that SARS must:
- Not pursue criminal prosecution for a tax offence arising from the default;
- Grant relief in respect of understatement penalties; and
- Grant 100% relief in respect of administrative non-compliance penalties.
The crux of the Medtronic case lies in the fact that the relief provided in the VDP and in terms of Chapter 16 of the TAA is unclear with respect to the interest levied in terms of the VDP. The question which therefore arose before the Supreme Court of Appeal (“SCA”) was whether a Taxpayer may, after entering a VDP and after the agreement has been fulfilled (i.e., having signed and agreed to the capital and interest payable on the VPD agreement and made full payment in accordance with said agreement), request a remission of interest outside the VDP process via section 39(7) of the Value-Added Tax Act, 89 of 1991 (“VAT Act”).
The Taxpayer requested SARS to have the interest remitted in terms of section 39(7)(a) of the VAT Act which states:
‘Where the Commissioner is satisfied that the failure on the part of the person concerned or any other person under the control or acting on behalf of that person to make payment of the tax within the period for payment …. as the case may be-
a) was due to circumstances beyond the control of the said person, he or she may remit, in whole or in part, the interest payable in terms of section ....’
In addition, in terms of SARS Interpretation Note 61 (“IN 61”), the Taxpayer relied on the explanation of what constitutes “circumstances beyond a person’s control” which stated that:
“circumstances beyond a person's control are generally those that are external, unforeseeable, unavoidable or in the nature of an emergency, such as an accident, disaster or illness which resulted in the person being unable to make payment of VAT due.”
On application of the above the Taxpayer contended that the fraud by an employee was a circumstance beyond its control. SARS however argued that section 39(7)(a) of the VAT Act does not apply to any VDP agreement. Therefore, SARS stated the "remission of interest was not catered for in the VDP programme under the TAA" and contended that IN 61 was not binding on it. As a result, SARS considered the request for remission of interest invalid and informed the Taxpayer that it ought rather submit a notice of objection.
The Taxpayer however did not follow this recommendation on the basis that the VDP agreement explicitly stated that objections to an assessment or determination issued or made by SARS were impermissible. It is also noted that section 232(2) of the TAA states that:
“An assessment issued or determination made to give effect to an agreement under section 230 is not subject to objection and appeal.”
On 3 March 2023, the SCA found in favour of the Taxpayer and rejected the arguments raised by SARS, stating that the refusal by SARS to consider the request for remission was unjustified and eligible to be reviewed under sections 6 and 8 of the Promotion of Administrative Justice Act, 2000 (PAJA) and dismissed the appeal with costs. In particular, the court held that the VDP provisions contained in the TAA do not prohibit a request for remission of interest in terms of section 39(7) of the VAT Act, notwithstanding a VDP agreement being entered into. It is important to note that the SCA ruled in favour of the taxpayer in that SARS is obliged to consider such a request. However, the SCA did not rule that the interest itself be remitted and therefore it remains to be seen whether SARS will in fact remit the interest in this case.
In principle, this case demonstrates the fact that after a VDP process has been concluded, a Taxpayer still has the right to apply for the remission of the interest imposed and is entitled to other remedies as contained in the tax legislation provided the criteria for such remission is satisfied. Whether SARS will entertain such remission on a case by case or in special circumstances is yet to be seen. In addition, we may perhaps see a legislative change given this judgement that encourages a taxpayer further opportunity to apply for remission of interest, particularly where the default relates to VAT.
Partner, PKF Octagon - Johannesburg