A taxing assessment. Evaluating South African mechanisms that curtail tax fraud in cases of impeachable transactions
| Pages | 293-312 |
| Published date | 07 January 2019 |
| Date | 07 January 2019 |
| DOI | https://doi.org/10.1108/JFC-09-2017-0085 |
| Author | Paul Nkoane |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
A taxing assessment
Evaluating South African mechanisms that curtail
tax fraud in cases of impeachable transactions
Paul Nkoane
University of South Africa College of Law, Pretoria, South Africa
Abstract
Purpose –The purpose of this paper is to enlighten the reader about the development in tax law.
Moreover, the author intends to show that other measures could be implemented to supplement the
existing machinery.
Design/methodology/approach –The paper explores the duty vested in the courtsto probe the merits
of transactions meant to evade or avoid the burden of tax. So much of the text is based on caselaw. The
methodologyis based on literature research rather interpersonal research.
Findings –The paper highlights that the current tax machinery has solved a number of tax issues.
However, the machinery has not addressedthe problem of fraud committed in the banking sector. The paper
thereforerecommends solutions to this problem.
Research limitations/implications –The paper was formulated before the current tax laws where
implemented. The current law contains the solution this study advanced. In a sense, this study
examines the impact of the current law and the duty of the court to probe the merits of impeachable
transactions.
Practical implications –The study wouldgive the legislature food for thought and wouldalso guide the
courts withmatters of tax fraud.
Originality/value –Though the original recommendationsform part of the current statute, this study is
still immenselyoriginal in delivery and thought. It providenot only an original influence on the court but also
the legislaturewith original solution to the existing problem.
Keywords Banking law, Tax fraud, Tax evasion, Tax avoidance, Forfeiture, Tax laws
Paper type Research paper
1. Introduction
It is trite law that tax evasion must be punished[1], whereas the law is lenient towards
tax avoidance if arranged within a legal framework[2]. The term tax avoidance even
when used to imply a moral act can be easily conflated with impermissible tax
avoidance, to eschew possible confusion, I shall refer to lawful minimising and
postponement of tax as “tax planning”. It is, accordingly possible to make
arrangements which are lawfully allowed to defer or diminish certain tax liabilities.
However, where a tax debt is due and cannot be left unsettled[3], it will be unlawful to
make plans to avoid the honouring of tax[4], particularly without the consent of the
Commissioner for South African Revenue Services (hereinafter SARS). This is so,
because such conduct may amount to tax immorality[5]. It happens at times in financial
audits that tax payments are deferred, for one reason or the other, chiefly to balance
accounts. The deferred amount may be kept for SARS or used for all sorts of benefitfor
The author would like to extend my heart felt gratitude to Prof Puseletso Letete of the University of
South Africa for her comments on an earlier draft. However omissions and errors are all mine.
Taxing
assessment
293
Journalof Financial Crime
Vol.26 No. 1, 2019
pp. 293-312
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2017-0085
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
the entity before SARS collects[6]. Where a deferment has been unreasonably long[7],
then the Receiver of Revenue may resort to other measures to secure compliance. In
such cases, SARS can take measures to collect tax itself or assign any person (to be an
agent) to collect tax[8]. Although a person may be designated to collect tax, it could
happen that the funds are transferred before they become preserved for SARS.
The court in Nedbank v. Pestana case ruled that where a transfer is made prior to the
preservation of the funds, the bank cannot unilaterally reverse the transfer[9]. In this case,
circumstances suggested that the taxpayer deliberately disposed of the property which
formed part of the taxpayer’s tax debt. The court’s ruling has received stern critique from
the academic circle. Schulze argues that such a ruling while advances banking law of
mandate, it also carries the impetus to fuel fraudulent transactions[10]. Schulze further
argues that the feasible remedy to the problem of transactionsmeant to defraud or elude the
payment of tax is the reversal thereof.
Where crime (e.g. fraud) is involved, banks could or should not turn a blind eye to proceedings. In
the case of fraud, public policy dictates that a bank should do everything in its power to prevent
or expose such criminal conduct. This is an acknowledged principle in other spheres of banking
law too. For example, in the case of documentary letters of credit it is well established that where
the beneficiary in terms of the credit has submitted forged or falsified documents, the bank will be
allowed to refuse payment on the credit, notwithstanding the trite principle that the letter of credit
is independent from any underlying transaction[11].
It appears that the dichotomy in jurisprudence generated unsatisfactory corollaries in this
case. This article, therefore, investigates whether the law has implemented or ought to
implement machinery to ameliorate tax problems exhibited in the Pestana case. It is
essential that would-be taxcheats become cognisant of the fact that their acts cannotbe left
un-castigated if they were to engage in tax immorality. History teaches us that tax law
amendments are passed to remedy a persistent past ill[12]. Thus, the implementation of
supplementary machinery to remedy an existing ill would be in line with tradition and for
that matter no more than necessary.
In an effort to understand the courts’competence to pronounce on cases of tax
immorality, the article will assess tax laws to define what sort of comportment should
arouse the courts’scrutiny. The article will furtherprobe the courts’position with regard to
cases of poor tax assessment and the right to possess property. In that light, the article
provides a synopsis of the Deutschmann NO v. Commissioner for South African Revenue
Services case [13], where the court had to determine whether a right to property is
guaranteed where there is failure to comply with tax laws. In addition, the article will
attempt to offer solutions for cases of analogous circumstances to that of Pestana. The
article will assess whether other legal machinery could be assimilated into tax laws or the
Criminal Procedure Act (CPA) to facilitate the improvement of cases similar to Pestana.
Moreover, the article aims to evaluate how the promulgation of the Tax Administration Act
has solved the problems encounteredin Pestana.
2. What tax immorality entails and how it should dealt with
Due to the distinction drawn between tax evasion and tax planning, wherethe former is an
offence and the latter is not necessarilyso, several taxpayers look for ways of planning their
affairs so as to postpone or minimise their liability[14]. Tax planning is characterised
by arrangements that are ordinarilylawful; that is to mean, legally permissible[15]. The law
allows tax planning which is meant to manage tax liability where the taxpayer has made
arrangements that are lawfullypermissible to minimise or postpone tax[16]. In cases where
a taxpayer has to spend a considerable amount in order to settle a minutiae tax liability, tax
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