17 Sep 2019

SARS the Unequal Opponent

by Anton Lockem, Partner, Durban, Chrichan de la Rey, Senior Associate, Durban,
Practice Area(s): Tax |

It is well known that litigation in any court can be a protracted battle. It is a journey that litigants have to be prepared for, both mentally and financially. In the midst of it all, one should weigh up the principles (the subject matter) of the dispute and the
commercial advantages of finding a resolution to the matter.

Tax litigation is no different, but here there are two pertinent aspects to be considered even further. The first is that the South African Revenue Service (Sars), your opponent, is vested with vast statutory powers and resources. The second is that once Sars starts the battle typically through an assessment, the onus of proving why the assessment is wrong lies with the taxpayer. It is these two attributes that differentiate tax litigation from ordinary litigation and on the face of it, create an unequal battlefield.

While it is understandable that Sars (being an organ of state) is vested with these wide-ranging powers so as to fulfil its collection and enforcement mandate, these powers are definitely limited. It is herein that taxpayers can find efficient armory – taxpayers have a right to just and fair administrative action. These rights are entrenched in the supreme law of the land, the Constitution, and every action or decision by Sars before, during and after the battle, must be consistent therewith. Tax litigation contemplates two types of battlefields.

The first relates to a dispute of the application or interpretation of tax legislation to a particular set of facts. This, for example, will be when Sars assesses a certain amount to fall within the taxpayer’s gross income, while the taxpayer is of the view that, having regard to the particular set of facts, the very same amount either does not fall within the ambit of gross income or is excluded from income because it is exempt.

The second type of battle relates to the taxpayer challenging an administrative action or power exercised by Sars. This, for example, will be the case when Sars disallows a taxpayer’s reasonable request to suspend or compromise a tax liability, or when Sars obtains information from a taxpayer (such as with a search seizure) in a manner that is not consistent with enabling tax legislation or prevailing common law.

In all cases, the taxpayer needs to be prepared for the fight. The facts are what matters and on which decisions turn. Bearing in mind that taxpayers have the onus to prove their case on a balance of probabilities, the facts, supported by documentary and oral evidence are indispensable weapons to the courtroom battle.

Legal theory, however poetic or pure, is only worth the paper it’s written on if the facts don’t support its application. Don’t get us wrong, the facts or evidentiary framework will hardly ever be perfect – if they were, most disputes would not arise. In the
commercial world, for example, parties may have agreed historically to transact with each other in a certain way, but over time and through their conduct and practise, the contractual framework may have shifted from the archaic agreement that gathered
dust in the financial manager’s drawer. But just because it prances like a horse doesn’t mean it is a horse, right? Right!

Our courts will consider the terms of the agreement, the surrounding circumstances and the intention of the parties in an endeavor to determine the true or real effect of the contract. This is where the work of evidence and the real preparation for
trial takes shape.

The evidentiary framework only takes shape during the period leading up to trial, and the stronger the bundle of evidence, the more realistic the chances of success or of having the matter favorably resolved or settled before trial.

Sars is not your ordinary opponent and therefore, ordinary litigation armory simply won’t be good enough.

You need to package your case (legal and evidence) in such a manner that it speaks to your burden of proof; you need to know your opponent, including all the institutional knowledge it has gathered against the taxpayer during the audit and investigative process; you need to know when to stop, when to settle and when to fight to the end.

The answer lies not so much in the legal theory, but in the facts, and the facts lie in the evidence.