Tax headaches further complicates the recovery process

Recovery from the 2009 global financial crisis has put significant pressure on companies as the economic climate that they were used to before the crisis is very far off, and there is little hope of its immediate return. Cost cutting measures and finding innovative ways to diversify income are the current realities that companies have to deal with.

These challenges are significant considerations to deal with, and have many companies spending significant time and resources to overcome them.

Added to these challenges, is the pressure of having to deal with the South African Revenue Service (SARS) who is seemingly on a crusade to increase its revenue generation during the tough economic environment that many companies find themselves in.

Be prepared

This poses a serious problem to the industry, especially if your client is a high net worth individual, a small company or even a large company as these are the groups which SARS is targeting. Professor Daniel Erasmus, founder of TRM Services, says that because of this, tax is becoming a significant risk area when dealing with SARS.

"The current economic climate is making it hard for SARS to generate the revenue that they need. This means that they are becoming very aggressive in the market, and this is a concern for targeted groups. If they give SARS the slightest reason to look into them, they must be prepared for a roller coaster ride,” says Erasmus.

The first problematic area is that, as Erasmus points out, assessments raised by SARS is a time consuming process and one which cannot be passed onto any normal individual within the company as they may not necessarily be trained in the legal niceties which is required when dealing with SARS.

"But perhaps the biggest problematic area is the law which surrounds these assessments. Unlike the US, if SARS raises an assessment which has penalties tied to it, the penalties become immediately payable. This can often amount to millions of rands and if the individual or company is not able to pay this, SARS has the power to freeze assets and bank accounts which will have a significant crippling effect.”

Call in the cavalry

Because SARS has significant legal muscle, Erasmus says that it is vitally important that targeted companies and individuals acquire their own legal muscle early in the assessment process, adding that there are measures which can be put in place to avert a nasty situation.

SARS is governed by the Tax Amendment Act, and like any other act which is signed into law, it is protected by the constitution. So if the targeted individual or entity can prove that their rights have been infringed, there is a possibility that the process can be made smoother.

"Assessments need to be lawful, fair and reasonable. SARS have to inform you that they are launching an assessment, and when they do this you are allowed to ask them key questions which will give you more insight into the nature of the assessment and how to proceed. These key questions are: What is the scope of the assessment? What is the extent of the assessment? What is the purpose of the assessment? What specific part of the Tax Amendment Act does my supposed infringement apply to?”

Targeted companies or individuals then have 21 days in which to respond to SARS' findings. It is during this time that targeted companies/individuals will be able to see whether their rights have been infringed.

Industry solutions

This is potentially a nasty situation which is becoming more of a reality as SARS is intensifying its program. It has created a demand in the industry for legal, as well as risk services, which caters specifically for these unfortunate events.

One of the ways to have a fighting chance against successfully defending yourself and your clients against SARS is for a targeted individual/company to purchase legal defence and accounting cover which enables them to engage proficient tax professionals to act on their behalf from the commencement of an official audit by SARS. This is offered by a number of companies in the industry and as Clint Harker, MD of PI Financial Risk Services, points out. The demand for these products is growing significantly.

"The need for personal indemnity cover and tax insurance is becoming more apparent following recent changes in legislation which include the Tax Administration Act as well SARS's Compliance Programme,” says Harker.

Editor's Thoughts:
The biggest problem when faced with a SARS assessment is that companies/individuals feel as if they will be fighting a losing battle against a far superior opponent. And who can blame them? However, Erasmus points out that SARS can be beaten and that they, at times, take shortcuts in their internal procedures, which infringes on companies/individuals' constitutional rights. The key to this is adopting a very strategic approach. Erasmus warns that companies/individuals must not take the approach of using a sledge hammer to crack a nut. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].

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