• Tax Governance – A New Tripartite Pact Beckons

Tax Governance – A New Tripartite Pact Beckons

06 July 2018

The terms of reference of the contested SARS Commission of Inquiry, currently sitting, include the impact of the conduct of SARS management on the public image of SARS upholding the basic values and principles governing public administration envisaged in section 195 of the Constitution. In terms of this section, SARS must, inter alia, at all times, act with a high standard of professional ethics and act impartially, fairly equitably and without bias.

In the writers’ view, there is little doubt that the President has demonstrated his commitment to restoring the reciprocal relationship of trust between the government, the tax administration and the country’s taxpayers – a tripartite trust which has been badly eroded in recent times (which the President expressly alluded to in his letter of suspension to Mr Moyane), leading to an increasing adversarial relationship between all three parties. The government of the day, the tax administration and the taxpayer all have their respective crucial roles to play in re-establishing such trust, based on the underlying principles of mutual respect, transparency and a cooperative and constructive working relationship. Such mutual trust can further lead to a collaborative relationship to create a more certain and positive business environment to the economic benefit of all parties.

It is instructive to note that the President, in his suspension letter to Mr Moyane, confirmed his statement in his State of the Nation Address that “tax morality is dependent on an implicit contract between taxpayers and government that the state spending provides value for money and is free from corruption”. His assertion resonates with a Report of the International Bar Association’s Human Rights Institute Task Force on “Tax Abuses, Poverty and Human Rights”,which has a particular focus on tax abuses that have negative impacts on developing countries. The Task Force concluded that tax abuses negatively impact the enjoyment of human rights, as they deprive governments of the resources required to provide the programmes that give effect to economic, social and cultural rights and to create and strengthen the institutions that uphold civil and political rights. The Report emphasizes that actions of States that encourage or facilitate tax abuses could constitute a violation of their human rights obligations.

The role of SARS, in its capacity as the custodian and administrator of the tax system, is to build the confidence of all taxpayers in the system which, in turn would, encourage taxpayers to do the right thing by fulfilling their responsibilities under the law. The SARS Service Charter, published earlier this week is a welcome development, undertaking to uphold the South African Constitution and Bill of Rights, to provide a service that is fair, accurate and based on mutual trust and respect and to demonstrate values of accountability, fairness, honesty, integrity, respect, transparency and trust - all aspects in which SARS appears to have fallen well short of in recent times.

As far as large corporate taxpayers are concerned, tax authorities globally have been introducing initiatives to ensure that a company’s approach to tax management is overseen by its board of directors. In Australia, when engaging with such a taxpayer, an important departure point for the Australian Tax Office (ATO) is to understand a taxpayer’s tax governance framework (TGF). Last year the ATO expanded its “Tax Risk Management and Governance Review Guide” (the Guide), which sets out both board and management level responsibilities for the management of tax risk, together with a framework for controls and testing. The Guide now includes a “director’s summary”, which outlines the responsibilities of directors and public officers in the context of TGF, as well as guidelines for the various internal stakeholders to assist in the testing and self-assessment of the operational effectiveness of a corporate taxpayer’s TGF. In addition, the ability afforded by the ATO to large corporate taxpayers to report voluntarily under a “Tax Transparency Code”, to conclude an “Annual Compliance Agreement” with the ATO and to strive for a low risk rating in terms of the “risk differentiation framework” of the ATO are all factors which encourage the maintenance of open and constructive relationships between the two parties. In the Netherlands, a similar “enhanced relationship” initiative applies, in prescribed circumstances, to regulate the relationship between the Dutch Tax Authorities and taxpayers and their advisors, based on trust and transparency. At this point in time, SARS does not appear to have introduced any such initiatives and does not appear to be capable of tailoring its approach and focus, based on an understanding of the unique business and risk management framework of a taxpayer.

In the South African context, corporate governance proposals expressly recognize the role and responsibilities of the board and the audit committee in tax governance and oversight, including the formulation of a tax strategy and policy that are aligned with responsible corporate citizenship and wider stakeholder considerations, including reputational risk, however carefully balancing the fiduciary duties of directors and the legitimate expectation of shareholders that costs (including tax costs) should be kept to a minimum.

The President has acted quickly in taking the first step to restore public confidence in SARS. Large corporate taxpayers in South Africa should now evidence their bona fides in contributing to a new spirit of fiscal partnership by endorsing and operating within clearly defined tax principles and communicating their approach to all stakeholders. This would be an important first step in both establishing trust and building credibility, with not only the fiscal authorities, but institutional investors, civil society and the public at large. Reciprocally, SARS should establish its own internal framework, processes and procedures to foster cooperative and collaborative relationships with its corporate taxpayer “clients”, based not only on a commercial and operational awareness of their industries and supply chains but, more importantly, on the existence and effectiveness of the taxpayer’s governance and risk management framework.


Ray Eskinazi                                                                                   Marcus Botha
Senior Manager                                                                              Director
BDO Tax Services.                                                                         BDO Tax Services

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