27 February 2004


We refer to your e-mail dated 17 November 2003 calling for comment on the above-mentioned document. We would like to applaud SARS for initiating this proposed system as we believe it is a vital part of a properly functioning tax administration system. Set out below, please find SAICA’s comments:

  1. General
    1. Whilst an Advance Tax Ruling System and the efforts by SARS to introduce such a system are welcomed, a critical success factor of such a system is providing rulings within a reasonable timeframe of receiving the application. In the past, rulings and the interpretation of general and specific legislation have often taken a significant amount of time before the taxpayer received a response. In the absence of the necessary resources, capacity and skill on the side of SARS a system such as this would not be successful in achieving the purpose for which it has been established.
    2. The document itself states that only 50% of the countries canvassed publish these Advanced Tax Rulings (ATRs). Special care needs to be taken in South Africa in this regard, especially regarding confidentiality, as well as the concept that Taxpayer A pays for a ruling which may now be used by Taxpayer B without any cost.

  2. Paragraph 3.2: Advantages
  3. The following is stated as an advantage to tax authorities:

    "… it provides tax authorities with the opportunity to preview the type of transactions taxpayers are contemplating."

    The objectives behind the ATR System are to provide clarity and certainty to the taxpayer. We do not believe that the system should be used in the first instance as a tool for SARS to do further investigation on the affairs of a taxpayer.

  4. Paragraph 3.3.2: Risks for the tax authority
    1. The paragraph indicates "Possible abuse of rulings by taxpayers" as a risk.
    2. We do not believe this is the case as rulings will be fact specific. That is, if the taxpayer does not implement the transaction in line with the facts as stated in the ruling application then the ruling is invalid and does not apply.

  5. Paragraph 3.4: Models of Advance Ruling Systems
  6. This is more an observation: We are surprised that in the range of countries studied, countries such as India and Mexico were chosen and a country such as the United Kingdom was not chosen.

  7. Paragraph 4.2: Statutory basis
    1. We agree with the approach that the Advanced Tax Rulings Procedure (ATRP) should have a statutory basis. Tax is, however, a very dynamic discipline. Care should therefore be exercised not to make the process too rigid by "overlegislating" ATRP. Rather, the legislation should aim to encourage flexibility and due regard for the commerciality of transactions and issues that may be put to the ATRP.
    2. It is recognised, of course, that a fine balance must be struck between flexibility and the preservation of rights of both the taxpayer and SARS through clearly defined and legislated guidelines.

  8. Paragraph 4.3: Structure
    1. The success of ATRP will depend largely on the relevant structure set up in this regard. Taxpayers may have reservations about a centralised unit within SARS to attend to ATRP, specifically where a proposed transaction may be tax aggressive, albeit clearly within the confines of the law.
    2. This will not only ensure the independence and objectivity of the unit, but should also address reservations that taxpayers may have in putting a matter to ATRP.




  9. Paragraph 4.4: Taxes to be covered
    1. Although the Customs and Excise Act, 1964 contains a system for determination of classification of tariffs and transaction values, there may be practical situations where a ruling is required regarding the application of certain Customs & Excise rules and regulations, or the application or calculation of excise or ad valorum duty.
    2. It is, therefore, in our view imperative that the ATRP should specifically include the Customs and Excise Act at the outset. This will also ensure consistency and uniformity within SARS.

  10. Paragraph Binding general ruling – nature of ruling
  11. The binding general ruling, in the form of interpretation notes, guides and brochures should not be subject to a SARS decision as to exclusions and refusals. If there is a need identified by a reasonable number of taxpayers for clarity on a particular transaction or taxation interpretation, or even an administrative procedure, SARS should be responsive to this requirement. If there is a need identified by academics, which is well motivated and relevant, it might be forthcoming to clarify the issue beforehand.

  12. Paragraph Binding effect
  13. We agree with the rulings being binding on SARS but not on the taxpayers.

  14. Paragraph Withdrawal or modify prospectively
  15. Whilst we support the withdrawal or modification of rulings prospectively as opposed to retrospectively, there will be an element of retrospectivity if the tax consequences in subsequent years are altered as a result of the withdrawal or modification of the ruling. We are of the view that if there has been an error on the part of SARS, the rulings issued should remain in force for a given period of time after the taxpayer is advised of the error so as to allow the taxpayer to re-arrange its affairs. Our concern is that SARS may abuse this proviso by claiming that rulings have been given in error without any basis or foundation so as to minimise tax loss to the fiscus notwithstanding that the transaction qualifies for the allowance, deductions or exclusions being claimed.

  16. Paragraph Binding private ruling – nature of ruling
  17. The granting of the above rulings should not be limited to proposed transactions or proposed courses of action. In many instances taxpayers may require clarification/certainty with regard to existing transactions as taxpayers may not have been aware of the tax consequences at the time of entering into the transaction and this is subsequently brought to their attention by the advisors. In these circumstances we cannot see why SARS should be unwilling to grant rulings as the matter will have, in any event, been considered by SARS upon assessment. This also encourages transparency as the taxpayer has the opportunity of disclosing all the facts to SARS prior to assessment under this option.



  18. Paragraph Exclusions and refusals
  19. We comment below on some of the grounds for refusal of an application. It is noted that these grounds are repeated in other types of rulings, such as binding class rulings. For purposes of brevity, we will not repeat our comments when dealing with those rulings.

    1. Automatic exclusions
      1. 1st bullet: Investigations

      1. 4th bullet: Independent contractor or labour broker
      2. This area of the law creates a lot of uncertainty and places an undue administrative responsibility and potential liability on the employer. It is therefore imperative that advance rulings be given in this area and that it not be excluded, since this is possibly one of the areas where the biggest need for advance rulings and tax certainty lies. We are of the view that SARS is best placed to make the decision as to whether someone is an independent contractor or labour broker or not as SARS has more information than that available to the taxpayer who wishes to use the services of such persons. We are strongly of the view that SARS has currently abrogated responsibility in this regard and this needs to revert to SARS as the tax administrator.




      3. 5th bullet: Matters relating to interpretation of foreign law

      1. 6th bullet: Matters relating to the pricing of goods and services rendered by or to a connected person




12.1.6 7th bullet: Frivolous or vexatious issues

We are concerned as to who will determine whether a request for ATR is frivolous or vexatious. Surely, if it deals with the interpretation of the tax laws and the taxpayer has paid for a ruling, such ruling should be given, eg it is common knowledge that SARS grants employers a maximum of 20% deduction as opposed to the 10% legislated in section 11(l)(ii) of the Income Tax Act No.58 of 1962 ("the Act"). Will an ATR request by a taxpayer in the absence of any public document by SARS on this matter be regarded as frivolous? We believe not.

      1. 9th bullet: Alternative courses of action

      1. 10th bullet: Matters where the transaction is not seriously being contemplated

    1. Discretionary exclusions
    2. The circumstances in which SARS may refuse to provide a taxpayer with a binding private ruling are rather onerous. Discretion should be limited as increasing the circumstances in which discretion is granted defeats the purpose of the proposed ATR System.

      1. 12th bullet: Matters relating to anti-avoidance provisions
      2. It is disappointing to note that SARS will not give a ruling "regarding the application of any anti-avoidance provisions or mechanisms". This reintroduces uncertainty into an area which is supposed to be giving certainty.

      3. 15th bullet: Matters where a ruling will be time consuming

      1. 16th bullet: Matters relating to double taxation agreements that should be dealt with by the competent authorities of the parties

      1. 17th bullet: Matters where a ruling has already been given to a taxpayer on a similar matter

Also, a taxpayer wanting to establish tax certainty cannot rely on the previous ruling, as it is not binding on SARS in regard to the new matter.

      1. 18th bullet: Matters depending on the tax treatment of another party

This forces both parties to a transaction to apply for the ruling and therefore a duplication of costs would arise. We do not support this exclusion as a taxpayer may not be aware of another taxpayers tax consequence. Further with the introduction of section 76A Reportable Transactions, although not yet effective, we believe that the exclusion should not be based on the fact that another party has not applied for an ATR. Surely SARS intention must be to use the information obtained from section 76A.

  1. Paragraph Binding effect
  2. We cannot understand why once these rulings have been published, they cannot be regarded as binding public rulings. Surely if SARS issues many similar rulings, SARS should then issue a binding public ruling to limit the need for further private binding rulings.

  3. Paragraph Withdrawal of modification of ruling
    1. We also have a concern where the taxpayer has a number of transaction steps and has implemented 2 of say the five steps. Does it mean the remaining steps cannot rely on the ruling given? Again we believe this should only occur if the taxpayer agrees thereto.
    2. 5th bullet: We find the first two circumstances inappropriate. To withdraw a ruling retrospectively due to the erosion of the South African tax base or its negative impact on another taxpayer undermines the canons of certainty, which the ATR System is trying to introduce. Should this remain the usefulness of the entire ATR System is questioned. On the basis that all ATRs are to be published, surely all taxpayers must then be expected to be aware of the rulings issued by SARS. We believe that SARS should not be allowed to withdraw rulings given in error, given that SARS is autonomous, it should be able to attract the appropriate skills to be able to give well considered and thought out ATRs.

  4. Paragraph Publication of rulings
    1. Depending on the extent of the background facts that will be published, the risk is that even if the identity of a taxpayer will not be disclosed, market sensitive information, trade secrets and other intellectual property in regard to tax effective structures may be compromised. It seems, however, as if the ATRP introduces a consultative process that allows the taxpayer to provide input on this matter. It is imperative that the taxpayer’s views and concerns are adequately considered when determining the extent of information that is ultimately published. We need to ensure that the consultative process with the taxpayer is not merely carried out for the purpose of claiming there was consultation without the taxpayers views and concerns being properly considered.
    2. The published rulings will furthermore not be binding on SARS. It remains to be determined, however, what persuasive power a published ruling may have on an application relating to a similar matter. From SARS’ perspective, the risk is that another taxpayer may regard a different ruling on similar facts as unequal or unfair treatment. This needs to be managed and clear guidelines and policies need to be set in this regard.
    3. It is not clear whether the taxpayer can influence the format or content of the publication. It is also not clear what happens in cases where the taxpayer disagrees with SARS on the content of the publication, which disagreement cannot be resolved. In our view the taxpayer’s view should prevail.
    4. It is recommended that the publication of all rulings should be subject to editing prior to being published. Confidentiality may be breached by publishing the names of any parties involved.

  5. Paragraph Binding product rulings – nature of ruling
  6. It is unclear as to what is meant by "promoters of investments" and "investors" in this category. Will this, for instance, include structured finance products aimed at providing a taxpayer with a cost effective funding rate on the raising of capital? It is suggested that this be clarified in further detail.

  7. Paragraph Period for which the ruling will apply
  8. The new rulings system should make provision for taxpayers to apply for product specific rulings covering the normal duration of the product. Once obtained, both the taxpayer and the taxpayer’s clients should be able to rely on the ruling concerning the tax treatment of the product for the normal life of that product.

  9. Paragraph 4.5.5: Non-binding private opinion
  10. We do not believe there is any value in issuing non-binding private opinions, particularly if the binding ruling facility will give more certainty.

  11. Paragraph 4.6: Certain rulings will be void
  12. We are supportive of the circumstances under which rulings are void. However we are concerned where SARS is the sole determinant of what is regarded as material. This is one sided, subjective and destroys the certainty, which the system is trying to engender.

  13. Paragraph 4.7: Information required
    1. It should be made clear that a taxpayer makes representations and provides facts with "the reservation of rights".
    2. We do not agree with "The recordal by SARS of the proceeds at any meeting will in the event of a dispute be conclusive". Any agreement between the taxpayer and SARS should be in writing and signed by each party.
    3. About ruling sought
    4. We have serious concerns with regard to the third bullet. As currently drafted it is exceptionally wide in that if a shareholder of a company is requesting an ATR, such shareholder has to determine whether other shareholders of the company (as connected persons) have entered into any transaction of a similar nature and this has to be furnished to SARS. We can accept where the connected person is confined to "a connected person in relation to the proposed transaction" as opposed to its current endless ramification.

    5. The last bullet under "Description of the transaction or course of action" requires certain additional details if the application is made by a representative of the taxpayer. This requires a tax advisor or any other person acting on behalf of the taxpayer to disclose to SARS details of that advisor's involvement with any transactions similar to the proposed transaction or course of action that have been or are being implemented by another person or other persons.
    6. This is a serious breach of client confidentiality and with respect we cannot see why an advisor is required to disclose to SARS details of other taxpayers’ involvement in transactions merely as a result of the advisor representing one client.
    7. The provisions of section 76A Reportable Transactions require every company or trust to report certain transactions. Although this section is not yet effective, we believe that it should suffice and there is no further need to require a similar provision in the ATR System for advisors.
    8. This will effectively result in taxpayers no longer wanting to use tax advisors for any advice or assistance even matters not relating to ATR as such matters may have to be disclosed by the advisor should he seek an ATR for another client sometime in the future.
    9. We implore you to give serious consideration to the removal of this requirement in the final rules and regulations of the ATR System.

  14. Paragraph 4.8: Fees
    1. There is no indication of what the initial lodgement fee charge will be. Clarity is needed regarding the additional fees payable on a "cost recovery basis".
    2. We believe the charging of fees for providing certainty into our tax system is inappropriate. This service should have been an integral part of our tax system and the belated introduction hereof should not cost taxpayers any more than the taxes they pay. The major concern in this regard is that the system prejudices taxpayers who cannot afford to pay for ATRs, which must be addressed in some way. This will apply in the case of individuals and small, medium and micro businesses.
    3. Consideration could be given to charging fees only in respect of outside consultants appointed by SARS (with no fees being charged in respect of employees or officials in the employ of SARS). Alternatively, fees could be charged to promoters of transactions as opposed to taxpayers who request ATRs for transactions they intend implementing.
    4. Once the estimated total additional fees have been determined and the applicant decides to proceed with the application, the estimated fees should not be exceeded without prior consultation with the applicant. Valid reasons should be provided as to why the initial estimated costs will be exceeded and a justification of the additional time spent should be provided upon request by the applicant.
    5. Where a ruling has been withdrawn due to an error by SARS, what happens to the fees charged in respect of this ruling? We are of the opinion that where an ATR is declined as opposed to being granted in the negative, the total fees, including any initial non-refundable fee, should be refunded. Where an ATR is withdrawn, the fee or proportionate amount depending on whether retrospective or prospective, should be refunded.

  15. Paragraph 4.9: Timeframes
    1. Clarification is required regarding the timeframe, particularly in light of the sentence, "... will be determined in line with international benchmarks…".
    2. There needs to be an obligation on SARS to process rulings within a reasonable amount of time. We would suggest 30 to 60 days, which is consistent with many tax provisions of the Income Tax Act in which a similar obligation is placed on taxpayers.

  16. Paragraph 5: Capacity
    1. We understand the capacity constraints placed on SARS, and accept a phased introduction is sensible. However we are firmly of the view that non-binding private opinions should be withdrawn.
    2. We believe emphasis should be placed on introducing Binding General rulings and Binding Private rulings first and thereafter Binding Class rulings.

  17. General
  18. A system of determining prioritising of applications for ATRs has to be devised and publicised as it may not be appropriate to merely deal with them on a "first come first serve" basis. Our reason for this view is that a major multinational corporation may consider investing in South Africa, but find the request for ATR is in a queue which may only be dealt with in 6 months time due to the total number of applications. This will not be conducive to attracting investment into South Africa. Some aspects that you may want to take into consideration are separate system for individuals, listed companies and their subsidiaries, close corporations and other private companies with each having their own basis of prioritising.

  19. Conclusion

We commend the move towards streamlining tax administration and promoting tax certainty. The success of the endeavour will greatly depend on the set-up of the unit, the expediency with which the applications are dealt with, and the technical correctness and consistency with which the law is applied. This should go a long way in promoting the public image of SARS and the international reputation of the South African tax system.

Please do not hesitate to contact me should you require further assistance.

Yours faithfully




J A Arendse (Mrs)