A battery of almost constant change to the South African Income Tax Act in
recent years is undermining investor confidence in South Africa, especially as
many of the changes have been imposed with retrospective effect, according to
one leading tax and legal expert.
“It takes little imagination to appreciate the negative effect retrospective
law changes have on business activity, particularly foreign investment,"
commented Ed Liptak, Director of corporate tax at Webber Wentzel, SA’s
leading corporate law firm, in a recent press release attacking the government
for its frequent tinkering with the tax laws.
“These changes have been imposed with retrospective effect, often extending
back over several years. In an increasing number of cases, retrospective amendments
appear to have been prompted by nothing more than the fact that SARS and National
Treasury have decided, in hindsight, that they do not like a particular result,"
he added.
Liptak notes that the impact is most pronounced in emerging markets, where
concerns about certainty, stability and the rule of law are more acute. And
it has a special urgency for South Africa, he said, given its dependence on
foreign investment to meet its targets for economic growth, job creation and
poverty reduction.
“These changes are particularly offensive because the transactions at
issue – almost without exception – fell squarely within the plain
language of the law at the time and would not have been subject to challenge
under the General Anti-Avoidance Rule,” he stated.
What is worse, according to Liptak, is that the National Treasury seems to
have adopted a new effective date ‘default rule’ which guarantees
an element of retrospectivity in almost all cases. The new default rule makes
changes to the tax laws applicable to years of assessment ending on or after
a specified date. In the case of the annual Revenue Laws Amendment Act, this
date is typically the first of January of the following year.
But Liptak points out that the most disconcerting aspect of the problem is
not only its economic impact.
“It is the lack of respect for the rule of law, a founding principle
enshrined in the Section 1 of the South African Constitution," he argues,
noting that the ‘rule of law’ is one of the oldest principles in
the Western legal tradition, within which is the inherent right to certainty
and a concomitant protection against retrospective legislation.
However, within the past 12 months, SARS and the National Treasury have, on
two separate occasions, proposed amendments that would have made drastic changes
to long-standing rules, Liptak explained. These changes would have applied retrospectively,
not just to transactions in the pipeline, but to transactions that had already
been completed. In each case, National Treasury was very responsive to taxpayer
concerns and ultimately corrected the specific problems at hand, but the experience
has still left the business and investment communities shaken, he said.
“The proposed changes would have resulted in massive new up-front liabilities
for many deals and virtually assured their failure. Even where it might have
been possible to stop or unwind these transactions, the effort would have involved
enormous costs and the very real possibility of litigation,” added Liptak.
He went on to observe that these same principles are a cornerstone of Roman
law and continue to form an integral part of the legal systems in Continental
Europe – as well as key features of international agreements such as the
European Convention on Human Rights and the International Covenant on Civil
and Political Rights.
Liptak believes that a similar antipathy toward retrospective legislation also
runs deep in the United Kingdom.
"While tax laws are not penal in nature, it has been widely recognised
that taxes represent enforced exactions backed by the full power of the government,"
he noted.
“For this reason, countries such as Sweden have extended their constitutional
prohibitions against retrospective legislation to taxation, while other countries
such as Poland and Hungary have concluded that retrospective tax legislation
violates the basic human rights guaranteed by their constitutions,” concluded
Liptak.
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