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SARS Allows Business Groups Extra Time In Tax Avoidance Consultation

by Robert Lee,, London

06 February 2006

The South African Revenue Service (SARS) has announced that the deadline for submissions in response to proposed changes to income tax legislation, which are designed to crack down on corporate tax avoidance, has been extended to allow several prominent business groups time to respond.

The discussion paper was released by Finance Minister Trevor Manuel on November 3 last year and the initial deadline for public submissions and comment passed on January 31, 2006.

However, in order to accommodate requests for an extension from, among others, the Banking Association of South Africa and the South African Chamber of Business (SACOB)/Business Unity South Africa (BUSA), SARS has extended the deadline to 28 February 2006 to allow further submissions.

Facing what it considers to be a growing problem with increasingly complex and sophisticated forms of tax evasion, the South African Revenue Service (SARS) has expressed its desire to clamp down on "impermissible tax avoidance" by corporate taxpayers.

A key question the paper raises is the distinction between tax evasion, impermissible tax avoidance, and tax planning.

"Trends in tax avoidance have been driven by several factors including globalisation, deregulation in the financial markets, rapid advances in computer and telecommunications technology, and a new emphasis by many professional firms on the development and marketing of so-called 'tax products,'" SARS noted upon the launch of the discussion paper.

Specifically, SARS has proposed five major changes to Section 103 of the Income Tax Act, which, it believes, has "not kept pace with the times". Under these proposals, SARS will:

  • Introduce a non-exclusive set of factors to be considered in determining abnormality for schemes in the context of business and create a rebuttable presumption of “abnormality” where certain of those factors are present;
  • Change the existing subjective purpose requirement to an objective determination based upon the relevant facts and circumstances;
  • Clarify that section 103 may be applied to steps within a larger scheme (and that a general business purpose for a larger scheme is not sufficient to shield each and every step in that scheme from review);
  • Authorise the Commissioner to apply Section 103 in the alternative; and
  • Introduce new penalties for scheme promoters and for taxpayers that substantially underreport their income.

The Discussion Paper is a precursor to amendments to Section 103 which SARS expects will be introduced later this year.

SARS will shortly release an Interim Response to submissions that have been made public to date. Further comment on this interim report will also be invited by SARS.

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