Many taxpayers have felt the pain of receiving administrative penalties that in some instances border on being unfair and may even be considered disproportionate to the “offence”.
The South African Institute of Tax Professionals (Sait) has submitted several proposals to ensure fairness in the treatment of taxpayers who do not have any intent to benefit financially from their conduct without compromising compliance.
Sait chief executive Keith Engel says in a submission on behalf of its tax administrative work group that the public fully understands the need for the South African Revenue Service (Sars) to have the power to enforce legislation.
“But there is a point where taxpayer fairness can no longer be ignored. Setting aside the various political events, there is a widespread perception that the Tax Administration Act (TAA) is often unfair to taxpayers, especially smaller business and others without sufficient resources to properly defend themselves,” he says in the submission to National Treasury.
Engel adds that the work group has previously made various submissions in relation to problems with the act. “The work group is of the view that these submissions have largely fallen on deaf ears.”
The submissions were made with the intention of addressing these concerns during the 2019 Budget Review. One of the matters raised by Sait pertains to the “unfair and excessive percentage based penalties”.
Engel refers to research in various jurisdictions which has confirmed that while higher penalties can increase taxpayers’ compliance, imposing harsh penalties is only effective up to a certain point.
“Thereafter increasing penalties actually triggers disengagement and resistance to the tax system.”
The TAA states the purpose with administrative non-compliance penalties is to ensure they are imposed impartially, consistently, and proportionately to the seriousness and duration of the non-compliance.
However, the percentage-based penalties on late payments are standard percentages of the amount of tax payable in the relevant period, with no regard to “seriousness or duration” of non-compliance.
Engel gives an example of a company whose VAT payments are late due to unforeseen circumstances - the responsible person falls ill and the tax is paid two days after the due date. If the tax amount was substantial, a 10% late payment penalty is harsh and disproportionate.
Sait also states the penalty remittance provisions in the act are “extremely restrictive”.
It would like to see amended wording of the definition of “first incidence”, since it considers it unfair to impose a penalty for non-compliance when Sars and the taxpayer could not agree on an assessment but reached a settlement.
Engel referred to the time before the TAA when “reasonable circumstances” were considered as a test for remittance of penalties.
“Taxpayers who are largely compliant, experience percentage based penalties as excessive and unfair. This drives down tax compliance,” warns Engel.
He also notes that percentage-based penalties are not “proportionate to the seriousness or the duration” of non-compliance. When taxpayers have “acted in good faith, without the intention to deceive” they escape penalties for understatements.
“There does not appear to be any reason why similar principles should not apply to percentage-based penalties.”
Sait calls for the amendment of the TAA to provide for full remittance of percentage-based penalties where the duration of non-compliance is less than five business days. This would address cases where errors as a result of public holidays or brief illness give rise to late payment, but is remedied within a very short time frame.
It also calls for further remittance criteria, based on seriousness.
When a company pays VAT late because it adjusted its submission following incorrect advice, it is quite clearly of lesser “seriousness” than a taxpayer who decides not to submit any VAT returns or make any payments for many months for no legitimate reason whatsoever, Sait proposes.