SARS scores a major legal victory

SARS secured a major Tax Court victory against a company linked to the State Capture-era Chinese locomotive procurement scandal, with the court upholding additional tax assessments and a 200% understatement penalty.

The case in question, Taxpayer LE v CSARS, arose from locomotive procurement contracts linked to Marshall SOC.

The Tax Court confirmed additional assessments and an understatement penalty of 200% imposed on the taxpayer’s determined tax liability for the 2013 to 2018 years of assessment.

“SARS successfully came after the taxpayer years after the underlying transactions took place,” said Tax Consulting SA’s team lead of tax debts, Junaid Bhayla.

“The ruling is a stark warning to taxpayers who believe time, complexity and procedural litigation can shield them from SARS indefinitely.”

While SARS may sometimes move slowly, Bhayla warned that, once it begins following the money trail, it is relentless in its pursuit.

One of the most striking features of the judgment is how clearly it reflects SARS’s evolving role in the post-State Capture era.

SARS alleged that Taxpayer LE overstated its cost of sales and channelled funds through related entities to facilitate “kickbacks” tied to inflated procurement pricing.

SARS alleged that approximately R3 billion in costs had been overstated and that the taxpayer faced the disallowance of significant interest deductions and consultancy expenses.

The revenue service argued these expenses were not incurred in the production of income, Bhayla explained.

“While criminal prosecutions linked to State Capture continue to move slowly through the justice system, SARS has increasingly become one of the first institutions capable of imposing meaningful accountability,” he said.

Through additional assessments, penalties, and interest, SARS can financially challenge taxpayers long before criminal liability is determined.

“The scale of the allegations alone demonstrates how SARS is now approaching large-scale matters through the lens of tax enforcement,” Bhayla said.

SARS can revisit old tax matters tied to fraud and non-disclosure

A central issue in the matter was whether SARS was entitled to reopen assessments that would ordinarily have been prescribed under section 99 of the Tax Administration Act 2011 (TAA).

The taxpayer argued that SARS had issued the additional assessments outside the normal three-year period permitted under section 99(1)(a) of the TAA and alleged that this was unlawful.

However, the court reaffirmed that prescription does not protect taxpayers where the failure to assess the correct amount of tax arose from fraud, misrepresentation or the non-disclosure of material facts.

Importantly, Bhayla said the court accepted SARS’s position that the true facts emerged only after extensive investigations.

These investigations included SARB, forensic investigations, information exchange requests, and wider State Capture-related inquiries.

“The judgment confirms an increasingly important principle in modern tax administration, being that taxpayers cannot rely on prescription where SARS later uncovers concealed or misleading information,” Bhayla said.

The judgment also reaffirmed the long-standing principle established in the Metcash Trading case, where the court held that a SARS assessment stands until the taxpayer proves it wrong, as the taxpayer bears the onus of proof.

“Many taxpayers assume that SARS must first prove every aspect of an assessment before the taxpayer is required to respond, which is incorrect,” Bhayla said.

“Once SARS issues an assessment, the burden shifts to the taxpayer to demonstrate why the assessment is wrong.”

SARS takes hard line on tax evasion

Bhayla said the proceedings were clearly marred by trivialities from the appellant, including attempts to have the President of the Tax Court recuse themselves and disputes over who should commence proceedings.

The taxpayer also argued that certain documents SARS used contained “hearsay contents, unproven contents, falsified contents, unrelated information, duplicated information and false information”.

However, they ultimately closed their case without leading evidence. Despite trying several objections to delay proceedings, SARS would not be railroaded. “In the end, the court ruled that the assessment against the taxpayer stands,” he said.

While some taxpayers may seek to protract litigation and raise technical arguments before the substance is addressed, the court repeatedly stressed that procedural attacks cannot substitute for substantive evidence.

“If a taxpayer wishes to challenge a SARS assessment, the taxpayer must place credible evidence before the court to discharge the burden of proof,” Bhayla said.

After finalising its investigation and considering the facts at hand, SARS levied a 200% understatement penalty, together with interest, under section 89quat(2).

“The scale of the penalties is significant because it reflects SARS’s increasingly aggressive stance, where it believes there has been deliberate concealment, inflated pricing or unlawful deductions,” he said.

“Taxpayers often underestimate how quickly interest and understatement penalties can escalate an already substantial liability into a financially catastrophic position.”

In matters involving allegations of intentional tax evasion, SARS is clearly prepared to pursue the harshest penalties available to it.

Sophisticated SARS investigations leave little room to hide

The judgment also revealed the depth of SARS’s investigation, led in part by a senior official with over 30 years of experience who investigated illicit financial flows linked to State Capture, Bhayla noted.

The court found that SARS conducted an extensive and independent investigation into the taxpayer’s affairs.

It gathered information from the taxpayer, SARB, banks, auditing firms, and international authorities before issuing the additional assessments.

This included information obtained through exchange requests under the South Africa–Hong Kong double taxation agreement, with Hong Kong authorities providing financial records between 2020 and 2022.

This culminated in the proceedings before the court, and ultimately, the taxpayer failed to discharge the burden of proof required to overturn those findings.

The court confirmed the additional assessments as determined by SARS in terms of section 129(2)(a) of the TAA. Bhayla explained that the broader message from this judgment is impossible to ignore.

“SARS is becoming increasingly sophisticated, internationally connected and willing to pursue historic matters involving complex structures and politically exposed transactions.”

Bhayla warned that time is no longer the shield many taxpayers once assumed it to be, and while SARS may take years to build a case, it does so with sufficient particularity to ensure there is no prejudice to the fiscus.

“When SARS does eventually arrive, they do so with evidence from bank statements, treaty-based information exchanges, forensic investigations and experienced officials,” he said.

“The consequences of which can be severe for the mischievous taxpayer. This judgment is a reminder that in modern South African tax administration, taxpayers may delay the process, but they should never mistake delay for escape.”