Edward Kieswetter takes a hammering

The South African Revenue Service (SARS) has lost a string of court battles, suffering major setbacks in its efforts to revive its enforcement capabilities. 

Particularly concerning for the tax authority is that these cases have ranged from individual taxpayers to JSE-listed corporates and the illicit cigarette trade. 

SARS was renowned for its enforcement capability throughout the 2000s, effectively preventing the illicit cigarette trade from growing and was a highly efficient government institution. 

The authority had numerous specialised enforcement units to take on complex tax crimes and prevent companies, in particular, from evading tax. 

However, since 2010, this capability has largely disappeared as a result of state capture and mismanagement at SARS. 

The Tobacco Control Data Initiative’s data shows that by 2017, illicit cigarette consumption had grown from under 10% to over 30% of the country’s total. 

A deterioration in SARS’ capacity allowed illicit trade to flourish and resulted in significant administrative inefficiencies at the institutions, impacting law-abiding citizens. 

Edward Kieswetter was charged with turning this around when he was appointed Commissioner of SARS in 2019. 

At the time, Kieswetter said the damage done at SARS by state capture was significantly deeper than what a commission of inquiry could report. 

He explained at a Wits webinar that the organisation had been deliberately divided with corrupt intent and that some employees had not given up their affiliation with a particular faction. 

This made it hard for the revenue service to be objective in the cases it pursued and how its enforcement was conducted. 

Despite this, Kieswetter has made good progress in turning SARS around and restoring its enforcement capacity. 

SARS has repeatedly collected more tax than was expected by the National Treasury due to enhanced enforcement, effectively bolstering the state’s finances and reducing the need for tax hikes to generate extra revenue. 

However, in recent months, experts have suggested that SARS is overreaching in its tax collection efforts. 

This is reflected in the numerous losses the revenue service has experienced in court cases relating to its enforcement. 

The most public of these defeats was against JSE-listed asset manager Coronation, which has had a running battle with the revenue service for a decade. 

The dispute centred on SARS’s claim that Coronation owed significant taxes on profits from its Irish subsidiary, Coronation Global Fund Managers.

A series of legal challenges unfolded, with SARS initially prevailing in the Supreme Court of Appeal. 

The hefty tax bill, including interest, imposed on Coronation reached over R700 million. However, Coronation appealed the ruling to the Constitutional Court.

Earlier this year, in a significant win for the asset manager, the Constitutional Court overturned the previous rulings, validating Coronation’s interpretation of the relevant tax laws. 

Another high-profile defeat was against tobacco manufacturers and distributors, where SARS was prevented from putting CCTV cameras in their warehouses. 

SARS wants to use these CCTV cameras to monitor the volume of cigarettes they produce and clamp down on illicit cigarettes entering the market.

However, Judge Linda Retief interdicted SARS from installing the cameras last month and said there was no evidence that the cigarette manufacturers SARS was targeting weren’t tax compliant.

She added that the interdict against installing CCTV cameras would not prevent SARS from collecting tax.

Kieswetter said the tax authority may turn to physical site inspections from its auditors to assess the volume of illicit cigarette sales and enforce compliance. 

South Africa’s tax boss said that SARS is disappointed in the ruling and is appealing it to a higher court. 

The surveillance of regulated production is an international practice and not unique to South Africa. In many countries, surveillance of production is often stipulated in the licencing requirements for alcohol and tobacco traders. 

SARS has also recently lost a case against an individual taxpayer, which shows that its enhanced collection efforts go beyond businesses. 

“Anyone dealing with SARS, South African tax or who wants to know the temperature of the South African tax environment would find this well-written judgement useful,” Tax Consulting partner and head of legal Darren Britz said. 

In this case, the appellant is a discretionary trust that received an additional tax assessment from SARS for the 2012 tax year. The taxpayer objected to the assessment on two grounds:

First, that the time limit for issuing an additional assessment had passed. Second, that the penalty for understatement was excessive. SARS rejected both objections.

The taxpayer then appealed to the Tax Court, which ruled against it, citing that the taxpayer introduced new objections during the appeal that were not part of the original objection.

The taxpayer took the matter to the South Gauteng High Court, which ruled in its favour.

The High Court determined that the Tax Court Rules did not prevent the introduction of new grounds of objection. Additionally, the court stated that SARS should not impose taxes that are not legally owed.

This is the latest in a series of legal defeats for SARS this year.

One notable case was its legal battle with asset manager Coronation, which ended with the Constitutional Court ruling against SARS.

Another significant loss for SARS came in its case against Capitec Bank.

In that case, the Constitutional Court specifically stated, “This judgment concludes that SARS should not have disallowed the objection in full.”

“SARS, as a state entity bound by the Constitution, should not seek to collect taxes that are not lawfully owed.”