Taxpayers who engage in a voluntary disclosure agreement (VDA) as part of the voluntary disclosure programme (VDP) are prohibited from requesting the South African Revenue Service (SARS) to waive the interest after the agreement has been signed.
The Constitutional Court (ConCourt) emphasized that allowing a taxpayer to finalize a VDA that includes interest provisions and then subsequently request a waiver would lead to a “glaring absurdity.”
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The court indicated that this situation undermines the framework of the VDP and threatens the finality of VDAs, particularly in light of an appeal filed by SARS against a ruling from the Supreme Court of Appeal (SCA) concerning SARS and Medtronic.
The difficulties for Swiss-registered Medtronic Africa and Medtronic International began in 2017 when former accountant Hildegard Steenkamp was found to have embezzled a staggering R537 million from the companies over a span of 12 years.
Steenkamp falsified value-added tax (VAT) returns to claim refunds that were not rightfully owed and diverted those refunds to a personal account. Her role involved working for Medtronic Africa while also performing duties for Medtronic International.
Medtronic reported the fraud to SARS and successfully applied for the VDP in December 2017, ultimately reaching an agreement. Steenkamp was later arrested, convicted, and sentenced to 50 years in prison.
Both Medtronic Africa and Medtronic International independently requested SARS to waive the interest resulting from the VAT underpayment. SARS responded by indicating that it did not have the authority to waive interest under the VDP.
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Medtronic was informed that it could either proceed with the VDAs and make full agreed payments with interest or choose to withdraw from the VDP.
The companies opted to continue with the VDP, leading to the execution of two VDAs, one for each entity. Medtronic International agreed to pay almost R457.6 million, which included VAT, understatement penalties, and interest.
The request
Upon completing the VDA, Medtronic International requested interest remission under the VAT Act, which SARS declined to entertain.
Medtronic International then sought a declaratory order from the Pretoria High Court to clarify that the Tax Administration Act (TAA) does not prevent a request for interest remission under the VAT Act. The case moved to the SCA, which concluded that SARS had a statutory duty to review the request for remission.
SARS subsequently sought permission from the ConCourt to appeal the SCA’s decision. The ConCourt granted the appeal, overturning the SCA’s majority opinion.
The issue
The pivotal question was whether a taxpayer who entered into a VDA under the TAA and agreed to pay interest could still seek interest remission under the VAT Act.
The SCA ruling did not provide a direct answer to this question, with the majority stating that the primary consideration was whether SARS could legally refuse to review Medtronic International’s request for interest remission.
The majority concluded that neither the VAT Act nor the TAA explicitly or implicitly prohibits a taxpayer who has completed a VDA from seeking interest remission.
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In a unanimous judgment, ConCourt acting deputy chief judge Mbuyiseli Madlanga expressed bewilderment about how this could be framed as the primary issue.
“If there is no authority to consider the request for interest remission under Section 39(7) of the VAT Act following the conclusion of a VDA, there is no reason to assess the request,” he stated.
The minority opinion concluded that the regulations governing the VDP “do not permit a taxpayer who has entered a voluntary disclosure agreement to seek remission of interest that was incorporated into the calculated tax liability after the conclusion of the VDA.”
The ‘centrepiece’
“I would contend that the minority’s position indicates that once you modify the fundamental terms of the ‘centrepiece’—such as interest payment provisions in the VDA—you effectively nullify the VDA,” Madlanga asserted.
Additionally, he remarked that the lack of clarity in the TAA concerning interest remission under the VAT Act does not inherently suggest that remission is granted post-conclusion of a VDA.
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The ConCourt concluded that by signing the VDA, a taxpayer explicitly agrees to its terms, including the interest clause, as prescribed by law.
It is illogical, if not contradictory, for a taxpayer to think that they could retract from the obligation to a specific interest rate and amount mandated by the VDP after committing to the VDA, Madlanga pointed out.
Standard wording
ENSafrica tax executive Charles de Wet noted that SARS asserts that VDAs (and settlement agreements) are standardized and that individual clauses are not negotiated.
“Given the court’s view that the signed agreement is binding for all parties, even amidst varying provisions across tax acts, taxpayers must ensure that every clause in their agreements with SARS aligns with their intended outcomes instead of simply accepting the standard SARS terminology,” he added.
De Wet further mentioned that this might discourage taxpayers from taking advantage of the VDP to rectify tax discrepancies, especially as finalizing a VDA without the standard limitations and full interest obligations could lead to significant financial burdens.
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