An employee of the Medtronic Group embezzled R537 million. She exploited the group’s weak accounting system by making payments from one of the group’s bank accounts to her late husband’s bank account and concealed the crime by submitting false VAT returns to SARS. Consequently, Medtronic sought reimbursements from the South African Revenue Service (SARS) for VAT payments which it had not made.
Medtronic’s employee went to prison for her crime and the company brought a voluntary disclosure programme application (VDP) for R457 million in VAT, understatement penalties and interest. SARS entered into a voluntary disclosure agreement (VDA) with Medtronic where it granted Medtronic 100% relief from administrative non-compliance penalties and agreed not to pursue criminal prosecution against Medtronic. No relief was granted in respect of interest on the tax debt as the VDP rules do not provide for this.
After concluding the VDA Medtronic applied for a remission of the interest under section 39(7) of the Value Added Tax Act, 1991 (VAT Act), which SARS refused. Medtronic successfully reviewed and set aside SARS decision in the High Court. SARS’s appeal to the Supreme Court of Appeal was dismissed and thereafter it appealed to the Constitutional Court in the matter CSARS v Medtronic International Trading S.A.R.L.
The Constitutional Court had to decide whether, once a VDA has been concluded, SARS has the power to remit interest in terms of section 39(7). If SARS has no such power, it would be the end of the matter. If SARS does have such power, it would have to exercise such power either for or against the remission of the interest.
The court pointed out that the Tax Administration Act’s (TAA) silence on remission of interest in terms of section 39(7) of the VAT Act does not of necessity lead to a conclusion that it permits remission post conclusion of a VDA. When a disclosure for a VAT default is made in a VDP with a view to concluding a VDA, interest is automatically on the table. If a taxpayer is more than one month late with their VAT payment, interest is automatically payable on the VAT amount in terms of section 39(1)(a)(ii). When it comes to the interest provision, a taxpayer concluding a VDA, according to the court, “does so with her or his eyes wide open” and “there can be only one conclusion, and that is that the taxpayer accepts this provision and considers her- or himself bound by it”.
When a taxpayer signs a VDA it accepts its terms, including the statutorily imposed interest provisions. It would be illogical, the court held, if a taxpayer commits to a statutory interest rate in a VDA and there “is still room to walk away from that categorical commitment”. When SARS concludes a VDA it is obliged not to pursue criminal prosecution and provides relief from penalties. SARS does this not only because the TAA requires it, but because it believes the terms of the VDA are binding. The commitment to pay interest is a material term of a VDA, and if removed the rest of the agreement cannot remain binding on SARS. Once concluded, a VDA cannot not be undone by a remission of interest through section 39(7) of the VAT Act.
The Constitutional Court concluded that to allow a taxpayer to conclude a VDA which makes provision for interest and, at the same time, to allow the taxpayer subsequently to deal with issues relevant to interest separately, leads to a glaring absurdity. A VDA binds the parties and must be enforceable on all its terms. The principle of pacta sunt servanda (agreements must be honoured) applies. SARS therefore succeeded with its appeal.
Tel: +27 31 570 5496, Email graeme.palmer@gb.co.za
