SOUTH AFRICA: Can SARS Simply Throw ‘SUBSTANCE OVER FORM’ Out There – PART 1

SOUTH AFRICA: CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE – PART 1 1. It often happens that SARS simply ‘throws out there’ the threat of substance over form, when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is used as a ‘fall back’ additional reason for issuing a revised assessment, where their other substantive reasons are weak. 2. This modus operandi by SARS should be challenged, and can be achieved by applying the following measures:

a. The SARS Internal Audit Manual sets the internal SARS norm. The manual describes the norm practiced by SARS in the implementation of audits and enquiries. For SARS it creates a self-imposed limitation which SARS should not deviate from except for sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it does not apply these norms to all taxpayers undergoing audits or enquiries.
b. What follows are extensive extracts of these guidelines:

‘In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part.

…

SARS intends to give each taxpayer/group of taxpayers the attention which is necessary according to its tax importance and tax risk.

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The object of an audit is in general the examination of [a] tax return of a taxpayer and/or the books and records on which the tax return is based.

…

The risk profiling team will manually select cases to be audited by screening the tax returns in order to determine the level of risk per case, and to establish which cases warrant an audit (desk or field) selection will be done under the guidance and ambit of the Manual Risk document.

The Audit Assignment

The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit.

The audit assignment is thus the link between the audit plan and the auditing process.

2. Stage 1: AUDIT PLANNING

… The team leader will have to prioritise each case assigned. All decisions taken at this stage of the audit process and all information and considerations on which decisions are based, are recorded in the audit file.

Pre-planning

Not as critical in our environment, although the following two components of pre-planning should still be relevant:

• An engagement letter informing the taxpayer of the audit, i.e. notice of the intention to audit, when, purpose, approximate duration, information required and other general aspects.
• Allocation of staff in respect of the specific engagement.

Collecting Information

Prior to the audit, information will have to be collected, on the taxpayer to be audited, as this will provide inside into the entity.

• Information on the taxpayer himself. Obtained from the existing tax files of the taxpayer. …
• Information from other sources (third parties) …
• Information on the business processes, administrative organisation and the internal control of the entity. …
• Information from minutes of meetings e.g. board of …
• Information from the file of the tax consultant and/or accountant/ external auditor of the taxpayer. …

The auditor should restrict the initial information collected to the potential issues of the relevant case, which will be of value to the audit of the risk areas identified.
…

Carrying out the preliminary analytical review

The purpose of this exercise is not to produce volumes of interesting, but ultimately useless information.

… The preliminary review may require that the auditor researches the tax laws and court cases that are relevant to particular issues to be examined in the audit of the entity. Notes on the research are incorporated into the audit working papers.’

Risk analysis based on the tax return

In determining which activities will be carried out to achieve the audit objectives, the team leader continually considers the relationship between the cost and the benefits of the audit …

3. Stage 2: THE IMPLEMENTATION OF THE AUDIT PROGRAMME …

The general rule is as follows:

• Where the auditor finds no or immaterial mistakes or errors, the audit in that particular area should be stopped.
• Where many material mistakes or errors are detected, the audit should be expanded in that particular area.
• If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated.

The auditor must consider whether advice or support from a well-informed colleague is necessary. Consultation with colleagues will ensure that the auditor is better informed when making decisions.

All decisions at this stage of the auditing process, as well as the information and considerations, on which they are based, are recorded in the audit file. Sampling techniques are encouraged while performing the audit.’

4. Stage 3: CONCLUSION

In this stage of the auditing process the auditor in charge reviews and summarises the findings of the audit and forms a conclusion based on these findings.

During the discussion with the taxpayer the auditor informs him of the conclusions reached on the tax return(s) and explains the decision. If the taxpayer does not agree with the judgement, the auditor listens to the reasons and considers whether these reasons may call for an adjustment of the conclusion. If it is decided that no adjustment is required, bearing in mind the outcome of previous consultation with colleagues, the auditor discusses the taxpayer’s reason and arguments with the audit manager.

Where compromises are reached, they are recorded in the file and included in the report. SARS and the taxpayer should sign the compromises.

After the concluding discussions with the taxpayer and the audit manager, the position of SARS is determined. There are two possibilities:

• No further action is required; or
• The results of the audit necessitate further action, which usually involves adjustment of the assessments as well as the levying of interest, penalties and additional tax.

In some instances this is not sufficient and it is necessary to extend the audit to the criminal domain. This calls for a change in the nature of the audit. The timely recognition of such a change, is an essential element of the auditing process. Refer to part 7 of the audit manual.

The audit report is completed and forwarded to the team leader who reviews, monitors and controls the completion and quality of the audits being performed. The team leader communicates the relevant findings to the research and analysis team and the risk evaluation committee.’

TO BE CONTINUED...in PART 2