EMPLOYMENT TAX INCENTIVE

In a victory for the taxpayer, the Eastern Cape High Court, sitting in Gqeberha, heard the matter of Total Human Resources CC v Commissioner for the South African Revenue Service Case No. 776/21. The court was asked to consider whether outstanding Employment Tax Incentive (“ETI”) Credits, which had remained unpaid, should accrue interest.

It should be noted that the purpose of the ETI scheme (and by implication the credits) is to reduce the overall pay-as-you-earn obligations of a taxpayer. This is in line with a legitimate government purpose to up-skill young unemployed South Africans. However, in this instance and for a period of 18 months, the South African Revenue Service (“SARS”) failed to pay ETI credits that were due to the taxpayer.

The taxpayer argued successfully that the general interest provisions of the Tax Administration Act 28 of 2011 (“TAA”) were applicable in relation to the Employment Tax Incentive Act 26 of 2013 (‘ETI Act”) refunds. With the court establishing that the TAA applies, the main question to be answered by the court was at which point in time the interest would begin to run having regard to section 190(1) of the TAA.

In order to determine when the interest should have begun to run, the taxpayer successfully relied upon paragraph 14(3) of the 4th Schedule to the Income Tax Act 58 of 1962 (“ITA”). This paragraph sets out when EMP 501 reconciliation returns ought to be submitted by taxpayers. The taxpayer was of the view that interest should run from the day after such a return has filed its EMP501. The Court agreed with the taxpayer and therefore held that the first day after the last day in which a taxpayer has to file its EMP501s is the appropriate period as to when interest should begin to run on any ETI credits.

This means that should a taxpayer have an ETI credit available to them, the interest begins running from the first day after the last day it has to submit its EMP501 for the relevant period. The rate is the prescribed legal rate of interest as determined by the Minister of Justice from time to time.

The court made important remarks as it relates to interest on refunds which are subject to audits/verifications:

“Were it accepted that interest is payable upon finalisation of the verification process, or an audit, in the particular circumstances of this case, it would create a lacuna. This could not have been the intended, or even desired result”

The above remark by the Court reinforces the position that regardless of whether a refund is subject to verification or audit, the interest on that amount continues to run and accumulate. Put differently, the interest benefit is not suspended as a result of an audit/verification. As the court put it: “such a proposition would lead to absurdity”.

The effect of this judgment on the ETI refund landscape is important. Firstly, it confirms with finality the entitlement to interest on ETI credits. Secondly, the judgment confirms that interest is determined in terms of section 187 – 189 of the TAA, and the relevant procedures associated thereto. Thirdly, it clarified when interest begins to run. Finally, the judgment provides vital clarity on the interaction between SARS audit/verification processes and the running of interest.

At TRM we have a dedicated team of tax specialists that have extensive experience in dealing with ETI-related issues and disputes pragmatically and efficiently. Please feel free to get in touch should you need any assistance.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.