THE IMPORTANCE OF ADHERING TO LEGAL PARAMETERS

I recently encountered a situation with a multinational enterprise (MNE) client in Africa that underscores the importance of adhering to tax legislation when resolving disputes. The client was grappling with a revised tax assessment and was required to pay 30% of the revised amount to proceed with tax dispute resolution. However, financial constraints made this impossible.

In an attempt to alleviate the situation, an in-country shareholder with ties to the Commissioner of Taxes initiated informal discussions to reduce the payment to 10%. The Commissioner agreed to this reduction, suggesting that the dispute resolution process could proceed with a 10% payment.

However, this approach bypassed the formal application process, where the Commissioner has the discretion to reduce the payment based on evidence of financial hardship. Instead, the 10% was paid with a simple letter stating that only 10% could be afforded, without any supporting proof.

The Revenue Authority accepted the 10% payment but then requested an additional 10% to proceed. The taxpayer, dissatisfied with this outcome, sought legal advice to compel the Revenue Authority to accept the initial 10% suggested by the Commissioner.

This is where complications arose. The Commissioner had not lawfully exercised discretion as per the empowering laws, nor had he reviewed evidence to support the claim that a 30% payment was unaffordable. Consequently, if the taxpayer sought a judicial review of the Commissioner's decision, it would be too late to provide the necessary evidence to support their inability to pay the 30%. The court would likely find that the Commissioner had not properly applied his mind, leading to the decision being set aside, revoking the 10% payment, and reinstating the original 30% payment requirement.

This situation resulted in no resolution and unnecessary legal costs. The taxpayer's shortcut had backfired, highlighting the importance of following the legal path. After initial negotiations with the Commissioner, the taxpayer should have formally submitted a reduction of payment proposal with all supporting evidence. If the Revenue Authority then requested an additional 10%, the taxpayer could have launched a judicial review to challenge this request, not based on the Commissioner's word, but due to the Revenue Authority's failure to exercise proper discretion based on supporting facts.

Attempting to leverage connections with authorities outside the law's parameters is risky and often ineffective. Here are some reasons why such shortcuts do not work:

1. Legal Compliance:
   Negotiating outside the law can lead to legal disputes and non-compliance issues. Tax laws provide a clear framework for taxation, and deviating from this can lead to legal consequences.
2. Uncertainty and Unpredictability:
   Without adhering to existing laws and regulations, it becomes difficult to predict the outcome of negotiations and the resulting tax implications. This uncertainty can create financial instability and hinder effective tax planning.
3. Lack of Precedent:
   Tax laws are often built on precedents to ensure consistency. When negotiations deviate from these parameters, it becomes challenging to set a precedent for future cases, potentially leading to inconsistent tax treatment.
4. Enforcement Challenges:
   When negotiations deviate from established parameters, it can create challenges for authorities in enforcing tax compliance, leading to administrative difficulties and a lack of clarity in enforcing tax obligations.
5. Public Perception and Fairness:
   When taxpayers negotiate outside of legislative parameters, it can lead to perceptions of unfair treatment and erode public trust in the tax system.
6. Potential Abuse and Evasion:
   These negotiations can create opportunities for abuse and tax evasion. Without clear adherence to established laws, there is a risk of underreporting income or overstating deductions.
7. Lack of Transparency:
   It can lead to a lack of transparency in the tax assessment and settlement process, raising concerns about transparency and accountability in the tax system.
8. Complexity and Administrative Burden:
   Deviating from legislative parameters can introduce complexity and administrative burden for both the taxpayer and the revenue authorities.

It is thus crucial for taxpayers to work within the established legal framework and seek professional guidance to address tax issues within the bounds of the law.

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