Tax prescription period a confusing and contentious issue

This week I decided to take a break from writing about mid-term fiscal policy issues knowing very well some of these issues might be changed. Going through some of my work for the month of July 2019, I thought I should air my views on the issue of prescription period. That month alone I handled about three tax cases involving the Commissioner lifting immunity on the prescription period. Prescription is about rights that have come into existence but have ceased to exist by the passage of time. As part of our law creditors are barred from making claims beyond a certain period. More precisely, the Income Tax Act prohibits the Commissioner from raising assessments on taxpayers beyond 6 years except in exceptional circumstances as more fully explained below. In turn, taxpayers are also prohibited by the same Act from raising claims against the State after the expiry of six years prescription period.

A justification for prescription period is on the pretext that the ‘society is intolerant of stale claims’.  Businesses need to be certain, beyond a certain period there will not be some surprise claims from the State. In Road Accident Fund & another v Mdeyide [2010] ZACC 18; 2011 (2) SA 26 (CC) the judge stated that “… The realities of time and human fallibility require that disputes be brought before a court as soon as reasonably possible … If a claim is not instituted within a fixed time, a litigant may be barred from having a dispute decided by a court…” If a claim is delayed, it damages the interests of justice, thereby prolonging the uncertainty of all concerned about their affairs. Witnesses may no longer be available to testify or their memories could have faded and become unreliable. Documentary evidence may have disappeared or even archived. This point holds truth because our law requires documents to be kept for a minimum of 6 years. The same reasoning was put forward in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541, where the judge said that: “The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one… First, as time goes by, relevant evidence is likely to be lost. Second, it is oppressive, even cruel, to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed. Third, people should be able to arrange their affairs and utilize their resources on the basis that claims can no longer be made against them … The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible … A limitation period … represents the legislature‘s judgment that the welfare of society is best served by causes of action being litigated within the limitation period…” Whilst the context in which the reasoning was given was in relation to prescription in civil actions, the same principles apply in the case of tax assessments.

There are however exceptions to the prescription period in instances where a taxpayer is found to have been fraudulent, misrepresented or to have wilfully failed to disclose facts that are material to the determination of tax. The terms fraud, misrepresentation or wilful non-disclosure are not defined in the taxes law. A misrepresentation however it is generally known as a factual statement concerning a certain state of affairs but is not true and has its roots in the law of contract. Common law recognises 3 types of misrepresentation, that is, fraudulent misrepresentation; negligent misrepresentation and innocent misrepresentation. Fraudulent misrepresentation is one made “knowingly; without belief in its truth or recklessly, careless whether it should prove to be true or false”. Negligent misrepresentation is one made honestly, but carelessly. An innocent misrepresentation is one made without fraud or negligence. Nonetheless, all 3 circumstances must meet certain requirements to be considered misrepresentation, however the consequences of misrepresentation differ across the 3 types, with fraudulent having more severe consequences whilst innocent has the least. Misrepresentation implied by the tax law is one bordering on criminality and not innocent misrepresentation.

It was highlighted in ITC 1470 (52 SATC 88) that the Commissioner must communicate in writing to the taxpayer his findings giving rise to the additional assessment failing which the assessment will be unlawful. He must provide evidence that he was satisfied that the circumstances for lifting the six year prescription period existed and should state the particular conduct of the taxpayer supporting that conclusion of fraud, misrepresentation or non-disclosure (ABY Limited (in Liquidation) v CSARS ). Proof is not a mere allegation of misrepresentation. It must be followed by a positive investigation on the affairs of the taxpayer. In the case of non-disclosure, the facts must be material. It was said in Corbett JA in Natal Estates Limited v SIR [1975] 37 SATC 193) that the Commissioner’s satisfaction as to the circumstances cannot be presumed from the correspondence and actions taken by SARS –it is a ‘substantive and far-reaching determination, which should be communicated to the taxpayer’. Although the Zimbabwean tax law does not expressly require communication of the Commissioner’s state of mind, the courts have made it clear repeatedly that the Commissioner’s right to disturb the taxpayer’s immunity from reassessment can only be exercised if the Commissioner has satisfied himself. Every assessment must be supported by a reason for assessment and where the reasons are not supplied it is incumbent upon ZIMRA to do so promptly upon request by a taxpayer.  The onus is on the Commissioner to prove the act alleged to be committed by a taxpayer. An allegation of misrepresentation cannot be made in a vacuum and then place the burden on the taxpayer to prove non-liability. Where an allegation of fraud has been made, it follows that that the requirements of fraud must be met. Over and above the investigations carried out by ZIMRA, a docket may well be opened resulting in prosecution for the criminal offence of fraud. Wilful non-disclosure of material facts may overlap to include fraud as well. Once it has been established that information was purposefully withheld by a taxpayer resulting in the Commissioner failing to assess the correct tax and the taxpayer having the intention to defraud the Commissioner, it flows that the taxpayer may well be guilty of the criminal offence. In conclusion we urge the tax authorities to desist from reopening assessments beyond the 6 year prescription in order to bring certainty and not cripple business planning as a result of unanticipated tax liabilities. It would be in the interest of both the tax authorities and taxpayers if affairs were to be investigated on time should there be suspicion of any wrong doing by the taxpayer.

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