Tucked away in the additional tax policy and administrative amendments contained in this year’s Budget Review is some good news for companies in business rescue.
National Treasury is going to revisit the circumstances under which the South African Revenue Service (SARS) may decide to write off temporarily an amount of tax debt while a company is subject to business rescue.
“If companies in business rescue are able to trade back to health without the noose of tax debts around their necks, this can only contribute towards a conducive environment for business recovery and economic growth in South Africa,” says Julia Choate, tax partner at law firm Bowmans.
She says the Tax Administration Act (TAA) gives SARS the discretion temporarily to write off an amount of debt if it is satisfied that the tax debt is uneconomical to pursue, or for the duration of the business rescue proceedings.
In practice, taxpayers have been unable to rely on this provision and are forced to approach the courts for relief. Choate says several cases are being prepared for court because of SARS’s attitude towards business rescue, which essentially prejudices the taxpayer’s ability to trade out of distress.
Insult to injury
To add insult to injury, SARS has the power to revoke a taxpayer’s compliance status if there is any outstanding debt. This makes it extremely difficult for a company to continue trading. It needs a tax clearance certificate to tender for new business, or if it is doing business with the government, to receive payment.
“There have been instances where we literally settled on the steps of court to have a client’s tax clearance reinstated because SARS’s conduct prejudiced the business,” Choate says.
The business rescue practitioner’s first task is to assess the business and to compile a business rescue plan to which the creditors must agree. It is the pre-commencement debt that must be dealt with. “Everybody’s going to have to agree to take a little bit of a haircut for this company to survive,” Choate says.
However, things are bogged down because of the inability to put in place a compromise or payment deferral arrangement with SARS and the reversal of the entity’s tax compliance status.
SARS is entitled to revoke a tax clearance certificate when there is non-compliance. However, a company should not have its tax clearance revoked when it has a tax debt that it cannot pay because of the financial distress it is experiencing.
Compromise or deferral of payment
Choate explains that SARS cannot revoke a tax clearance certificate if a tax debt has been suspended, or where SARS has not issued a decision on an application to suspend payment.
It may also not revoke a tax clearance certificate if the tax debt is subject to either a compromise or a deferral arrangement.
The problem is that there is a huge backlog in obtaining a compromise or deferral arrangement. Choate says she is aware of instances where it takes up to 12 or even 18 months to obtain a decision from SARS.
She says they have had discussions with SARS relating to the provisions in the TAA that allows it to offer a temporary write-off of the tax debt when the company is in business rescue.
It seems that SARS considers the provisions as an internal arrangement for its own accounting purposes. There also seems to be a reluctance to offer a compromise or deferral arrangement because of the potential abuse by unethical businesspeople.
“On the one hand, we really need to facilitate successful business rescue proceedings and not lose key businesses to the economy. At the same time, you can’t set a precedent where anybody can trade recklessly or engage in criminal activities and get a ‘get out of jail free’ card because they are in business rescue proceedings,” Choate says.
Tax and business rescue alignment
National Treasury’s commitment to review the discretion afforded to SARS represents a crucial step towards aligning tax administration practices with the objectives of the business rescue provisions in the Companies Act, Choate says.
“Such an amendment will hopefully prevent scenarios where SARS is compelled by legislation or policy to force viable businesses into insolvency due to their inability to secure a tax clearance certificate within a reasonable timeframe.”
She adds that it can be a win-win situation: the interests of distressed taxpayers are safeguarded and SARS and the fiscus benefit by prioritising extended repayment of tax debts over non-recovery when distressed taxpayers are liquidated.
A temporary write-off still leaves SARS in control of the process because it remains a creditor for the remainder of the business rescue proceedings. The mechanism may include the power to revoke a temporary write-off in certain circumstances, she says.
SARS can still pull the plug if it needs to, but at least the taxpayer is not left in a situation where it cannot go through business rescue because it cannot trade itself out of its financially distressed position.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
