The Purpose of the VDP
The VDP administered by SARS exists to:
- Enhance voluntary compliance with tax laws.
- Promote efficient tax administration by allowing taxpayers the opportunity to rectify past non-compliance.
- Provide relief from understatement penalties while ensuring tax obligations (including imposition of interest) are met.
- Offer certainty and finality in tax disputes through binding Voluntary Disclosure Agreements (VDAs) between SARS and taxpayers.
Notwithstanding these principles, and as the as the Medtronic case illustrates, VDP agreements are not open to renegotiation, particularly where interest obligations arise under tax laws.
Must the Appeal Succeed?
In this case, it was common cause that the VDA concluded between the SARS and the taxpayer was valid. A key issue considered by the court was whether the taxpayer could later apply for remission of interest, despite having expressly agreed to it in the VDA.
The taxpayer’s obligation to pay interest arose under section 39 of the Value-Added Tax Act, No. 89 of 1991 (the “Act”), which obligation was not discretionary—it arose automatically by operation of the Act. Further, this was an express term of the VDA.
Section 39(1)(a)(ii) of the Act states that interest “shall” be payable, which the court interpreted as a peremptory provision, meaning SARS has no discretion to waive said interest unless explicitly provided for by statute.
The court emphasized this point in its judgement, stating:
“Agreement in a VDA by a taxpayer to pay interest is an agreement to pay something that section 39 peremptorily requires to be paid.” (Paragraph 31)
Practically, this means that a taxpayer cannot conclude a contract which contradicts a statutory obligation, nor can a court remit interest which arises by operation of law.
The Principle of Pacta Sunt Servanda
The court further addressed a fundamental principle of South African contract law, namely the “pacta sunt servanda” (agreements must be honoured) principle, emphasizing that:
“The VDA is a binding agreement entered into voluntarily by the taxpayer.
By signing the VDA, the taxpayer categorically accepted all its terms, including the interest obligation. The taxpayer’s later attempt to renegotiate the interest provision ran contrary to pacta sunt servanda, which ensures the sanctity of contracts and promotes legal certainty.
Allowing a taxpayer to challenge an agreed obligation post facto would create instability in SARS’s enforcement of the VDP and could undermine the entire voluntary disclosure framework.”
The Risks of Medtronic International’s Interpretation
The court proceeded to highlight the dangers of the taxpayer’s interpretation of the VDP and section 39(7) of the Act, ruling that:
- It renders the VDP susceptible to bad faith, as taxpayers could attempt to avoid legal consequences after receiving benefits under the programme.
- It undermines the certainty and integrity of the VDP, which relies on taxpayers honouring their agreements.
- It creates unnecessary legal uncertainty, which runs contrary to the VDP’s purpose of providing a clean slate for compliant taxpayers.
The Broader Policy Rationale
The court’s judgment in this case confirmed and reinforced the policy purpose behind VDPs, which are designed to:
- Regularize tax affairs by allowing taxpayers the opportunity to rectify past non-compliance.
- Provide a clean slate for taxpayers who voluntarily disclose tax defaults and meet the programme’s requirements.
- Ensure SARS collects outstanding tax liabilities, including interest, which is a statutory obligation and not subject to discretion.
This ruling further reiterates the principle that interest arising under our tax laws is not a penalty, nor is it negotiable—it is compensation for the time value of money and an inherent consequence of late payment.
Key Takeaways
This case serves as a critical reminder to taxpayers that while interest arising in terms of legislation is a statutory obligation, and not up to SARS’ discretion. Further, taxpayers will be held to the terms they agreed upon with SARS in a VDA, while attempts to undermine the spirit and purpose of VDPs will be quashed.
Engaging with SARS under the VDP framework requires a clear understanding of both the legal and financial consequences of any ensuing agreement. Once a taxpayer signs a VDA, they are bound by its terms—including the obligation to pay interest.
Given the complexity of South Africa’s tax laws and the strict statutory provisions governing voluntary disclosures, taxpayers should seek expert legal advice before entering into a VDA. An experienced tax attorney can:
- Ensure full compliance with the VDP’s requirements.
- Mitigate risks by reviewing all terms before an agreement is signed.
- Engage with SARS on the taxpayer’s behalf, ensuring clarity on obligations.
- Advise on any legal remedies available in cases of dispute.
Due to the technical nuances involved, taxpayers should not navigate the VDP process alone. Enlisting representation from skilled and experienced tax attorneys is crucial to securing the intended relief while avoiding unforeseen liabilities.
Medtronic International v The Commissioner for the South African Revenue Service 33400/19 ZAGPPHC
A link to our previous article discussing the original Pretoria High Court case from 2020 may be found here.
