The wheels of tax enforcement may turn slowly, but they do turn. This is demonstrated by the South African Revenue Service (SARS) securing a major Tax Court victory against a taxpayer linked to the controversial Chinese locomotive procurement deal of the State Capture era.
Junaid Bhayla
Team Lead: Tax Debts
In Taxpayer LE (Pty) Ltd v CSARS, the Tax Court confirmed additional assessments and an understatement penalty of 200% imposed on the taxpayer’s determined tax liability for the 2013 to 2018 years of assessment. SARS successfully came after the taxpayer years after the underlying transactions took place.
The ruling is a stark warning to taxpayers who believe time, complexity and procedural litigation can shield them from SARS indefinitely. While SARS may sometimes move slowly, once it begins following the money trail, it is relentless in its pursuit.
SARS Going Full Steam Ahead with State Capture’s Real Accountability
One of the most striking features of the judgment is how clearly it reflects SARS’s evolving role in the post State Capture era.
The case arose from locomotive procurement contracts linked to Marshall SOC Ltd, where SARS alleged that Taxpayer LE overstated its cost of sales and channelled funds through related entities to facilitate “kickbacks” tied to inflated procurement pricing.
SARS alleged that approximately R3 billion in costs had been overstated and that the taxpayer faced the disallowance of significant interest deductions and consultancy expenses, which SARS argued were not incurred in the production of income.
While criminal prosecutions linked to State Capture continue to move slowly through the justice system, SARS has increasingly become one of the first institutions capable of imposing meaningful accountability. Through additional assessments, penalties and interest, SARS can challenge taxpayers financially long before criminal liability is determined.
The scale of the allegations alone demonstrates how SARS is now approaching large scale matters through the lens of tax enforcement.
Section 99 Remains a Powerful Weapon for SARS
A central issue in the matter was whether SARS was entitled to reopen assessments that would ordinarily have prescribed under section 99 of the Tax Administration Act, No. 28 of 2011 (“TAA”).
The taxpayer argued that SARS had issued the additional assessments outside the normal three-year period permitted under section 99(1)(a) of the TAA and alleged that this was unlawful.
The Court, however, reaffirmed that prescription does not protect taxpayers where the failure to assess the correct amount of tax arose from fraud, misrepresentation or the non-disclosure of material facts.
Importantly, the Court accepted SARS’ position that the true facts only emerged after extensive investigations involving SARB, forensic investigations, exchange of information requests and wider State Capture related inquiries.
The judgment confirms an increasingly important principle in modern tax administration, being that taxpayers cannot rely on prescription where SARS later uncovers concealed or misleading information.
The Metcash Principle Still Governs Tax Disputes
The judgment also reaffirmed the long-standing principle established in Metcash Trading case, where the Court confirmed that a SARS assessment stands until the taxpayer proves it wrong, as the taxpayer bears the onus of proof.
Many taxpayers assume that SARS must first prove every aspect of an assessment before the taxpayer is required to respond, which is incorrect. Once SARS issues an assessment, the burden shifts to the taxpayer to demonstrate why the assessment is wrong.
You Cannot Escape the Long Arm of SARS
From reading the judgment, it is clear that the proceedings were marred by trivialities from the appellant, including attempts to have the President of the Tax Court recuse themself, disputing who should commence proceedings and putting forth arguments that certain documents SARS used, contained “hearsay contents, unproven contents, falsified contents, unrelated information, duplicated information and false information”. However, the taxpayer ultimately closed its case without leading evidence.
Despite trying several objections under law to delay proceedings, SARS would not be railroaded. In the end the court ruled that the assessment against the taxpayer stands.
While some taxpayers may seek to protract litigation proceedings and raise technical arguments before the substance is actually addressed, the Court repeatedly emphasised that procedural attacks cannot replace substantive evidence.
If a taxpayer wishes to challenge a SARS assessment, the taxpayer must place credible evidence before the Court to discharge the burden of proof.
SARS’ Imposition of 200% Understatement Penalties and Interest
After finalising its investigation and considering the facts at hand, SARS levied a 200% understatement penalty together with interest in terms of section 89quat(2).
The scale of the penalties is significant because it reflects SARS’s increasingly aggressive stance where it believes there has been deliberate concealment, inflated pricing or unlawful deductions. Taxpayers often underestimate how quickly interest and understatement penalties can escalate an already substantial liability into a financially catastrophic position.
In matters involving allegations of intentional tax evasion, SARS are clearly prepared to pursue the harshest available penalties at their disposal.
The Right Official, The Right Evidence and The Right Time
Another noteworthy feature of the judgment was the Court’s acceptance of the quality and depth of SARS’ investigation.
Central to the case was the evidence of Mr F, an experienced SARS official with approximately 31 years of service who formed part of the investigative team examining illicit financial flows linked to State Capture.
The judgment reads: “His evidence covered the background to the investigation, the methodology used to determine the taxpayer’s additional tax liability and the findings reached resulting in the additional assessment, of which a substantial component is made up of the alleged inflation of costs of sales.”
The Court repeatedly highlighted that SARS had undertaken an extensive and independent investigation into Taxpayer LE’s tax affairs and obtained information from various sources, including the taxpayer itself, before issuing the additional assessments.
SARS’ investigation through its Illicit Economy Unit (IEU) included requests for relevant material under section 46 of the TAA to a number of entities, including Marshall, the SARB, various commercial banks and several auditing firms.
The tax authority sourced information through an Exchange of Information (EOI) request made in terms of Article 24 of the Double Taxation Agreement (DTA) between South Africa and the Hong Kong Special Administrative Region in China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. Through EOI requests, the Inland Revenue Department of Hong Kong (IRD) provided SARS with financial records on several occasions between November 2020 and August 2022.
This culminated in the proceedings before the Court.
Ultimately, the taxpayer failed to discharge the burden of proof required to overturn those findings, and the Court confirmed the additional assessments as determined by SARS in terms of section 129(2)(a) of the TAA.
The Warning for South African Taxpayers
The broader message from this judgment is impossible to ignore, as SARS are becoming increasingly sophisticated, internationally connected and willing to pursue historic matters involving complex structures and politically exposed transactions.
Time is no longer the shield that many taxpayers once assumed it to be. While SARS may take years to build a case, moving methodically and quietly, they do so with sufficient particularity to ensure that there is no prejudice to the fiscus.
When SARS does eventually arrive, they do so with evidence from bank statements, treaty-based information exchanges, forensic investigations and experienced officials. The consequences of which can be severe for the mischievous taxpayer.
This judgment is a reminder that in modern South African tax administration, taxpayers may delay the process, but they should never mistake delay for escape.
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