TAX AVOIDANCE &

TAX EVASION

Chapter 7
INTRODUCTION
• Generally, a taxpayer can enter into bona fide transaction which has the effect of
avoiding/reducing tax liability.
• Provided the law does not prevent the avoidance and reduction.
• See Duke of Westminister v IRC = principle.
• Tax avoidance means a situation where taxpayer arranges affairs in a legal manner where
income is reduced or no income is taxable.
TAX EVASION V TAX AVOIDANCE
• Tax evasion refers to illegal activities deliberately undertaken by a taxpayer to free
themselves from a tax burden.
• Examples: non-payment of tax when there is an obligation.
• Tax evasion characterized by: fraud & deceit, falsification of returns, conclusion of sham
transactions, the deliberate non-disclosure of income or deliberate overstatement of
deductible expenditure.
• For instance, taxpayer omits income from annual tax return. Penalties per sec 234 & 235 of
TAA.
EFFECTS OF TAX AVOIDANCE
• Revenue loss;
• Poor tax compliance;
• Uneconomic allocation of resources;
• Pressure on marginal tax rates;
• Unfair redistribution of the tax burden;
• Inability of Parliament & National Treasury to set & implement economic policy
EXAMPLE
• Paul, a medical doctor, runs a medical practice in Pretoria. He charges R3 000 for an initial
consultation. Patients are required to pay the consultation fee on arrival. Paul instructs his
secretary to request certain patients to pay cash instead of paying directly into the practice’s
business account. Other patients pay for the consultation via the POS (point-of-sale)
system. An unhappy patient asks his friend, a SARS official, if this is standard practice. The
SARS official advises the patient that a tax crime may have been committed. The SARS
official launches an audit into the affairs of Paul’s medical practice. The audit finds that Paul
has been willfully omitting to pay tax and that the practice was set up to evade tax liability.

• Advise Paul on SARS’s claim that his practice was set up to evade taxes.
IMPERMISSIBLE TAX AVOIDANCE
ARRANGEMENTS

• GAAR Section What is governed by this section?

• Section 80A Impermissible tax avoidance arrangement

• Section 80B Tax Consequences of Impermissible tax avoidance

• Section 80C Lack of commercial substance

• Section 80D Round Trip Financing

• Section 80E Accommodating or tax-indifferent parties

IMPERMISSIBLE TAX AVOIDANCE
ARRANGEMENTS

• THE TEST:

• (1)Was an “arrangement” entered into?

• (2) Is the result that a tax benefit is obtained?

• (3)Was the sole or main purpose to obtain a tax benefit?

• (4)Is there lack of commercial substance?

IMPERMISSIBLE TAX AVOIDANCE
ARRANGEMENTS
• Section 80A –80L = General Anti Avoidance Rules (GAAR). Applies from after 1 Nov 2006.
• What is an “impermissible avoidance arrangement” in terms of Section 80A?

If the sole or main purpose was to obtain a tax benefit AND

(a) In the context of business;
(i) It was entered into/carried out by means or in a manner which would not normally be
employed for bona fide business purposes (other than obtaining a tax benefit) or
(ii) It lacks commercial substance, in whole or in part, taking into account provisions of
section 80C.
IMPERMISSIBLE TAX AVOIDANCE
ARRANGEMENTS
(b)In a context other than business, it was entered into/carried out by means or in a manner
which would not normally be employed for bona fide purposes (other than obtaining a tax
benefit) OR
(c)In any context:
(i) It created rights/obligations that would not normally be created between persons
dealing at arms length;
(ii) It would result directly/indirectly in the misuse or abuse of provisions of this Act.
REQUIREMENTS
Requirement 1 (arrangement)
• Any transaction
• Any operation
• Any scheme
• Any agreement
• Any understanding
• Any foregoing involving the alienation of property
REQUIREMENTS
• Requirement 1 (arrangement)
• Question: whether the particular step is commercially necessary in achieving the intended
final commercial result, or whether it could be dispensed with without affecting the
commercial result.
• In Meyerowitz v CIR, it was held that the term “scheme” = covers series of transactions and
is wide enough to cover situations in which later steps in a course of action were left
unresolved at the outset.
REQUIREMENTS
Requirement 2 (tax, tax benefit, and avoidance arrangement)
• “Tax benefit” refers to any avoidance, postponement or reduction of any tax liability.
• “Tax” means any tax, levy or duty imposed by the Act or any other law administered by the
commissioner.
• In the Canadian case of Copthorne Holdings Ltd v Canada (2011 SCC 63), it was held that when
looking at whether a “tax benefit” materialized, it is important to consider a taxpayer’s situation
with an alternative arrangement. Consider whether a different outcome would have reasonably
been carried out but for the existence of the tax benefit.
• The Commissioner needs to show what transaction or arrangement would otherwise have been
entered into.
REQUIREMENTS
Requirement 3 (Sole or main purpose)
• The sole or main purpose was to obtain a tax benefit.
• Section 80G(1) = presumption.
• Onus on taxpayer or relevant party to show that scheme was not entered solely for avoiding
tax.
• Objective test = see SIR v Gallagher. See also Sec80A
REQUIREMENTS
Requirement 4 (lack of commercial substance)
• S80C(1)
• An avoidance arrangement lacks commercial substance = results in a significant tax benefit for a party but
the avoidance arrangement does not have a significant effect upon either the business risks or the net cash
flow of the party.
• Sec 80C(2): examples
• The legal substance or effect of the avoidance arrangement as a whole differs significantly from the legal
form of its individual steps.
• Round-trip financing
• Accommodating or tax indifferent party.
• Inclusion or presence of elements that have the effect of offsetting or canceling each other.
ROUND TRIP FINANCING
• S80D(1)
• Round-trip financing:
- Funds are transferred between or among parties; and
- Transfer would result in a direct or indirect tax benefit, and significantly reduce, offset or
eliminate any business risk by any party in connection with the avoidance arrangement.
• Applies to any round-tripped funds.
• No genuine business arrangement.
CONSEQUENCES OF THE APPLICATION OF SS
80A TO 80L
• Tax consequences under the Act may be determined as if the transaction has not been
entered into or carried out.
• Other remedies include:
- Disregard or combine any steps in or parts of the arrangement;
- Disregard any accommodating or tax indifferent party or deem the party and any other party
as one and the same person;
- Connected persons = one and the same;
- Re-classify income, receipts etc
REPORTABLE ARRANGEMENTS
• Ss 34 – 39 of TAA
• Purpose: to enable Commissioner to evaluate them for anti-avoidance point of view at an
early stage of the implementation.
• Obligation to disclose (s 37)
• What is a reportable arrangement? (s 35)
• Excluded arrangements (s 36)
• Information to disclose (s 38)
ASSESSED LOSSES (103(2))
• Section 103(2)
• Prevents tax avoidance specifically for assessed losses.
• Tax advantage = buying a Co. with assessed loss. Taxable income diverted to entity to set-off
against the assessed loss.
ASSESSED LOSSES (103(2))
• Requirements:
• Agreement affecting company/trust or a change in the shareholding of any company; or
members interest in any company that is a close corporation; or trustees or beneficiaries of
any trust.
• Must result in a receipt or accrual of income.
• Purpose to use assessed loss or reduce a tax liability.
• If all above requirements are met, no income may be offset against assessed loss.
ASSESSED LOSSES (103(2))
• Section 103(4)
• Presumption that agreement has been entered into for the sole purpose of using the
assessed loss to avoid liability or reduce liability.
CASE LAW
• ITC 1388
• ITC 983 & ITC 989
• New Urban Properties v SIR
• ITC 1123
• Glen Anil Development Corporation v SIR
• ITC 1347
• Conshu v CIR
• CSARS v Digicall Solutions (Pty) Ltd
SUBSTANCE OVER FORM
• When considering substance over form, the courts look at the substance of the scheme and
ignore the form of the scheme. In other words: what is the true intention of the parties?
• Erf 3183/1 Ladysmith v CIR
• CSARS v NWK Ltd
• CSARS v Bosch
• Roshcon v Anchor Auto Body Builders
• Sasol Oil v CSARS
CRYP TOCURRENCIES & TAX AVOIDANCE
• Cryptocurrencies definition.
• Changed to crypto asset.
• There are different types of cryptocurrencies.
• Pseudonymity
• Decentralisation
• No uniform definition
• Different legal bodies
• Different tax laws
CRYP TOCURRENCIES & TAX AVOIDANCE
• Peer-to-peer
Who are the parties?
- Users
- Miners
- Exchange platforms
- Merchants
CRYP TOCURRENCIES & TAX AVOIDANCE
The positives
- No transaction fees;
- Fast;
- Cross-border;
- Limited/no interference from authorities.
- Privacy.
CRYP TOCURRENCIES & TAX AVOIDANCE
• The negatives?
• Electricity
• Regulation?
• Identity – tax liability – assessments – collect – public expenditure
• Decentralisation
• Man power?
• Political will?
• IT?
• Skilled personnel?
• Possible solution? – Target entities (regulation)