South Africa has concluded double tax agreements with a number of countries, the primary purpose being the prevention of double taxation.
In terms of South African law, a double tax agreement approved by Parliament has the force of South African legislation. SARS therefore contended that the relevant provisions of the Income Tax Act had to be read in the context of the double tax agreement’s information exchange provisions.
The agreements essentially divide up the taxing rights between the contracting countries, in situations where they might both claim such rights.
Another purpose to these agreements is the prevention of tax evasion by taxpayers of the contracting countries, says Tim Desmond, director in the tax and commercial departments at Garlicke & Bousfield Inc.
The prevention of tax evasion aspect requires the exchange of information by the two tax authorities.
In the case of The Commissioner for the South African Revenue Service (SARS) v Werner van Kets, the Western Cape High Court considered some practical aspects of information exchanges.
The Australian Tax Office (ATO) requested information from SARS on a person suspected of evading his Australian tax obligations.
The request was made in terms of the applicable double tax agreement.
The information was known to a South African resident: Werner van Kets and in seeking the information from Van Kets, SARS relied on provisions of the Income Tax Act requiring the furnishing of information to SARS.
SARS’ request was refused by Van Kets.
He argued that the provisions of the Income Tax Act did not apply in the circumstances.
He contended that they only applied to information required in respect of a South African taxpayer.
On that basis, the provisions could not be utilised to obtain information on an Australian taxpayer.
A strict reading of the relevant provisions appeared to favour Van Kets’ contentions.
SARS then argued for a wider interpretation.
In terms of South African law, a double tax agreement approved by Parliament has the force of South African legislation.
SARS therefore contended that the relevant provisions of the Income Tax Act had to be read in the context of the double tax agreement’s information exchange provisions.
If a strict interpretation was applied, SARS would practically have no way of obtaining information requested by the ATO.
The High Court accepted SARS’ arguments.
It found that the provisions of the double tax agreement and the Income Tax Act should, if at all possible, be reconciled and read as a coherent whole.
This required that the relevant provisions of the Income Tax Act be applied to all taxpayers falling within the scope of the double tax agreement, including Australian taxpayers.
SARS’ information request was therefore valid and Van Kets was ordered to comply with it.