The value of a good legal tax opinion
Several taxpayers find themselves in dispute with the South African tax authorities (Sars), despite having obtained legal advice on the tax position they have taken.
Only in very limited cases should Sars remit an understatement penalty where the taxpayer is in possession of legal advice from a registered independent tax practitioner, warns Peter Dachs, an executive at ENSafrica.
“A tax opinion can only get you so far. We are seeing more cases where the client did not follow the correct advice or ignored the advice, or the facts were incorrect. They find themselves in conflict with Sars.
Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC, says this becomes relevant when Sars wants to impose a penalty.
The penalty must be remitted if the taxpayer obtained the opinion of a registered tax practitioner, it was done before the due date of a tax return and the opinion was based on all facts relevant to the taxpayer’s affairs , she says.
Keith Engel, CEO of the South African Institute of Taxation, says the value of a good opinion is not whether the tax liability would be lower if a certain tax position were taken. The question is whether the opinion will survive judicial review.
“A good opinion should reassure you. It’s more of a risk assessment than a green light,” he says.
“The ultimate test of whether it’s a good opinion is when the judge rules in your favor.”
Dachs says it’s important for taxpayers to read and understand their opinion. Tax advisers may make assumptions about facts. “If the taxpayer does not read it carefully and ensure that the facts on which the opinion is based [are] absolutely right, the advice could be wrong.
It is also important to carefully consider the findings. In some cases, the conclusion of the tax result is “all things considered” as opposed to a definitive result. People think they have a “positive” opinion and stick it somewhere in a folder.
Sars can always disagree with the opinion, argue that it is an “all scales” opinion anyway, and issue an assessment. The case may end up in Tax Court, which is an arduous process.
Beware of expressions such as “it’s debatable”. Pay attention to the strength of the conclusion on all aspects, advises Dachs.
Alarm bells should ring if the tax advisor has not taken into account the far-reaching anti-tax avoidance provisions. These must be taken into account in each tax opinion.
“If Sars attacks the transaction on anti-avoidance rules, there is no waiver of penalties,” Dachs says.
It remains important to obtain advice, particularly when the taxpayer wants to enter into a large and complicated transaction.
“If the tax consequences are unfavorable, the taxpayer can either walk away or seek advice on how to better structure the transaction. It is possible that the transaction will lead to double taxation or even layers of taxation and it simply becomes unprofitable to pursue it. Taxation can kill transactions.
If it is a major operation, it is preferable to contact tax specialists specializing in a particular area of taxation rather than a general tax specialist. It’s almost like going to see a medical specialist rather than a general practitioner.
Quite often, taxpayers will seek a second opinion on big issues. “The customer will end up with two opinions. If they don’t come to the same conclusions, the taxpayer may rightly get a little nervous,” says Dachs.
Rossato advises taxpayers to ensure that the tax expert is proven and independent of the taxpayer.
The expert should consider the most recent legislation and case law, provide an accurate account of all facts relevant to the issue at hand, and include a discussion of the taxpayer’s case strengths as well as weaknesses.
“When in doubt, get a second opinion,” she says.
In many cases, taxpayers do not have a large budget to spend on small transactions and can only get one opinion. They can end up with someone who doesn’t have the expertise and the result is an opinion that’s just plain wrong, Dachs says.
“There are millions of small transactions and the taxation is complicated. I’m afraid there are opinions where people just miss things.
While this leaves them defenseless against Sars, they potentially have a claim against whoever gave them the notice. It doesn’t really help them if the tax practitioner does not have liability insurance.
Sars won’t think the taxpayer “at least tried.” He will enforce the law.
The goal of a good opinion is an appropriate risk assessment, with the position standing firm if challenged because of the strong foundations on which the opinion is based, says Engel.