TRYING TO SETTLE TAX DISPUTES OUTSIDE THE PARAMETERS OF TAX LEGISLATION

Written by Prof. Dr. Daniel N. Erasmus

This reminds me of a recent issue raised by a client MNE in Africa. The taxpayer was facing a revised tax assessment and had to pay 30% of the revised assessment to advance the matter to tax dispute resolution, i.e. object and then follow the tax dispute resolution process. The taxpayer was not in a financial position to do so. Hence, an in-country shareholder with a relationship with the Commissioner of Taxes was asked to enter into ‘off the record’ discussions to see if the 30% could be reduced to 10%.

Informal discussions were had, and the Commissioner suggested that the 10% should be paid and that the matter would most likely be able to proceed through the tax resolution process.

You see, in a formal application for a reduction of the 30% payment the Commissioner has a discretion, which must be motivated with supporting proof of the inability to pay the 30%.

Due to the informal discussions with the Commissioner, this did not happen. The 10% was paid under a covering letter simply stating without proof that only 10% could be afforded. After all, the Commissioner suggested this!

Well, the 10% was paid and the Revenue Authority immediately came back accepting the payment and asked for another 10% and matters would be able to proceed. Unhappy with the outcome, the taxpayer sought legal advice to compel the RA to accept the 10% suggested by the Commissioner.

Here the problems arose.

The Commissioner had not exercised a lawful discretion in terms of the empowering laws. He had not reviewed the key evidence that a 30% payment could not be afforded. Thus, if the taxpayer had approached the courts to judicially review the Commissioner’s decision, it would be too late to provide the actual documentary evidence to substantiate the reasons for not being able to pay the 30%. Thus the court would most likely find that the Commissioner had not applied his mind properly and that the entire decision be set aside revoking the 10% payment and the claim for another 10% placing the taxpayer back in its original position to pay the full 30%.

No result and wasted legal costs!

The shortcut followed by the taxpayer had back-fired.

The lesson: stay on the legal well-trodden path.

After the initial negotiations with the Commissioner, the taxpayer should have submitted a formal reduction of payment proposal will all the documentary evidence attached. Had the Revenue Authority then come back with another 10% claim the taxpayer would have been well within its rights to launch a judicial review and challenge the additional 10% payment request. Not on the say-so of the Commissioner, but because the RA’s failed to exercise proper discretion based on supporting facts.

Shortcuts and connections with authorities outside the parameters of the law do not work. It’s too risky.

Here are some principles to consider why shortcuts outside the law do not work.

When a taxpayer attempts to negotiate a settlement with the revenue authorities outside the parameters of legislation, several problems can arise. It’s important to note that tax laws and regulations are put in place to ensure fairness and consistency in tax treatment for all taxpayers. Attempting to negotiate outside of these parameters can lead to a variety of issues, both for the taxpayer and the revenue authorities.

• Legal Compliance – One of the primary concerns when negotiating outside the parameters of legislation is the issue of legal compliance. Tax laws are designed to provide a clear framework for taxation, and negotiating outside of these laws can potentially lead to legal disputes and non-compliance issues. Revenue authorities are bound by the law to enforce tax regulations, and attempting to negotiate outside of these boundaries may put the taxpayer at risk of facing legal consequences.
• Uncertainty and Unpredictability – Attempting to negotiate outside of the established parameters of legislation can lead to uncertainty and unpredictability in the tax treatment. Without adhering to the existing laws and regulations, it becomes difficult to predict the outcome of the negotiation and the tax implications that may arise. This uncertainty can create financial instability and make it challenging for the taxpayer to plan effectively for their tax obligations.
• Lack of Precedent – Negotiating outside of legislative parameters can also lead to a lack of precedent. Tax laws are often built on precedents and established principles to ensure consistency in tax treatment. When negotiations stray from these parameters, it becomes challenging to set a precedent for future cases, potentially leading to inconsistent and arbitrary tax treatment for taxpayers.
• Enforcement Challenges – Revenue authorities are responsible for enforcing tax laws and regulations. When negotiations deviate from the established parameters, it can create challenges for the authorities in enforcing tax compliance. This may lead to administrative difficulties and a lack of clarity in the enforcement of tax obligations, creating a potential burden for both the taxpayer and the authorities.
• Public Perception and Fairness – Taxation is a fundamental aspect of public finance, and the system must be perceived as fair and equitable. When taxpayers negotiate outside of legislative parameters, it can lead to perceptions of unfair treatment and erode public trust in the tax system. This can have broader implications for compliance and public support for the tax system.
• Potential Abuse and Evasion – Negotiating outside of legislative parameters can also create opportunities for abuse and tax evasion. Without clear adherence to established laws and regulations, there is a risk that some taxpayers may exploit the lack of clarity to underreport income, overstate deductions, or engage in other forms of non-compliance, leading to potential revenue loss for the government.
• Lack of Transparency – Negotiating outside of legislative parameters can lead to a lack of transparency in the tax assessment and settlement process. Transparency is essential for maintaining public trust and ensuring that tax authorities operate with integrity. When negotiations occur outside of established legal frameworks, it can raise concerns about transparency and accountability in the tax system.
• Complexity and Administrative Burden – Deviating from legislative parameters can introduce complexity and administrative burden for both the taxpayer and the revenue authorities. It may require additional time and resources to navigate non-standard negotiation processes, leading to inefficiencies and increased costs for all parties involved.

Negotiating a settlement with revenue authorities outside the parameters of legislation can lead to legal compliance issues, uncertainty, unpredictability, lack of precedent, enforcement challenges, public perception and fairness concerns, potential abuse and evasion, lack of transparency, and complexity and administrative burden. Taxpayers must work within the established legal framework and seek professional guidance to address any tax issues within the bounds of the law.