Constitutional Court Issues Definitive Ruling on Sars and Medtronic Interest Dispute

Taxpayers who engage in a voluntary disclosure agreement (VDA) as part of the voluntary disclosure programme (VDP) are prohibited from requesting the South African Revenue Service (Sars) to waive interest after finalizing the agreement.

The Constitutional Court (ConCourt) emphasized that it would lead to a “glaring absurdity” to permit a taxpayer to conclude a VDA that incorporates interest provisions and then later demand that it be waived.

Read: Sars voluntary disclosure programme drives R3.3bn in tax collections

The court noted that this behavior undermines the VDP framework and threatens the finality of VDAs, referencing the appeal launched by Sars against a decision from the Supreme Court of Appeal (SCA) related to Sars and Medtronic.

Issues arose for Swiss-registered Medtronic Africa and Medtronic International in 2017 after it was revealed that former accountant Hildegard Steenkamp had embezzled a staggering R537 million from the firms over a span of 12 years.

Steenkamp falsified value-added tax (VAT) returns to claim refunds that were not owed to the company, subsequently redirecting those refunds to her personal account. She was employed by Medtronic Africa while also handling tasks for Medtronic International.

Medtronic reported the fraudulent activity to Sars and applied for the VDP in December 2017, ultimately reaching an agreement. Steenkamp was arrested, convicted, and sentenced to 50 years in prison.

Both Medtronic Africa and Medtronic International separately sought to have Sars waive the interest arising from VAT underpayment. Sars responded by stating it lacked the authority to waive interest under the VDP.

Read: Calls for another tax and exchange control amnesty to help close tax gap

Medtronic was informed that it could either proceed with the VDAs and comply with the full agreed payments including interest or opt out of the VDP.

The companies decided to go ahead with the VDP, leading to the execution of two VDAs, one for each entity. Medtronic International committed to pay approximately R457.6 million, covering the VAT, understatement penalties, and interest.

The request

After finalizing the VDA, Medtronic International submitted a request for interest remission under the VAT Act, which Sars declined to entertain.

Medtronic International then sought a declaratory order from the Pretoria High Court clarifying that the Tax Administration Act (TAA) does not prohibit requesting interest remission under the VAT Act. The case progressed to the SCA, which determined that Sars had a statutory obligation to evaluate the request for remission.

Sars then sought permission from the ConCourt to appeal the SCA’s decision. The ConCourt accepted the appeal, reversing the SCA’s majority verdict.

The issue

The central issue revolved around whether a taxpayer who entered into a VDA under the TAA and agreed to pay interest could also apply for interest remission under the VAT Act.

The SCA’s ruling did not specifically answer this question; the majority opinion focused on whether Sars could legally refuse to address Medtronic International’s request for interest remission.

The majority concluded that neither the VAT Act nor the TAA explicitly or implicitly prohibits a taxpayer who has completed a VDA from seeking interest remission.

In a collective judgment, ConCourt acting deputy chief judge Mbuyiseli Madlanga expressed disbelief that this issue was considered primary.

“If there is no authority to consider the request for interest remission under Section 39(7) of the VAT Act after concluding a VDA, there is no rationale for evaluating the request,” he stated.

The minority opinion maintained that the regulations governing the VDP “do not permit a taxpayer who has entered into a voluntary disclosure agreement to request remission of interest that was included in the calculated tax liability post-VDA completion.”

The ‘centrepiece’

“I would argue that the minority’s view suggests that once you modify the essential terms of the ‘centrepiece’—which includes provisions for interest payment in the VDA—you essentially nullify the VDA,” Madlanga commented.

Moreover, he pointed out that the TAA’s lack of reference to interest remission under the VAT Act does not imply that it permits remission following the conclusion of a VDA.

Read: Sars to gain private practice tax expertise

The ConCourt concluded that by signing the VDA, a taxpayer unequivocally consents to its provisions, including the interest clause, as required by law.

It is illogical, if not contradictory, for a taxpayer to believe that despite the VDP’s stipulation—the VDA necessitating a firm commitment to a specific interest rate and amount—they could still withdraw from that obligation, Madlanga observed.

Standard wording

ENSafrica tax executive Charles de Wet remarked that Sars insists that VDAs (and settlement agreements) are standardized and that individual clauses are not negotiable.

“Given the court’s view that the signed agreement is binding on all parties, even in light of different provisions of the tax acts, taxpayers must ensure that every clause in agreements with Sars aligns with their desired outcomes rather than simply accepting standard Sars language.”

De Wet added that this could discourage taxpayers from utilizing the VDP mechanism to correct tax discrepancies, particularly since the cost of concluding a VDA without the standard limitations and full interest obligations could become significantly burdensome.

Follow Moneyweb’s in-depth finance and business news on WhatsApp here.