SARS nails taxpayer with maximum 200% penalty
The South African Revenue Service (SARS) has nailed a taxpayer with triple-rate penalties following a years-long court battle full of delays and complex litigation.
The case was against a taxpayer linked to the controversial Chinese locomotive procurement deal of the State Capture era.
The case was notable not only because of the findings of the Tax Court in SARS’ favour and the massive 200% penalty applied, but also because of the timing.
The court confirmed additional assessments by SARS on the taxpayer’s determined tax liability for the 2013 to 2018 years of assessment—years after the underlying transactions took place.
According to tax experts at Tax Consulting SA, this should serve as a warning to all taxpayers who think prescription and delaying the process through litigation will spare them from having to pay up.
“The ruling is a stark warning to taxpayers who believe time, complexity and procedural litigation can shield them from SARS indefinitely,” it said.
“While SARS may sometimes move slowly, once it begins following the money trail, it is relentless in its pursuit.”
Tax Consulting noted that a central issue in the matter was whether SARS was entitled to reopen assessments that would ordinarily have prescribed under section 99 of the Tax Administration Act.
The taxpayer argued that SARS had issued the additional assessments outside the normal three-year period permitted under section 99, and alleged that this was unlawful.
However, the Tax Court reaffirmed that prescription does not protect taxpayers where the failure to assess the correct amount of tax arose from fraud, misrepresentation or the non-disclosure of material facts.
Importantly, the Court accepted SARS’s position that the true facts only emerged after extensive investigations.
This includes those involving the Reserve Bank, forensic investigations, exchange of information requests and wider State Capture-related inquiries.
“The judgment confirms an increasingly important principle in modern tax administration, being that taxpayers cannot rely on prescription where SARS later uncovers concealed or misleading information,” the group said.
Massive penalty
The case arose from locomotive procurement contracts, where SARS alleged that the taxpayer overstated its cost of sales and channelled funds through related entities to facilitate “kickbacks” tied to inflated procurement pricing.
After finalising its investigation and considering the facts at hand, SARS levied a 200% understatement penalty together with interest—the maximum penalty allowed, usually reserved for extreme cases.
SARS understatement penalties range from 10% to 200% of the tax shortfall, which is the difference between the tax properly chargeable and the amount initially declared by the taxpayer.
SARS alleged that approximately R3 billion in costs had been overstated.
It added that the taxpayer also faced the disallowance of significant interest deductions and consultancy expenses, which SARS argued were not incurred in the production of income.
Tax Consulting noted that the scale of the penalties is significant because it reflects SARS’s increasingly aggressive stance, where it believes there has been deliberate concealment, inflated pricing or unlawful deductions.
“Taxpayers often underestimate how quickly interest and understatement penalties can escalate an already substantial liability into a financially catastrophic position,” it said.
“In matters involving allegations of intentional tax evasion, SARS is clearly prepared to pursue the harshest available penalties at its disposal.”
The broader message from this judgment is that SARS is becoming increasingly sophisticated, internationally connected and willing to pursue historic matters involving complex structures and politically exposed transactions.
“Time is no longer the shield that many taxpayers once assumed it to be,” Tax Consulting said.
“While SARS may take years to build a case, moving methodically and quietly, they do so with sufficient particularity to ensure that there is no prejudice to the fiscus.”
The group warned that SARS has a wealth of information at its disposal to pursue tax evasion, including bank statements, treaty-based information exchanges, forensic investigations, and experienced officials.
“This judgment is a reminder that in modern South African tax administration, taxpayers may delay the process, but they should never mistake delay for escape,” it said.
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