CSARS v Medtronic: Finality on whether interest agreed upon in a Voluntary Disclosure Agreement may be subsequently waived
On the 24th of December 2024, the Constitutional Court handed down judgment in the case of Commissioner for the South African Revenue Service v Medtronic International Trading S.A.R.L (456/2021) [2023] ZASCA 20 ("Medtronic").
The facts
The respondent, Medtronic, is an international company that manufactures and distributes medical devices and provides certain medical solutions, with its main offices in Switzerland and a subsidiary in South Africa.
From the year 2004 to 2017 Medtronic's VAT accounting and payment responsibilities were overseen by one Ms Hildegard Steenkamp ("Steenkamp"). Unfortunately, for the majority of her employment with Medtronic, Steenkamp, through an elaborate scheme, defrauded her employer and SARS by pocketing VAT payments that ought to have been made to SARS, in the amount of R537 236 176.59.
When Medtronic became aware of the fraud, they immediately approached SARS under the auspices of the Voluntary Disclosure Programme ("VDP"). See our previous article which describes the VDP here: A ‘voluntary’ disclosure in SARS’ VDP process: Get it right the first time! - Mabhelandile Ntuli Attorneys.
The benefits of the VDP are listed under section 229 of the Tax Administration Act 2011 ("the TAA"), and these are that the taxpayer who is in default gets absolution from criminal prosecution and relief in respect of any understatement penalties and administrative non-compliance penalties or other penalties imposed under a tax Act. All of these benefits are then recorded in a Voluntary Disclosure Agreement ("VDA").
Pertinently, during the VDP negotiations Medtronic also requested that SARS remit the interest on the VAT amount owing. SARS' response was that it would waive the understatement penalties and the administrative non-compliance penalties in line with section 229, however, it could not under section 229 waive interest. This was obviously because the waiving of interest was not included in section 229 of the TAA as a benefit of VDP.
Nonetheless, Medtronic opted to enter into the VDA. In terms of its agreement, Medtronic was to pay a total amount of R457 670 112, made up of capital VAT, understatement penalties and interest. SARS granted Medtronic International 100% relief in respect of administrative non-compliance penalties. Also, SARS was not to pursue criminal prosecution for any offence arising from the disclosed default. In terms of the VDA, of the R457 670 112 settlement amount, the interest portion was R171 205 355.12.
After the VDA was concluded Medtronic then submitted a request for the remission of interest, however, this application was made by way of section 39(7)(a) of the VAT Act 89 of 1991 ("The VAT Act") read with Interpretation Note 61 from SARS which says that interest may be remitted if the Commissioner is satisfied that the non-payment of the VAT stemmed from circumstances beyond the taxpayer's control. Medtronic was of the view that the remission request should pass since it was defrauded. However, SARS refused to even consider the request by Medtronic. This outright refusal was based on SARS' belief that section 39(7) of the VAT Act found no application where a VDA had been concluded.
The judgments
SARS' refusal to even consider the remission request prompted Medtronic to approach the High Court where it secured a declarator that the conclusion of a VDA does not prohibit a request for remission of interest, furthermore, that SARS' decision to refuse to consider the remission request is set aside and remitted back to the Commissioner to consider Medtronic's remission request. The High Court made its decision without making an order as to whether interest agreed upon in a VDA may be subsequently waived in terms of section 39(7) of the VAT Act. The reason for this approach was because the court focussed on SARS' decision not to consider the request, not whether the request itself was proper in law.
SARS then appealed to the SCA; however, it was unsuccessful in a 3/2 split where the majority decided to dismiss the appeal, confirming the High Court's ruling. Of particular importance in the SCA leg of the case is that, just like the High Court, the majority (in the SCA) decided not to answer the fundamental question of whether interest agreed upon in a VDA may be subsequently waived in terms of section 39(7) of the VAT Act. This responsibility was again deferred to SARS.
On the other hand, Goosen AJA who penned the minority judgment (in the SCA) sought to answer the fundamental question by engaging in an interpretative exercise. The rationale for doing so was set out at paragraph 59 where the acting judge of appeal was at pains to point out that, SARS' decision to not consider the remission request cannot be said to be unlawful (and set aside) if one does not know whether a remission request was permitted once a VDA had been concluded. It follows that, if the remission request was not permitted once a VDA was concluded then SARS' decision was not unlawful. Therefore, the fundamental question needed to be answered.
The minority came to the conclusion that interest agreed upon in a VDA may not be subsequently waived in terms of section 39(7) of the VAT Act. This meant SARS' decision to not consider the remission request was not unlawful.
At paragraphs 88 to 92 Goosen AJA set out the rationale to this answer and we can do no better than cite his exact words where the acting judge of appeal held -
"[88] it is not open to a court to ignore the conclusion of a voluntary disclosure agreement. The agreement is the centerpiece of the voluntary disclosure programme. It serves as the basis upon which outstanding tax may be recovered in exchange for a waiver of punitive sanctions. The conclusion of the agreement is the culmination of a process of engagement between the taxpayer and SARS."
"[89] In this case the VDA records, in clause 11, that it is the whole agreement. It records that no variation to any part of the agreement (which plainly includes the part that stipulates the amount of the tax debt) has any effect unless reduced to writing and signed by both parties. It also records that the agreement constitutes a legal, valid, binding and enforceable agreement on the parties."
"[90] It is a well-established principle of our law of contract that due and proper recognition is given to the bargain struck between contracting parties. A party who agrees to payment of a debt cannot escape the obligation unless the agreement was induced by misrepresentation, error or fraud or some other recognised ground of repudiation."
"[91] In this case, no basis was advanced to suggest that the agreement was concluded in circumstances which would render it unenforceable. Nor, as I mentioned earlier, was it suggested that the amount of the interest included in the tax debt occurred under reservation of rights. Indeed, the case was not about the agreement and no relief was sought in relation to it, even though it is binding upon both Medtronic International and SARS, whose decision not to consider the request for remission of interest, Medtronic International sought to set aside."
"[92] The provisions of Part B of Chapter 16, properly interpreted, do not permit a taxpayer who has entered into a voluntary disclosure agreement to seek a remission of interest, the amount of which was incorporated in the determined tax debt due, after the conclusion of the voluntary disclosure agreement. To hold otherwise would undermine the legal consequences that attach to the conclusion of such agreement."
"[93] the voluntary disclosure procedure involves the determination of a tax debt payable in consequence of a default. That determination necessarily includes the ‘capital’ of the outstanding tax and the interest payable in relation thereto. The voluntary disclosure agreement is an agreement to pay the mutually agreed tax debt, in exchange for indemnity from punitive sanctions that would ordinarily apply."
SARS agreed with the minority judgment and appealed to the Constitutional Court where the all-important question would finally be answered, with that answer being an unequivocal no – interest agreed upon in a VDA may not be subsequently waived in terms of section 39(7) of the VAT Act. The Constitutional Court thus agreed with the minority in the SCA.
The Constitutional Court reaffirmed the minority's view that, a VDA is an agreement that crystallises the tax debt. This tax debt includes the capital tax debt and the interest thereon. Once a VDA is concluded, interest may not be subsequently remitted as there is a binding agreement that includes the interest. The Constitutional Court put it plainly at paragraph 32 where it held -
"A taxpayer concludes a VDA with the...interest with her or his eyes wide open. There can be only one conclusion, and that is that the taxpayer accepts this provision and considers her- or himself bound by it. That being the case, Medtronic International’s contention that – in the event of interest being remitted in terms of section 39 of the VAT Act – it is open to it to walk away from part of this unequivocal covenant is glaringly absurd. On this argument, a taxpayer may conclude a VDA and on the same day apply for remission of the interest. Effectively, the interest portion of the VDA is not worth the paper it’s written on. One may ask: why bother to have this portion of the agreement? The reality is that this portion is there because it is decreed statutorily. So, it is unsurprising that – as was the case in Medtronic International’s VDA – a VDA makes provision for interest. By signing the VDA, a taxpayer categorically accepts its terms, including the provision for interest which is a statutorily imposed component."
Comment
The Medtronic series of cases, culminating in the Constitutional Court gives certainty on whether interest may be remitted following the conclusion of a VDA. The answer is an unequivocal no.
When contemplating a voluntary disclosure, it is advisable to consider all options in light of the facts. This is because in the Medtronic case, the understatement penalties and administrative non-compliance penalties (which were decreased in terms of the VDA) almost equated to the interest charged. Therefore, if, on a proper analysis of the relevant facts, it is more favourable to opt out of voluntary disclosure, then one should do so.
A simple example is where there is no threat of criminal prosecution (for lack of intentional tax evasion) and the interest charged far outweighs the administrative non-compliance penalties and the worst-case understatement penalty (which does not include intentional tax evasion), then one should opt out of the voluntary disclosure process and follow the normal course for disputing interest and penalties as there is a possibility that both may be remitted in part or in full under the relevant provisions of the TAA and/or the VAT Act and the Income Tax Act 58 of 1962.
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