2.6. THE INTERNATIONAL AND LOCAL LEGISLATIVE FRAMEWORK AND POLICIES ON
2.6.2 Section 234: Criminal offences relating to non-compliance with the Tax Act
Non-compliance penalties are described by De Hart, Klue and Smulders (2011:35) as penalties that are issued for the failure or neglect to “register as a taxpayer; inform the Commissioner of a change of address or other details; failing to notify the Commissioner of any change of public documents or information to SARS; failing to submit a return or other related documents or information to SARS; failing to attend or give evidence when required by SARS; employers failing to notify SARS of a change of address or the fact of having ceased to be an employer;
employer failing to submit a monthly declaration of employees tax; employer failing to provide details of an employee to SARS; failing to deliver an employee’s tax certificate to them or to former employees; delivering an employee’s tax certificate in contravention with the requirements that the employer must first render an employee’s tax return; failure by a provisional taxpayer to submit an estimate of taxable income; any other non-compliance with an obligation imposed under the act”.
Croome and Olivier (2015:517) highlight that the Adjustment Fine Act (No. 101 of 1991) makes provision that “if any law provides that on conviction of an offence a person may be sentenced to undergo a prescribed maximum period of imprisonment or, in the alternative, to pay a fine and the maximum amount of the fine is not prescribed, the maximum fine which may be imposed must be determined as a ratio set out in that Act, by taking into account the maximum period of imprisonment prescribed by such law”.
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Conviction for a tax offense crime usually results in the assessment of a sentence and penalties.
For example, imprisonment of up to five years, a fine of up to $250000, a civil fraud penalty of 75 percent on the portion of the underpayment due to fraud, and the cost of prosecution (Hopwood, et al. 2012:475). Tax non-compliance seems to be related to some other observable characteristics of taxpayers. According to Andreoni, Erard and Feinstein (1998:821–22),
“married filers and taxpayers younger than 65 have significantly higher average levels of non- compliance than others”.
Econometric studies by Clotfelter (1983:n.p.) and Feinstein (1991:n.p.) came to a similar conclusion. There also seems to be a variety of methods of tax evasion. TCMP studies conclude that, within any group defined by income, age, or other demographic categories, there are individuals who evade tax and others who do not do so, and some individuals overstate tax liability. For example, for taxpayers with a reported income between $50000 and $100000 in 1988, 60 percent understated tax, 26 percent reported correctly, and 14 percent overstated tax (Christian, 1994:39). However, this study do not explore to what extent this heterogeneity is explained by different ‘tastes’ for evasion as opposed to different opportunities to evade (Slemrod, 2007:n.p.).
The sources on legislative frameworks on governing tax in US and South Africa on taxing systems reveal that the US government is not allowed to announce a tax system and then rely on taxpayers’ sense of duty to remit what is owed. This can be also used as an effective method in South Africa. Some dutiful people will undoubtedly pay what they owe, but many others will not. According to Slemrod (2007:n.p.), “the ranks of the dutiful will shrink [over time] as they see how the others are taking advantage of them”. Thus, paying taxes must be made a legal responsibility of citizens, with penalties for non-compliance Fraud should be unearthed and “the courts [should] look for objective manifestations of fraudulent intent called badges or indicia.
Indicia are found in case law and are encapsulated in the IRM” (Slemrod, 2007:n.p.).
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Fraud indicators are divided into two categories, namely affirmative indications and affirmative acts. Affirmative indicators “represent signs or symptoms of actions that could have been performed for the purpose of deceiving or concealing. Affirmative acts are actions that provide evidence that a process was deliberately done to deceive, undermine, or conceal the true nature of events. Therefore, a taxpayer who is to be charged with committing tax fraud must have committed an affirmative act and have violated the law willingly” (Hopwood et al., 2012:470).
In this context, the former South African Minister of Finance, Trevor Manuel (1999), remarked that “non- compliance with tax legislation and [the commission of] tax fraud are ranked up there with some of the most sinister criminal activities in the Republic of South Africa (RSA). These criminal activities cost the RSA a considerable amount of rand each and every day.”
Compin (2015:n.p.) is of the view that “it is not politically expedient to compare tax havens to tax-free zones that encourage tax avoidance and fraud. It is therefore easier to treat an audited taxpayer as a fraudster because statistically, the amount of tax recovered can be considerably reduced through appeal and review proceedings”. Therefore, Phillips and Tatum (2001:26) argue that “fraud penalties do not apply if the taxpayer is merely negligent or ignorant of the tax law.
The IRS must prove by clear evidence that the taxpayer engaged in intentional wrongdoing and with specified intent to avoid the tax owed. The burden of proof is higher for criminal fraud than for civil fraud.”
In an attempt to understand tax returns in South Africa, an understatement is defined in section 221 of the Act as any prejudice to SARS because of:
• A default in rendering a return;
• An omission from a return;
• An incorrect statement in a return; and
• If no return is required, the failure to pay the correct amount of tax.
For an understatement penalty regarding tax fraud in South Africa, taxpayers who are guilty of understatement must pay the stipulated understatement penalty which is calculated as set out in Section 221(2) of the Act.
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The section requires that the understatement penalty must be determined by applying the highest applicable understatement penalty percentage (Croome & Olivier, 2015:476).It should be further noted that the Criminal Law Amendment Act (No. 105 of 1997), more especially Section 51 and schedule 2, prescribes minimum sentences for certain serious criminal offences. For example, in the South African High Court, if a group of persons/law enforcement officers deal in or are involve offences relating to exchange control, corruption, extortion, fraud (i.e., tax fraud), theft or forgery and the amount involved is more than R500 000 (R100 000 if convicted by a group of persons or syndicate and R100 000 if committed by a law enforcement officer), the court must impose imprisonment of at least 15 years for a first offence, 20 years for the second offence, and 25 years for the third offence. However, in the Magistrates’ courts, the period of imprisonment ranges from 15 to 25 years, depending on whether the person is a first or subsequent offender (Chetty, 2007a:18, 20).