Final Ruling Issued by Constitutional Court in Sars and Medtronic Interest Case

Taxpayers who enter into a voluntary disclosure agreement (VDA) as part of the voluntary disclosure programme (VDP) are not allowed to request the South African Revenue Service (Sars) to waive the interest after they have signed the agreement.

The Constitutional Court (ConCourt) asserted that it would create a “glaring absurdity” to allow a taxpayer to finalize a VDA that includes interest provisions and then subsequently request that it be waived.

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

The court remarked that this undermines the VDP framework and puts the finality of VDAs in jeopardy, highlighting the appeal initiated by Sars against a ruling by the Supreme Court of Appeal (SCA) involving Sars and Medtronic.

The troubles for Swiss-registered Medtronic Africa and Medtronic International began in 2017 when it was discovered that former accountant Hildegard Steenkamp had embezzled an astonishing R537 million from the companies over 12 years.

Steenkamp had falsified value-added tax (VAT) returns to claim refunds that the company was not entitled to and redirected those refunds to a personal account. She worked for Medtronic Africa while also performing tasks for Medtronic International.

Medtronic reported the fraud to Sars and successfully applied for the VDP in December 2017, eventually reaching an agreement. Steenkamp was subsequently arrested, convicted, and sentenced to 50 years in prison.

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

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

The companies chose to continue with the VDP, resulting in the execution of two VDAs, one for each entity. Medtronic International agreed to pay nearly R457.6 million, comprising the VAT, understatement penalties, and interest.

The request

After completing the VDA, Medtronic International requested interest remission under the VAT Act, which Sars refused to consider.

Medtronic International then approached the Pretoria High Court to obtain a declaratory order indicating that the Tax Administration Act (TAA) does not prevent requesting remission of interest under the VAT Act. The matter advanced to the SCA, which found that Sars had a statutory obligation to review the request for remission.

Sars sought permission from the ConCourt to appeal the SCA’s ruling. The ConCourt granted the appeal, overturning the SCA’s majority decision.

The issue

The main question was whether a taxpayer who had entered into a VDA under the TAA and agreed to pay interest could seek interest remission under the VAT Act.

The SCA ruling did not directly address this question, with the majority indicating that the key consideration was whether Sars could legally refuse to review 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 unified judgment, ConCourt acting deputy chief judge Mbuyiseli Madlanga expressed confusion regarding how this could be considered the primary issue.

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

The minority opinion concluded that the regulations governing the VDP “do not allow a taxpayer who has entered a voluntary disclosure agreement to request remission of interest that was factored into the calculated tax liability after the VDA’s conclusion.”

The ‘centrepiece’

“I would assert that the minority’s stance indicates that once you alter the substantive terms of the ‘centrepiece’—including provisions for interest payment in the VDA—you effectively negate the VDA,” Madlanga remarked.

Moreover, he noted that the TAA’s silence regarding interest remission under the VAT Act does not necessarily imply that it allows remission after the conclusion of a VDA.

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The ConCourt determined that by signing the VDA, a taxpayer unequivocally accepts its provisions, including the interest clause, which is mandated by law.

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

Standard wording

ENSafrica tax executive Charles de Wet comments that Sars maintains that VDAs (and settlement agreements) are standardized and do not negotiate individual clauses.

“Given the court’s perspective 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 and not merely accept the standard Sars phrasing.”

De Wet adds that this might deter taxpayers from utilizing the VDP mechanism to correct tax discrepancies, especially as the cost of finalizing a VDA without the standard limitations and full interest obligations could become financially burdensome.

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