Don’t rely on tax rulings that contravene law

 

By JOSEPH THOGO

I recently had to convey a difficult message to a client who found himself in a pickle because of a tax ruling. A couple of years back he wrote to the tax authority seeking clarification on an ambiguous tax provision

In the letter, he disclosed and described all the facts in he transaction that he had planned to undertake. He also highlighted the ambiguity that was present in the particular provision that he sought to rely on and sought guidance.

The tax authority responded with its interpretation of the ambiguous provision and provided guidance on how it would view my client’s transaction in light of its interpretation.

A few years later while examining my client’s books, a team from the tax authority noted my client’s transaction which had already taken place and this time they had a different view about its tax treatment.

Prudently, my client had kept his correspondence with the tax authority back then to support his position. Unfortunately, even after reading the correspondence, the tax audit team’s position has not budged.

Their position now is that my client’s letter seeking clarification was factually incorrect and in addition the guidance provided in the response letter contravened the law and therefore should not have been relied upon.

After fruitless arguments with the tax team, my client sought my help and the first thing that came to mind was estoppel.

Estoppel is a legal defence which provides that where person A through his actions or words gives another person B reason to believe a certain set of circumstances or position upon which B relies and adjusts his position accordingly, A cannot later deny those facts or say that his earlier actions or words were improper.

Estoppel is meant to prevent people from being unjustly wronged by the inconsistencies of another person’s words or actions.

Tax disputes revolve around questions of fact or questions of law. Facts are subjective and will often depend on a particular set of circumstances or factual situation.

A dispute revolving around a question of fact is resolved with reference to the facts, evidence and inference supporting all these. Questions of fact are capable of proof or disproof by reference to a certain standard of proof depending on the nature of the matter.

In criminal cases, the standard is usually ‘beyond reasonable doubt’ while in civil disputes a lower ‘balance of probabilities’ standard applies – that there is more evidence supporting the existence of a certain fact than there is against it.

Questions of fact are straightforward and should be fairly easy to resolve but often the lack of evidence can hurt a taxpayer’s position. I have seen taxpayers loss millions because they did not have evidence to support their tax position.

Most tax disputes revolving around abusive tax planning and sham transactions are often questions of fact and they stand or fall based available evidence. Remember though that evidence is not just about creating a paper-trail; substance will very often trump form.

Dispute on questions of law arises where two people while referring to the same legislative provision interpret and apply the provision differently to support the merits of their polar opposite positions.

 

The genesis of the legislative process is usually an intention or an idea, which is ultimately reflected in a written law.

This process involves a chain of people each playing important roles in the chain until the statute becomes a living document – we have the legislators, the draftsman and ultimately the person implementing the law.

This entire process requires the use of words which unfortunately are known to be fragile. Words are not perfect and it is not uncommon to find that the intentions of the legislators are lost during the legislation process.

As long as the draftsman has to use words to reduce Parliament’s intention into a written law, people’s understanding and application of that law will always be as different and as diverse as the people who read it and will be influenced in large part by their own interpretation of Parliament’s intention through the draftsman’s choice of words.

Rulings by the tax authority should reflect its official interpretation and should be published for the information and guidance of taxpayers.

They are meant to promote uniform application of the tax laws by revenue officers and to assist taxpayers with voluntary compliance.

Ideally, the rulings should be relied on as precedent by all taxpayers though is most cases some tax authorities argue that these are private rulings only binding the authority and the taxpayer who sought the ruling.

Remember that any response by the tax authority would only be the authority’s interpretation of the law and might not necessarily be the correct position.

Given my client’s predicament, one of the difficult truths that I have had to share with him is that estoppel cannot operate to prevent the operation of a written law; a taxpayer cannot rely on a ruling by the tax authority especially if the ruling contravenes the law (Roshani Meghjee & Co Ltd versus Commissioner General Tanzania Revenue Authority).

Mr Thogo works with Deloitte East Africa. jthogo@deloitte.com