14 October 2021 by and Tax & Exchange Control Alert

Piercing the corporate veil in tax fraud cases

Piercing the corporate veil” is a common law remedy used by courts to address the abuse of the separate personality of juristic entities by directors and shareholders, and has become a codified concept under the Companies Act 71 of 2008. In practice, this remedy enables the courts to ignore the separate personality of the company and hold its incorporators, shareholders or directors (collectively referred to as “Controllers”) accountable, in their personal capacities, for the manner in which the business is conducted.

Since entities have their own separate personality distinct from their Controllers and are obliged to pay taxes in South Africa (and outside South Africa), it is quite rare for entrepreneurs or directors to be required to personally cover the taxes due by these entities. Moreover, the Controllers are rarely subjected to criminal prosecution in respect of tax matters involving these entities. However, there have recently been various instances in which directors or entrepreneurs were held to account for taxes due by the entities in which they either serve as directors or hold an interest, with the more apparent reason for personal liability being fraud.

On 6 October 2021, the South African Revenue Service (SARS) published a statement in terms of which the Commissioner for SARS, Mr Edward Kieswetter, expressed great concern about crimes associated with tax, in particular, where juristic entities are used to defraud SARS whilst the individuals in control of these entities essentially hide behind the corporate veil.

Given SARS’ stance on holding Controllers accountable, individuals, especially entrepreneurs, must be aware of the repercussions they could face if they and their businesses become involved in schemes to defraud SARS. SARS, the judiciary and the National Prosecuting Authority have not taken this lightly. A recent example is the decision of the Bloemfontein Regional Court to sentence a businessman running a close corporation, Mr MJ Ntabe, to imprisonment for providing SARS with false supporting documents to substantiate incorrect calculations for value-added tax (VAT). It is reported that the SARS audit department raised additional assessments, which resulted in a total loss of R1 million to SARS. Similarly, during August 2021, the Bloemfontein Regional Court sentenced a director of a catering and accommodation company to imprisonment for submitting nil VAT returns to SARS while the business was actively trading. The imprisonment sentence was wholly suspended on condition that the accused reimburse SARS the tax due by a certain date. In addition, the company itself was subject to a suspended fine as a result of the fraudulent activity.

In light of the COVID-19 pandemic and challenges faced by many taxpaying entities and individuals, in a statement published on 19 August 2021, the Commissioner for SARS reiterated the efforts Government has undertaken to provide affected businesses and individuals with tax relief measures to alleviate hardship in the current economic climate. Considering these efforts, it is difficult to ascertain the reasons behind these fraudulent schemes, especially as the Commissioner for SARS had previously stated that companies and their directors would face criminal prosecution in respect of their transgression of the law and defrauding the fiscus of revenue that was due to the Government.

Comment

Entrepreneurs, and taxpayers in general, must strive to always have their tax affairs in order and seek professional assistance when uncertain, as they will face greater hardship should they engage in fraudulent activities. It is clear that although the concerned entity is in fact “the taxpayer” who is liable to SARS for any taxes due, the authorities are not afraid to look behind the corporate veil and hold the Controllers accountable.

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