David King, a South African businessman, is the owner of Ben Nevis, a company incorporated in the British Virgin Islands. Following various hearings and appeals, Ben Nevis was found liable to the Commissioner for the South Africa Revenue Service (SARS) for taxes of Rand 2.6bn (approximately £222m) for the 1998, 1999 and 2000 tax years. In March 2011 judgment was entered against Ben Nevis in South Africa for this sum.
SARS alleged that Mr King transferred Ben Nevis’ assets to Metlinka Trading Ltd when he learned of the tax investigations and £7.8m was credited to a London bank account in the name of Metlinka.
In 2002 the UK and South Africa signed a replacement double taxation convention. Article 27 prescribed the time at which the Convention was to enter force, which taxes were covered by the Convention and when the previous convention would cease to apply, and for most taxes in South Africa this was the tax year starting 1 January 2003.
On 13 October 2011 the 2002 Convention was amended by a protocol (the 2010 Protocol) which made provision for mutual assistance in the collection of all taxes by inserting a new Art 25A, and this substituted Art 25 shall have effect in respect of information requested or exchanged on or after the date of entry into force of the Protocol. A memorandum of understanding between HMRC and SARS detailed how Art 25A would be applied.
SARS then made a request of HMRC to assist in the collection of this tax debt. HMRC made a successful application without notice in 2012 for an order for permission to serve proceedings out of the jurisdiction and to freeze the bank account pending trial of the claims. Ben Nevis and Metlinka applied to set aside that order and to strike out the proceedings. The appellants sought to rely on expert evidence of the interpretation of the Convention and Protocol. On 20 July 2012 their application was dismissed.
The companies then appealed on two grounds:
- (1) The double taxation convention did not permit cross-border collection of tax debts due in respect of years of assessment commencing prior to the coming into force of the 2002 Convention. The new Art 25A must be read subject to Art 27 and therefore did not apply to tax years prior to 1 January 2003. Although Art 27 only refers to certain specified taxes it must be interpreted purposively to apply to all taxes. The memorandum of understanding was inadmissible as it was made by the tax authorities of the UK and South Africa rather than by the countries.
- (2) The Finance Act 2006, which implemented into domestic law international tax enforcement arrangements, did not apply to arrangements made before July 2006 and that legislation should not be retrospective.
- (1) The judge at first instance was right to reject expert evidence on the interpretation of the law – questions of interpretation are for the court.
- (2) Although South Africa is not a party to the Vienna Convention on the Law of Treaties it is still bound by the rules of interpretation set out in the Convention because they are rules of customary international law.
- (3) When the 2002 Convention was signed it was necessary to precisely define the scope of the agreement by reference to both the category of taxes and the time of accrual of liability to which they applied. This was because the Convention modified liability to taxation in both countries and was replacing an existing convention.
- (4) Article 25A has no bearing on liability to tax and is merely concerned with proceedings for enforcement. Therefore there was no need to define the years of accrual of liability.
- (5) Article 25A was an administrative provision and could be brought into effect immediately and so did not need to be linked to any tax year. Article 25A covers all taxes while Art 27 deals with certain specified taxes. Article 27 cannot be interpreted to cover all taxes as it would cause huge practical difficulties.
- (6) Ben Nevis’ liability to pay tax in South Africa has not been changed by Art 25A – there is no liability to tax in the UK but an ability to enforce the South African claim as if it were a UK claim. There is no unfairness in permitting the enforcement of pre-existing liabilities.
- (7) Obiter – the memorandum of understanding is admissible as it is an agreement relating to the Protocol and was made by the appropriate organs of the countries for this particular purpose. It is a concern that these memoranda are only available by making a Freedom of Information request and they should be in the public domain.
- (8) Obiter – the rules in relation to skeleton arguments were not followed by the appellants – they were too long and contained material not pursued in oral submission. If the appellants had succeeded in this appeal all of their costs of the skeleton arguments may have been disallowed. Any advocates due to appeal may wish to review their skeleton arguments, bearing in mind the costs sanctions available to the court.
Held (appeal dismissed):