Summary of the Constitutional Court case of CSARS v Medtronic International Trading S.A.R.L (CCT 79/23)

Background of the Case

The South African Revenue Service (SARS) appealed to the Constitutional Court (CC) to overturn a Supreme Court of Appeal (SCA) ruling that allowed Medtronic International Trading S.A.R.L. (Medtronic) to seek the remission of interest under section 39(7) of the VAT Act, despite having agreed to pay it in a Voluntary Disclosure Programme (VDP) agreement.

The key issue was whether interest could be waived after a taxpayer finalises a VDP agreement.

Case Facts and Legal Arguments

Medtronic, a Swiss-registered company manufacturing medical devices, has a South African subsidiary. Between 2004 and 2017, an employee of the subsidiary embezzled over R537 million from the group. She concealed the fraud by submitting false VAT returns, leading to an underpayment of VAT to SARS.

Upon discovering the fraud, Medtronic and its subsidiary applied for relief under SARS’ VDP to correct their VAT status. The VDB played a central role in determining the taxpayer’s obligations. Medtronic applied for the VDP to rectify its VAT underpayment after discovering fraudulent activities within its subsidiary. By entering into the VDP, Medtronic benefited from penalty waivers and immunity from criminal prosecution, which are key advantages of the programme. However, SARS made it clear that while penalties could be waived, interest on the outstanding VAT liability remained payable. Medtronic agreed to these terms but later applied to have the interest remitted under section 39(7) of the VAT Act. SARS rejected the request, arguing that interest could not be remitted after a VDP agreement was finalised.

Judicial Decisions

The High Court ruled in the favor of Medtronic, stating that SARS should have considered the request for remission of interest.

The Supreme Court of Appeal (SCA): SARS appealed, but the SCA ruled that the key issue was whether SARS was required to at least consider the request. The SCA held that SARS was obligated to entertain the application.

The Constitutional Court (CC): SARS escalated the case to the CC, which deemed the matter significant for tax administration. The CC ruled that once a taxpayer enters into a VDP agreement, they accept all its terms, including interest charges. It held that SARS did not have the power to remit interest after a VDP was concluded. The CC overturned the SCA's ruling, upheld SARS's appeal, and awarded legal costs to SARS.

Key Lessons Leant

1. VDAs are binding - once a taxpayer enters a Voluntary Disclosure Agreement (VDA), all terms—including interest obligations—are final and non-negotiable.

2. No post-agreement interest waiver will be allowed by SARS - This ruling confirms that SARS cannot remit interest after a VDP is concluded. Taxpayers should not expect interest relief after signing a VDA.

3. Correct interpretation of tax laws matters - highlighting the importance of understanding legislative intent and the limits of tax relief mechanisms.

Tax practitioners must ensure clients fully grasp the implications of entering into a VDP, particularly regarding interest obligations, to avoid disputes and financial setbacks.