Krok v Commissioner for the South African Revenue Services

Mark Krok (the first appellant) emigrated from South Africa to Australia in April 2002. Prior to emigration, capital assets valued at approximately R71.7 million held in the Mark Krok 1994 Trust were distributed to him personally. These assets became "blocked" under South African Exchange Control Regulations. Mr Krok entered into agreements with a British Virgin Islands company (Polperro Enterprises) purporting to sell his beneficial interest in the assets and income while retaining bare legal ownership. In 2008, he emigrated from Australia to the United Kingdom and entered into similar agreements with Jucool Enterprises Inc., another British Virgin Islands company. The Australian Tax Office (ATO) conducted an audit and determined Mr Krok owed Australian income tax of approximately AUD 25.3 million (approximately R235 million) for the income years 2004-2009. The ATO concluded the arrangements were shams designed to conceal foreign income and avoid Australian tax. The ATO requested assistance from SARS under the Double Taxation Agreement (DTA) as amended by a 2008 Protocol. SARS obtained a preservation order under sections 163 and 185 of the Tax Administration Act 28 of 2011 over Mr Krok's South African assets. Jucool intervened claiming beneficial ownership of the assets.

• Whether article 25A of the Protocol to the DTA between South Africa and Australia applies to tax debts arising before 1 July 2009
• Whether the preservation order granted under sections 163 and 185 of the Tax Administration Act was properly granted
• Whether article 13(2)(a)(ii) of the Protocol imposes a temporal limitation on the application of article 25A
• Whether the revenue rule prevents South African courts from assisting in the collection of foreign tax debts
• Whether Jucool established beneficial ownership of the assets sufficient to discharge the preservation order
• Whether the agreements transferring beneficial ownership to offshore entities were effective under South African law

The appeal was dismissed with costs, including costs of two counsel. The preservation order granted by the High Court was confirmed and remained in force.

The binding legal principles established are: (1) Article 25A of a double taxation agreement providing for mutual assistance in tax collection is not subject to temporal limitations in other provisions relating to substantive tax liability (such as article 13(2)(a)(ii)); (2) For purposes of mutual assistance provisions (articles 25 and 25A), the term "taxes" in article 2.4 of the DTA means "taxes of every kind and description" administered by the revenue authorities, not limited to the specific taxes enumerated in article 2.1; (3) Provisions for mutual assistance in tax collection concern enforcement procedures, not substantive tax liability, and may apply to tax debts arising before the provision came into force without being retrospective; (4) The revenue rule preventing enforcement of foreign tax claims is abrogated by double taxation agreements containing mutual assistance provisions and has no relevance to interpreting the scope of such agreements; (5) Double taxation agreements must be interpreted in accordance with the Vienna Convention on the Law of Treaties, giving terms their ordinary meaning in context and in light of the treaty's object and purpose; (6) Where assets are situated in South Africa, questions of whether ownership (or beneficial ownership) has passed must be determined according to South African law (lex situs), regardless of the governing law of contracts purporting to transfer such ownership; (7) Transfer of immovable property requires compliance with the Deeds Registries Act; transfer of movable property requires delivery; mere contractual agreement under foreign law is insufficient.

The court made several non-binding observations: (1) The revenue rule exists not for the benefit or protection of taxpayers but as a matter of state sovereignty and limitations on judicial power; taxpayers have no vested rights based on the revenue rule; (2) The OECD Model Convention commentary, while instructive, confirms that states are free to apply mutual assistance provisions to revenue claims arising before the convention enters into force; (3) Exchange control planning involving the separation of beneficial and legal ownership through offshore structures, while potentially compliant with the literal terms of exchange control regulations, may constitute shams designed to avoid tax obligations; (4) The court noted (without deciding) the similarities between this case and the English case of Ben Nevis Holdings Ltd v HMRC, endorsing that court's reasoning on the nature and purpose of article 25A; (5) The court observed that SARS delayed acting on the ATO's first request in 2012 because at that time it lacked statutory powers for preservation orders and feared that giving notice would trigger asset dissipation - this gap was filled by the Tax Administration Act 28 of 2011; (6) The numerous instances of Mr Krok treating the assets as his own (in tax returns, loan applications, exchange control applications, personal expenditure) were inconsistent with claims that beneficial ownership had passed to offshore entities.

This case is significant in South African tax law and international cooperation in several respects: (1) It clarifies the temporal scope of mutual assistance provisions in double taxation agreements, particularly article 25A providing for assistance in tax collection; (2) It establishes that such provisions apply to tax debts arising before the provision came into force, as they concern enforcement procedures rather than substantive tax liability; (3) It confirms the abrogation of the revenue rule (which previously prevented courts from enforcing foreign tax claims) through double taxation agreements; (4) It demonstrates South Africa's commitment to international cooperation in combating tax avoidance through offshore structures; (5) It establishes that beneficial ownership claims by offshore entities must comply with South African law requirements (lex situs) for assets located in South Africa; (6) It provides guidance on interpreting double taxation agreements using principles from the Vienna Convention on the Law of Treaties; (7) It illustrates the effectiveness of the Tax Administration Act's preservation order provisions (sections 163 and 185) in cross-border tax enforcement. The case represents an important development in South Africa's capacity to assist foreign tax authorities and combat international tax evasion schemes.