When is a levy not a tax? A guideline from Namibia
In the electronic communications industry the stakes are high. It is a lucrative world, complex and indispensable. If unregulated, things could easily get out of hand. Since it knows few boundaries, its services are readily tradeable.
A country with a relatively small population like Namibia is no less affected by the all-pervasive presence of electronic communications than any other place on earth. And it faces similar challenges in regulating these services.
Regulation requires funding. Due to ubiquitous demand, electronic communications companies, in particular those providing mobile telephony and data services, are invariably awash with money. And potentially an easy prey for cash hungry state-owned regulators.
Something akin to this scenario played itself out in Communications Regulatory Authority of Namibia (CRAN) v Telecom Namibia Ltd, a judgment of the Namibian Supreme Court.
CRAN was created in terms of the Namibian Communications Act of 2009. Its aims include regulating telecommunications services and networks in Namibia in pursuit of the sensible and ambitious objects of the Act. One of the objects is ‘to enhance regional and global integration in the field of communications.’
However, it was not this part of its business that brought CRAN and the two major firms in the Namibian telecommunications industry to the doors of the court. It was money.
In terms of the Communications Act, CRAN may derive its income from a variety of sources – an initial grant by the Namibian Parliament, license-related fees, income from services it renders, even fines and monetary sanctions it may be entitled to impose. Finally, it may receive income from levies prescribed in accordance with the Act.
Section 23(1) of the Act allows CRAN by way of regulation, ‘after having followed a rule-making procedure, [to] impose a regulatory levy upon providers of communications services in order to defray its expenses’ (own italics). Five forms of levy are permitted, first among which a ‘percentage of the income of providers of the services concerned (whether such income is derived from the whole business or a prescribed part of such business)’ (s 23(2)(a)).
Under the authority of section 23(2)(a), CRAN made a regulation, imposing a 1,5% levy on the annual turnover of telecommunications service providers. As an indication of the monetary value of a 1,5% levy on turnover, Telecom Namibia’s first invoice in 2013 under the regulation was more than N$17 million. It was this levy that became the bone of contention.
Telecom Namibia, joined by the dominant mobile service provider MTC, alleged that the levy was not what it professed to be, but rather a tax. According to the age-old principle of ‘no taxation without representation’, only a legislative body may impose a tax, not a regulatory one like CRAN. They attacked the constitutionality of both section 23(2)(a) and the regulation made under the section.
The High Court of Namibia agreed with them that the section, and automatically as a result the regulation, were unconstitutional.
In response to the High Court ruling, CRAN lodged an appeal to the Supreme Court of Namibia. The Supreme Court identified two issues for consideration: on the one hand, whether the section 23(2)(a) scheme amounted to a tax; on the other, whether the Namibian Parliament abdicated its legislative function by granting or delegating the powers it did in section 23(2)(a).
If the Court found that the so-called regulatory levy was indeed a tax, it would offend the principle of no taxation without representation, which would lead to the invalidity of section 23(2)(a). If the Court was of the opinion that the powers in section 23(2)(a) were too wide, the section would also be invalid because in delegating powers Parliament must provide some framework and guidelines for the exercise of such powers. It follows that a ‘yes’ to either question would ‘sink’ section 23(2)(a).
It is not necessary to dwell on the detail of the rather lengthy judgment. A brief summary of the Court’s reasoning in reaching its decision will suffice. It started with the question: when is a levy a tax? Relying mostly on Canadian and South African jurisprudence, the following scheme emerged:
The ‘pith and substance’ of a levy is its dominant features, to be distinguished from incidental ones
Where both tax and regulatory features are present, the primary purpose of the law concerned determines the outcome
To be a tax, five elements must be present: ‘(1) compulsory and enforceable by law; (2) imposed under the authority of the legislature; (3) levied by a public body; (4) intended for a public purpose; and (5) unconnected to any form of regulatory scheme’ (para 58)
If a levy is connected to a regulatory scheme it will not be a tax, even if all the other criteria are present
To establish whether a regulatory scheme exists, a two-step process must be followed:
The first is to determine whether the scheme presents features such as: ‘(1) a complete, complex and detailed code of regulation; (2) a regulatory purpose which seeks to affect some behaviour; (3) the presence of actual or properly estimated costs of the regulation; (4) a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation’ (para 61)
Should the first step be met, the second one requires a connection between the charge and the scheme. A connection would exist when ‘the revenues are tied to the costs of a regulatory scheme, or where the charges themselves have a regulatory purpose, such as the regulation of certain behaviour’ (para 62).
The distinction in the last point is crucial: the revenue, or levy, need not always be cost-related; it could also be used to regulate or influence behaviour.
The Supreme Court endorsed this approach (para 73). It then measured section 23(2)(a) against the requirements for a regulatory scheme and concluded that it passed the test. With regard to the third requirement of ‘actual or properly estimated costs’, the Court observed that it ‘will be… acceptable if the levy is related to a regulatory scheme in the sense that the monies realised are used to pursue the policy objectives and requirements of the Act’ (para 85).
Unfortunately for CRAN, the matter did not end there. There was a question remaining: whether the powers granted to CRAN to impose a levy were too wide to survive constitutional scrutiny. CRAN relied on the so-called Dawood principle of the South African Constitutional Court to justify the wide wording of section 23(2)(a). In short, the principle entails that specialised bodies could be entrusted with wider or less circumscribed discretionary powers. The Court was not persuaded. Its response is best captured in its own words (para 92):
“Can it be right for CRAN to have unchecked discretion, without any ascertainable limitation (or even as much as oversight by either the Executive or the Legislature), to determine what the percentage levy on ‘turnover’ should be? What if in one year they decide it is 1.5% and in another that it be 50%? How are the licensees to know what percentage exceeds the legislative competence of CRAN?… Without a reasonable degree of certainty, regulations made under s 23(2)(a) of the Act are fertile ground for incessant litigation. The rule of law requires that the law is ascertainable in advance so as to be predictable and allow affected persons to arrange their conduct and affairs accordingly. Section 23(2)(a) fails that test.” (Own emphasis)
The CRAN ruling is a timely reminder that the constitutional state, under the rule of law, is about circumscribed and contained power, transparency, accountability, predictability of government action and respect for the separation of powers. In turn, these features are cornerstones of good governance, the lifeblood of a successful state.
 Dawood, Shalabi and Thomas v Minister of Home Affairs 2000 (3) SA 936 (CC).
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