Final opportunity to regularise your unauthorised foreign assets
by Mmangaliso Nzimande and Jerome Brink
In the 2016 Budget Speech delivered on 25 February 2016, the Minister of Finance announced a special voluntary disclosure programme (“Special VDP”) to encourage taxpayers to regularise violations of tax laws and exchange control regulations. This article briefly examines the benefits of the Special VDP and why potential applicants should begin preparing to submit their application in anticipation of the 1 October 2016 commencement date.
Automatic exchange of information between tax authorities
The Common Reporting Standard for the automatic exchange of information, developed by the OECD, provides for the formal and organised automatic exchange of information between participating tax jurisdictions in respect of information reported to them by financial institutions. At this stage, close to 100 countries have committed to participate in this process and, as an early adopter, South Africa will begin receiving information during September 2017.
For South African resident taxpayers, this means that certain financial information maintained in a participating jurisdiction may be passed onto the South African Revenue Service (“SARS”). As a result, any previously undisclosed assets and income held offshore may be brought to the attention of SARS, which will, if the circumstances warrant it, issue requests for information and if necessary, launch audits into the relevant taxpayer’s foreign affairs in order to bring the previously undisclosed funds into the South African tax net.
The Permanent Voluntary Disclosure Programme under the Tax Administration Act
Currently, taxpayers are able to lodge applications to SARS’ Voluntary Disclosure Unit (“VDU”) under sections 225 to 233 of the Tax Administration Act 28 of 2011 (“TAA”). Such applications are aimed at regularising a taxpayer’s affairs to the extent that there have been any undisclosed income/assets held offshore or locally. The tax relief provided for under the current permanent Voluntary Disclosure Programme (“Permanent VDP”) includes the following:
· No criminal prosecution in respect of any alleged “tax offence”.
· Relief provided under the table in section 223 of the TAA in respect of the imposition of an understatement penalty (“USP”), which could, for example, result in a reduction of a USP from 100% to 5%, where SARS is of the view that the taxpayer was grossly negligent, or from 25% to 0%, where the behaviour is considered to be unreasonable.
· 100% relief in respect of an administrative non-compliance penalty, including a fixed percentage-based penalty for the late payment of tax, but excluding a penalty for the late submission of a return.
While the above relief is certainly attractive, there are several practical issues that have resulted in many non-compliant taxpayers not utilising the Permanent VDP. In particular, the Permanent VDP does not provide for any relief for interest on tax debts and does not specify how many years back a taxpayer must disclose such offshore income/assets. As a result, the interest on the outstanding tax debt pursuant to the VDP application has the potential to exceed the funds held offshore, which is a deterrent to many potential applicants.
Regularisation of alleged exchange control contraventions
While the Permanent VDP’s terms and conditions are clearly spelled out in the TAA, the potential relief for taxpayers who wish to regularise their alleged exchange control contraventions is not clear. A document which provides some guidance on any potential penalties or relief is a guideline issued by the Minister of Finance in 2003 in respect of the first amnesty, which provides for an effective levy of between 20% and 40%. While there is certainly some doubt as to the binding effect of this guideline, it is apparent that the wide discretion afforded to the Financial Surveillance Department (“FinSurv”) of the South African Reserve Bank results in some applicants paying a 5% levy, while others receive notice of levies in excess of 20%.
Furthermore, when one adds up the capital amount of tax, the interest thereon, the penalties and the potential 20% exchange control levy, it is clear that their offshore funds will be significantly depleted once they have gone through the regularisation process. This may have had a negative effect on the number of potential applicants regularising their affairs.
The introduction of a Special Voluntary Disclosure Programme
What may be a result of some of the issues described above, the Minister of Finance announced in the 2016 Budget Speech the introduction of a Special Voluntary Disclosure Programme (“Special VDP”) aimed at providing a final opportunity to non-compliant taxpayers to voluntarily disclose their offshore assets and income. SARS and FinSurv are set to work together to ensure that applications in respect of the Special VDP are assessed through a joint process for both tax and exchange control contraventions. The Special VDP will only operate for a very limited period and applications will need to be submitted between 1 October 2016 and 31 March 2017.
Persons that may apply for the Special VDP
A media statement issued by National Treasury on the same date as the 2016 Budget Speech states the following in respect of persons who may apply for the Special VDP:
· individuals and companies may initially make an anonymous (no-name) application in order to ascertain whether they comply with the stipulated requirements.
· Trusts will not qualify to apply for the Special VDP. However, settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts may participate in the Special VDP if they elect to have the trust's offshore assets and income deemed to be held by them for income tax purposes.
· Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts may participate in the Special VDP if they elect to have the trust’s offshore assets and income deemed to be held by them for income tax purposes.
· Persons may not apply for the Special VDP if they are aware of a pending audit or investigation in respect of foreign assets or foreign taxes.
· Amounts in respect of which SARS obtained information under the terms of any international exchange of information procedure will not be eligible for the Special VDP.
Potential tax relief granted under the Special VDP
The abovementioned media statement, together with draft legislation, currently provides for the following potential tax relief:
| Tax |
| Seed money; i.e., funds not previously taxed and utilised for funding the acquisition of offshore assets | 50% of the total amount (not previously taxed) originally transferred offshore before 1 March 2015 will be included in the taxpayer’s taxable income. |
| Investment return on offshore assets | 100% of the total amount between 1 March 2010 to the date of disclosure will be included in the taxpayer’s taxable income. Investment returns prior to 1 March 2010 are effectively exempt from tax. |
| Interest on tax debts | Interest on tax debts arising from the disclosure of the default amounts will only run from 1 March 2010. |
| Understatement penalties | No understatement penalties will be levied. |
| Criminal prosecution | No criminal prosecution will be pursued. |
The potential tax relief set out above is very favourable in comparison to the Permanent VDP, as many of the issues that make a disclosure under the current provisions unattractive have been resolved in the proposed Special VDP legislation, in that tax on the investment returns and interest on the outstanding tax debt will only be levied from 1 March 2010 onwards.
Potential exchange control relief
In addition to the tax relief, the media statement states that applications for exchange control relief under the Special VDP will commence on 1 October 2016 and continue until 31 March 2017, providing the following potential relief:
| Exchange control contraventions | South African residents (individuals and entities) will be allowed to disclose and regularise their exchange control contraventions that occurred prior to 29 February 2016. |
| Levy | A levy that is based on the asset’s market value as at 29 February 2016 will have to be paid (from foreign-sourced funds). The following conditions apply: · if the regularised assets are brought back to South Africa, then5% of the leviable amount must be paid. · if the regularised assets are kept offshore, then 10% of the leviable amount must be paid. · where insufficient liquid foreign assets are available, an additional2% will be added, to the extent that the local assets are utilised to settle the levy. |
| Foreign capital allowance | No deduction from the leviable amount may be made using the R10-million foreign capital allowance or any remaining portion thereof. |
The potential exchange control relief set out above provides much-needed certainty and is very favourable compared to the current ministerial guidelines providing for a discretionary levy of 20% or more.
Conclusion
The world is becoming a small place and, with the automatic exchange of information between tax jurisdictions about to commence, non-compliant taxpayers who have failed to disclose assets and income offshore to the authorities in South Africa have very little time left to ensure that their affairs are in order. All potential applicants are strongly encouraged to make use of the very favourable relief provided for by the South African authorities.
While the Special VDP will only commence on 1 October 2016, all potential applicants would be well advised to begin gathering the necessary information and preparing the documents in order to be ready for an impending application, as the window for the Special VDP will only be open for six months. It is also recommended that potential applicants consult professional advisers to guide them through the process efficiently and effectively and, by utilising the services of a law firm, they will benefit from legal professional privilege, which is available only in respect of advice provided by attorneys or advocates to their clients.
Mmangaliso Nzimande
tax director
[email protected]
+27 72 599 1274
Jerome Brink
tax associate
[email protected]
+27 82 947 0851