The low­down on those off­shore in­vest­ments

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

THE Panama Pa­pers rep­re­sent a leak of some 11.5-mil­lion files from a Pana­ma­nian-based ad­vi­sory firm, Mos­sack Fon­seca. The leak pro­vided in­for­ma­tion on off­shore bank ac­counts and off­shore trusts based in Panama, the Bri­tish Vir­gin Is­lands and the Sey­chelles, among other ju­ris­dic­tions.

Many politi­cians and celebri­ties have been named, in­clud­ing Bri­tish Prime Min­is­ter David Cameron, who is per­haps the high­est pro­file in­di­vid­ual named in this leak. He has sub­se­quently ad­mit­ted that he ben­e­fited from an off­shore trust fund based in the Ba­hamas, which was set up by his late father.

How­ever, while nu­mer­ous re­ports on the con­tro­ver­sial Panama Pa­pers point out that a num­ber of these struc­tures are en­tirely le­gal, they do not pro­vide any clear guid­ance on which struc­tures are le­gal and which are not. Per­haps a rea­son for this is that the ques­tion needs to be posed with ref­er­ence to the laws of the rel­e­vant coun­tries.

From a South African per­spec­tive, off­shore struc­tures are quite com­mon. If, for ex­am­ple, you have a pen­sion fund or have in­vested in off­shore funds, chances are that you have in­vest­ments in a tax haven. You may there­fore, ei­ther di­rectly or through your pen­sion fund, hold units or shares in a com­pany or some other off­shore ve­hi­cle lo­cated in some or other tax haven. This ve­hi­cle will then hold the un­der­ly­ing shares and other as­sets that make up your in­vest­ment port­fo­lio. The rea­son for set­ting up these in­vest­ment ve­hi­cles in a tax haven is pre­cisely to avoid pay­ing mul­ti­ple lev­els of tax on your un­der­ly­ing in­vest­ments. These are ex­am­ples of le­gal struc­tures.

If South African res­i­dent in­di­vid­u­als es­tab­lish their own off­shore trust or some other off­shore in­vest­ment ve­hi­cle in a tax haven, and the ve­hi­cle ac­quires var­i­ous off­shore as­sets, the in­di­vid­u­als will be re­quired to make dis­clo­sures to the exchange con­trol au­thor­i­ties at the Re­serve Bank and the Rev­enue Ser­vice. Pro­vided that these dis­clo­sures have been made, ap­provals are ob­tained, and the rel­e­vant tax re­turns have been cor­rectly com­pleted on an an­nual ba­sis, these also con­sti­tute ex­am­ples of le­gal off­shore struc­tures.

SA’s tax law caters for ex­actly these types of struc­tures. Tax pro­vi­sions de­tail the cir­cum­stances in which such struc­tures will be sub­ject to South African tax. These rules also set out the cir­cum­stances in which the dis­tri­bu­tions made from in­come earned, in terms of these struc­tures, are to be taxed in the hands of any South African ben­e­fi­cia­ries or founders.

The Davis tax com­mit­tee is mak­ing rec­om­men­da­tions on how to adapt and amend SA’s tax law re­gard­ing off­shore trust struc­tures. Pro­vided that there is com­pli­ance with SA’s ex­ist­ing tax law and exchange con­trol rules, these struc­tures are also le­git­i­mate.

Il­le­git­i­mate off­shore struc­tures are, for ex­am­ple, ones where in­di­vid­u­als set up off­shore trusts with­out mak­ing the nec­es­sary dis­clo­sures and ob­tain­ing the nec­es­sary ap­proval ei­ther from the exchange con­trol au­thor­i­ties or the South African Rev­enue Ser­vice. An off­shore struc­ture is also il­le­git­i­mate when there is no on­go­ing com­pli­ance with the rel­e­vant tax laws, such as in­stances where the rel­e­vant tax re­turns are not cor­rectly and timeously sub­mit­ted by the rel­e­vant par­ties.

It is in­ter­est­ing that a six-month tax and exchange con­trol amnesty is pro­posed from Oc­to­ber. For any South Africans with il­le­gal off­shore struc­tures, given the in­creas­ing like­li­hood of these struc­tures com­ing to light (ei­ther through leaks or due to the in­creas­ing in­for­ma­tion shar­ing be­tween in­ter­na­tional rev­enue au­thor­i­ties), this may be their last chance to avoid be­ing named and shamed.

From a South African per­spec­tive, off­shore struc­tures are quite com­mon

Peter Dachs and Bernard du Plessis are di­rec­tors and joint heads of ENSafrica’s tax de­part­ment.

Pic­ture: iS­TOCK

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