Not all smooth sail­ing for tax de­fault­ers

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

Vol­un­tary dis­clo­sure pro­gramme hits bump in the road as yet more pa­per­work is now re­quired

THE Vol­un­tary Dis­clo­sure Pro­gramme (VDP), en­acted by way of the Vol­un­tary Dis­clo­sure Pro­gramme and Tax­a­tion Laws Sec­ond Amend­ment Act, 2010, came to an end on Oc­to­ber 31, 2011.

It is un­clear, at this stage, how many per­sons ap­plied for re­lief in re­spect of tax de­faults ad­min­is­tered by the Com­mis­sioner: South African Rev­enue Ser­vice and for ex­change con­trol re­lief from the Fi­nan­cial Sur­veil­lance Depart­ment of the Re­serve Bank.

It is ap­pro­pri­ate to re­fer to the process which ap­pli­cants will face in­so­far as the fis­cal as­pects of the VDP are con­cerned.

Per­sons ap­ply­ing for re­lief un­der the VDP had to sub­mit a VDP ap­pli­ca­tion form elec­tron­i­cally to SARS through e-fil­ing with the ap­pro­pri­ate sup­port­ing doc­u­ments. The leg­is­la­tion stated that the Com­mis­sioner would eval­u­ate the ap­pli­ca­tions lodged and that a vol­un­tary dis­clo­sure agree­ment would be pre­pared to give ef­fect to the re­lief un­der the pro­gramme. Once the agree­ment has been con­cluded, SARS is com­pelled to is­sue as­sess­ments to the ap­pli­cant, giv­ing ef­fect to the doc­u­ment.

How­ever, it now ap­pears that SARS re­quires tax­pay­ers, who ap­plied for re­lief un­der the VDP, to re-sub­mit the tax re­turns pre­vi­ously sub­mit­ted in re­spect of the 2005 to 2009 years of as­sess­ment. It does not ap­pear that this process is con­tained in the leg­is­la­tion. How­ever, tax­pay­ers have re­ceived e-mails from the VDP Unit at SARS, con­tain­ing blank copies of tax re­turns for 2005 to 2009, which are re­quired to be re­sub­mit­ted. Un­for­tu­nately, the re­turns for­warded by SARS to ap­pli­cants are in .pdf for­mat, which means that the only way in which the tax re­turns can be com­pleted is man­u­ally and that it is not pos­si­ble to sub­mit amended re­turns via e-fil­ing. It is un­for­tu­nate that SARS did not ad­vise tax­pay­ers, at the time that the VDP com­menced, that this would be a re­quire­ment or, in fact, re­quire the re­turns to have been sub­mit­ted at the same time that the VDP ap­pli­ca­tion was filed.

It must be re­mem­bered that the VDP only dealt with tax de­faults which oc­curred prior to Fe­bru­ary 17, 2010. Those tax­pay­ers who ap­plied for VDP re­lief and have not yet filed their 2011 in­come tax re­turns, will need to take ac­count of in­come de­rived from off-shore or other in­come not pre­vi­ously dis­closed to SARS when com­plet­ing those re­turns. If the 2011 tax re­turn has al­ready been sub­mit­ted and as­sessed, VDP ap­pli­cants should ap­proach SARS to amend those re­turns to take ac­count of in­come which was not pre­vi­ously re­flected in the tax re­turn.

The for­mal VDP process came to an end last Oc­to­ber and it is, there­fore, not pos­si­ble to ap­ply for re­lief un­der the pro­vi­sions of the leg­is­la­tion. Those tax­pay­ers who, for what­ever rea­son, chose not to ap­ply un­der the leg­is­la­tion which op­er­ated from Novem­ber 1 2010 to Oc­to­ber 31 2011 and now wish to reg­u­larise their tax af­fairs, are re­quired to ap­proach their lo­cal branch of­fice of SARS.

It does not ap­pear that SARS has a for­mal process in place at the lo­cal branch of­fices to deal with those tax­pay­ers who wish to rec­tify prior de­faults. It would be im­por­tant, though, for those tax­pay­ers to have iden­ti­fied the mat­ters which re­quire rec­ti­fi­ca­tion, in­clud­ing the quan­tum.

Once the Tax Ad­min­is­tra­tion Bill, 2011 has been en­acted, tax­pay­ers will be in a po­si­tion to ap­ply for re­lief un­der a for­malised VDP. The VDP con­tained in the Tax Ad­min­is­tra­tion Bill is not as gen­er­ous as that which ended on Oc­to­ber 31, 2011, by virtue of the fact that the process will al­low for the waiver of ad­di­tional tax, but not in­ter­est which would oth­er­wise have been levied on the late pay­ment.

Where VDP ap­pli­cants are in­volved with, say, so-called “loop struc­tures” in vi­o­la­tion of the Ex­change Con­trol Reg­u­la­tions, the Re­serve Bank re­quires that these be un­wound. Ap­pli­cants must re­mem­ber that the un­wind­ing of such struc­tures will give rise to ad­verse con­se­quences in SA in the form of, pos­si­bly, cap­i­tal gains tax (CGT), sec­ondary tax on com­pa­nies (div­i­dends tax af­ter April 1 2012), or se­cu­ri­ties trans­fer tax, de­pend­ing on the na­ture of the as­set to be trans­ferred from the off-shore struc­ture to the South African res­i­dent.

It is not pos­si­ble, in this ar­ti­cle, to eval­u­ate the var­i­ous struc­tures which ex­ist and com­ment in de­tail on the fis­cal con­se­quences which may arise from un­wind­ing “loop struc­tures”.

Those ap­pli­cants who ap­plied for VDP re­lief from the Re­serve Bank will be re­quired to pay the levy on the unau­tho­rised for­eign as­sets within the pe­riod al­lowed by the Re­serve Bank. Where the for­eign as­sets are owned by a for­eign trust, it will be nec­es­sary for the for­eign trust to make an award of funds to the res­i­dent per­son­ally so that they can pay the levy due to the Re­serve Bank. It is not pos­si­ble for the for­eign trust to pay the levy di­rectly to the Re­serve Bank, with the re­sult that the off­shore struc­ture will need to make an award equiv­a­lent to the levy payable by the res­i­dent, to the res­i­dent so that they can pay the amount over.

The Tax­a­tion Laws Amend­ment Act, 2011, re­peals Part XIII of the eighth sched­ule to the In­come Tax Act, 1962. That part of the act re­quired tax­pay­ers, in re­ceipt of funds from off-shore, to cal­cu­late the cap­i­tal gain or cap­i­tal loss which arose on the con­ver­sion of amounts in for­eign cur­rency into SA Rand.

For­tu­nately, the leg­is­la­tion has re­pealed that part of the act with ef­fect from March 1 2011 and in re­spect of years of as­sess­ment com­menc­ing on or af­ter that date. There­fore, any for­eign ex­change gain or loss, which may arise as a re­sult of the award by the for­eign trust of funds to the res­i­dent to pay the levy due to the Re­serve Bank, will no longer be li­able to CGT as was pre­vi­ously the case.

Those per­sons who chose not to ap­ply for re­lief un­der the for­malised VDP process, and wish to reg­u­larise prior trans­gres­sions of the ex­change con­trol reg­u­la­tions, will be re­quired to ap­proach the in­ves­ti­ga­tions di­vi­sion of the Re­serve Bank with a view to reg­u­lar­is­ing their ex­change con­trol af­fairs. Where per­sons ap­plied for re­lief un­der the VDP, a levy of 10% was re­quired to be paid on the value of the for­eign as­sets held as at Fe­bru­ary 28 2010 in ex­cess of the for­eign in­vest­ment al­lowance avail­able to nat­u­ral per­sons. Where per­sons seek to reg­u­larise their ex­change con­trol af­fairs out­side of the VDP, the Re­serve Bank will im­pose a levy of up to 25% of the value of the as­sets at the time that the per­son ap­plies for reg­u­lar­i­sa­tion of the unau­tho­rised for­eign as­sets.

Once the ap­pli­cant has re­ceived re­lief un­der the VDP ad­min­is­tered by the Re­serve Bank, they may not utilise the for­eign as­sets to ac­quire as­sets in SA, or to ad­vance loans, di­rectly or in­di­rectly, to any other South African res­i­dent.

Fur­ther­more, should ei­ther the Re­serve Bank or SARS dis­cover that the VDP ap­pli­cant did not make full and proper dis­clo­sure of their af­fairs in the VDP ap­pli­ca­tion, the au­thor­i­ties are en­ti­tled to with­draw the ap­proval granted un­der the VDP.

It would ap­pear that it is go­ing to take months for both the Re­serve Bank and SARS to process all of the VDP ap­pli­ca­tions. Ap­pli­cants have no choice but to wait for the au­thor­i­ties to con­tact them to ad­vise as to the sta­tus of their ap­pli­ca­tions.

Dr Beric Croome is a tax ex­ec­u­tive at ENS.

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