Grace period for disclosure of offshore assets
IN TERMS of the automatic exchange of information agreement introduced by the Organisation for Economic Co-operation and Development (OECD), SA and other tax authorities will be exchanging taxpayer information from next year.
To encourage compliance, the finance minister announced a special voluntary disclosure programme (VDP) in respect of offshore assets and income in his February budget speech. This joint initiative of the Revenue Service (SARS) and the Reserve Bank will enable taxpayers with unauthorised offshore assets to make voluntary disclosure to rectify tax or exchange control violations. The 2003 and current amnesty were announced following the South African tax system’s changing from the residence to the worldwide basis of taxation in 1997.
Provisions relating to the VDP have been made available in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016, the Rates and Monetary Amounts and Amendment of Revenue Laws (Administration Bill), 2016, and under the Exchange Control Regulation 24 of 1961.
Taxpayers can apply for the VDP from October 1 this year to March 31 2017. Individuals and corporates may apply, initially on a no-names basis and may also be made by taxpayer representatives. This needs to be done on the same basis as the VDP contemplated in Part B of Chapter 16 of the Tax Administration, 2011.
Persons aware of a pending audit or investigation in respect of foreign assets or foreign taxes, or persons already under such audit or investigation, will not qualify. Trusts will also not qualify. If the scope of the audit or investigation is in respect of other areas a person may still qualify. Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts may participate if they elect to have the trust’s offshore assets and income deemed to be held by them. The VDP will not apply to amounts disclosed to SARS in terms of an international exchange of information procedure.
Unauthorised funds repatriated to SA will be subject to a 5% exchange control levy, and funds kept offshore will be subject to a 10% exchange control levy. These levies will be based on the market value of the assets on February 29 this year. The VDP will allow South African resident individuals and companies to disclose and regularise their exchange control contravention that occurred before February 29. Individuals will not be allowed to claim their R10m (or remaining part thereof) foreign capital allowance as a deduction.
The levy may also not be reduced by fees or commissions paid. Where a liable person has not applied for the VDP, a levy ranging from 10% to 40% will be imposed on current market value. The quantum of the imposition will depend on whether the funds are repatriated or not. The levy must be paid from foreign-sourced funds. To the extent that local funds are used to pay the levy, an additional 2% levy will be imposed.
The VDP will grant tax relief of 50% of the total amount (“seed money”) used to acquire offshore assets before March 1 last year to be included in taxable income and subject to tax. Only returns on those offshore assets received or accrued on or after March 1 2010 will be included in taxable income. Returns that accrued prior to that date will be exempt. Interest on tax debts resulting from the disclosure will be payable from that date.
The tax and exchange control amnesty of 2003 raised between R3bn and R7bn. At the time, foreign funds held by South Africans amounted to about R69bn, of which R48bn was held without authorisation. A recent report revealed that about R28bn (or 0.57% of SA’s gross domestic product) was held by South African citizens in more than 2,000 HSBC Swiss bank accounts. Although this may seem significant, it only represents one report from one bank in one tax haven.
The VDP now allows taxpayers a grace period within which to make disclosure before the automatic exchange of information agreement of the OECD comes into operation in SA next year. No understatement penalties will be levied and successful application will not result in prosecution or imprisonment.
Taxpayers can apply from October 1 this year to March 31 next year
Ferdie Schneider is head of tax at BDO South Africa.