A pressing matter currently discussed in the media is the exchange control foreign investment allowance for individuals and, in particular, recent amendments thereto. Some tax practitioners have described these amendments as marking the beginning of the end of financial freedoms previously enjoyed by South Africans, referring to the amendments as Treasury's decision to eliminate the R10 million annual investment allowance. Conversely, others have supported the amendments, contending that it enhances taxpayer compliance and aids in monitoring movements of currency.
Background
South Africa (‘SA’) has imposed restrictions on outbound monetary flows since 1961, when the first measures to restrict the export of capital were introduced. Gradually, allowances were established to enable South Africans to invest increasing amounts offshore, subject to approval from the SA Reserve Bank. From 1 April 2015, the annual allowance was raised from R4 million to its current level of R10 million, per major individual per calendar year.
Previously, the South African Revenue Service (‘SARS’) had separate processes in place, namely the ‘Emigration’ Tax Compliance Status (‘TCS’) pin, which applied to individuals transferring funds out of South Africa following the cessation of their South African tax residency, and the ‘Foreign Investment Allowance’ (‘FIA’) TCS Pin, which is the focus of this article and applied to other cases involving fund transfers out of South Africa.
Under the old FIA process, individuals could transfer up to R10 million per calendar year by obtaining a foreign tax clearance from SARS. The FIA process was relatively straightforward, with minimal documentary requirements that included the applicant's details, information about the foreign investment, and the transferring bank's particulars.
Recently, SARS has combined the FIA and Emigration applications into an Approval for International Transfer (‘AIT’) Application, which places a more burdensome duty on taxpayers compared to the previous FIA process. SARS states that the additional information is necessary to ensure that all required tax payable has been accounted for and to address any non-compliance detected through verification and audits, aligning with their strategic intent of promoting voluntary compliance. SARS further asserts that the changes will facilitate compliance for law-abiding taxpayers while making it more difficult for those unwilling to comply.
As mentioned above, the changes evoked criticism from some commentators. I pause to mention that it is important to consider the context and reasoning behind the changes to properly assess them.
In the 2020 Budget Review National Treasury proposed strengthening the compliance treatment for individuals wishing to transfer in excess of R10 million per annum abroad and to phase this new treatment in by 1 March 2021. The 2020 Budget Review stated the following:
“Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and the source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.”
Since then, South Africa has been grey-listed by the Financial Action Task Force, which appears to make the increased compliance more necessary, especially given deficiencies found in anti-money laundering and terrorism financing policies and systems. One area that requires increased scrutiny and regulation is the movement of money, thus the need to establish the source of funds when investing in and acquiring foreign assets, as discussed below. Therefore, the new requirements were not unexpected and should be viewed in that context.
What changed?
No TCS pin is required for yearly transfers up to R1 million, which remains the same as before. However, for transfers of more than 1 million, SARS previously had two separate types of TCS pins: one for 'Emigration' for individuals leaving South Africa after relinquishing their tax residency, and another for transfers made under the FIA. However, these two pins have now been combined into a single AIT pin, simplifying the process in this regard. It is important to note that, although the process has been simplified, the amount of information and supporting documentation required by SARS has increased substantially.
The new AIT application introduces the question of whether the applicant is considered a "resident" or a "non-resident" for South African tax purposes. For non-residents, a "non-resident confirmation letter" is required. This question aligns with the consolidation of the FIA and Emigration applications. Alongside the residence question, additional queries include whether the person is a beneficiary of any trust, holds shares in companies, or has provided loans to trusts.
Previously, the FIA application necessitated the disclosure of a taxpayer's local assets and liabilities for the previous three years. The AIT application introduces a new requirement to prove worldwide assets and their acquisition costs. However, since 2001, South Africa has operated on a residence basis whereby residents are taxed on their worldwide income. This includes income from foreign assets, rendering this requirement unproblematic unless a worldwide asset was not declared previously.
Another significant change that has drawn criticism is the disclosure of the source of funds used to acquire assets. This can be a burdensome process for taxpayers who have built their portfolios over many years. However, this requirement assists SARS in ascertaining whether authorised after-tax funds were used to purchase offshore assets, contributing to the fight against corruption and money laundering.
Conclusion
The changes were introduced suddenly and could easily be perceived as an antagonistic move by SARS. However, upon closer examination, it is evident that changes such as these were contemplated since at least 2020 and one can see why SARS would want to keep track of the assets of high net-worth individuals and the source of their funds and, given South Africa’s recent grey-listing, why National Treasury would also want information to be supplied in this regard. However, the amount of information required seems excessive when compared with the immediate purpose for which it is supplied. Be that as it may, the practical import is that the R10 million allowance is still available, but given the increased requirements, individuals will need to spend considerably more time collating the required information.