Voluntary Tax Disclosure – Is It For You?
Voluntary Tax Disclosure – Is It For You?
By Esther van Schalkwyk – Associate Director
Taxpayers with undisclosed tax liabilities in practice often derive great benefit from the general voluntary disclosure programme (commonly referred to as the VDP) administered by the South African Revenue Service (SARS). Unlike a special VDP or amnesty which is usually for a limited time only, relief under the general VDP is in theory always available (subject to meeting the various qualification requirements) and allows taxpayers to “come clean” while enjoying protection from criminal prosecution and practically all the penalties that may apply in the absence of the VDP. Also, the taxpayer is granted relief from possible criminal prosecution for the tax offences that may have arisen.
However, there are certain critical aspects and even potential disadvantages that should be considered before jumping headfirst into a VDP application.
The requirements
A person who meets the requirements may apply for VDP relief in a personal, representative, withholding or other capacity.
The six critical requirements of a VDP application are that the disclosure must:
a. Be voluntary;
b. involve a default which has not occurred within five years of the disclosure of a similar default by the applicant;
c. be full and complete in all material respects;
d. involve a behaviour referred to in column 2 of the understatement penalty table in section 223 of the Tax Administration Act;
e. not result in a refund due by SARS; and
f. be made in the prescribed form and manner.
SARS’ VDP Unit has over the years become increasingly strict in their interpretation of these requirements, especially the requirement that the disclosure must be “voluntary”. This is not a defined term and is therefore open to interpretation. Disclosures are generally considered voluntary if, at the time of submission of the formal VDP application (which can only be done via eFiling), SARS was not already aware of - and was not in the process of discovering - the disclosed default. Examples of applicants that are likely to be disqualified include:
- Where an audit or criminal investigation into the applicant’s affairs has commenced which has not been concluded and is related to the disclosed default.
- Where the applicant had divulged information about the default to SARS before the submission of a formal VDP application.
- Where the applicant has outstanding tax returns (i.e. past due but not yet submitted) for the relevant periods.
A “default” means the submission of inaccurate or incomplete information to SARS, the failure to submit information or the adoption of a tax position which resulted in an understatement; whereas an “understatement” means any prejudice to SARS or the fiscus as a result of—
a.The failure to submit a return as required;
b.an omission from a return;
c.an incorrect statement in a return;
d.if no return is required, the failure to pay the correct amount of tax; or
e.an impermissible avoidance arrangement.
The “default” requirement essentially requires some wrongdoing in a past tax period by an applicant, although as noted above, it is a qualification requirement for the VDP that the applicant must not have applied for VDP relief for a similar wrongdoing during the five preceding years. For example, the omission of foreign income from a resident’s income tax return constitutes the submission of inaccurate or incomplete information to SARS resulting in prejudice (in this case a financial loss) to SARS or the fiscus because of the omission of such foreign income from the applicant’s income tax return.
The disclosure must be full and complete in all material respects – therefore applicants should be sure to paint the full picture and not leave out any information that has a material impact on their tax position.
As mentioned above, a qualification requirement for the VDP is that the applicant’s behaviour must fall into a behaviour category referred to in column 2 of the understatement penalty table contained in section 223 of the Tax Administration Act. These behaviour categories are as follows:
i.Substantial understatement (where the prejudice to SARS or the fiscus exceeds the greater of 5% of the amount of tax properly chargeable or refundable, or R1 million);
ii.reasonable care not taken in completing return;
iii.no reasonable grounds for tax position taken;
iv.impermissible avoidance arrangement;
v.gross negligence; and
vi.intentional tax evasion.
For instance, SARS might categorise the omission of foreign income from a resident’s income tax return as “reasonable care not taken in completing return” which generally carries understatement penalties at 25% of the shortfall in tax (increased to 50% if it is an “obstructive” or “repeat case”). If such a VDP application is successful, relief from understatement penalties is provided as follows:
- No understatement penalty if VDP applied for before notification of audit or criminal investigation; and
- Only 15% understatement penalty is levied (instead of the 25% or 50%) if VDP applied for after notification of audit or criminal investigation (provided the disclosure still meets the “voluntary” requirement).
A disclosure that results in a refund due by SARS is disqualified from relief under a VDP. This is generally evaluated on a “net” basis if several tax periods are involved. An application under the VDP will therefore not be the appropriate manner to regularise the omission of foreign income from a return where the applicant had incurred tax-deductible expenditure in excess of such income, therefore placing the foreign income in an overall loss position.
Finally, the VDP application must be submitted in the prescribed form and manner, which is by the submission of a VDP01 form via the applicant’s eFiling profile. This step is critical since anything SARS uncovers before submission of a formal VDP application (and even statements made by the very applicant to SARS before such formal submission) may disqualify the applicant from obtaining VDP relief.
The time, process and professional fees
If the VDP requirements are met and the potential penalties are material, a VDP application is often the obvious choice. There is certainly comfort in signing a VDP agreement in which SARS undertakes not to pursue criminal prosecution or impose most (if not all) penalties.
However, applicants should be aware that the process involved in a VDP application is quite onerous and it is best navigated with the assistance of a tax practitioner with recent experience in dealing with the VDP Unit. Of course, this implies the incurral of professional fees, and thus the decision whether to proceed under a VDP application should be weighed against the quantum of the potential penalties and the relief from the threat of criminal prosecution that the conclusion of a VDP Agreement may bring.
A VDP also takes time to conclude. Not only should the application be sufficiently detailed to constitute a full and complete disclosure, but the VDP Unit also requires time (usually at least a few months) to consider the application in detail. All the while, interest continues to accrue on the outstanding taxes until the date of final payment, which is usually only after the VDP Unit has accepted the application and requested the submission of revised returns by the applicant. And it should be noted that interest remains payable in full even in the event of a successful VDP outcome.
The alternative
What then is the alternative for taxpayers with undisclosed tax liabilities who do not meet the VDP requirements or where the cost of a VDP may exceed the benefit? Sleepless nights until SARS’ technology eventually finds you?
In cases where formal VDP relief is either not an option or considered not to be worth it, taxpayers should regularise their affairs via the normal SARS operations channels. For example, resubmitting the relevant income tax returns with the foreign income included and simply suffering the penalties - interest being payable in either scenario. If the penalties are minor, they should be paid and the taxpayer can “move on”. If not, in the appropriate circumstances the taxpayer may still be able to apply for a waiver of the penalties, for instance in cases of “exceptional circumstances” or a “first incidence” of non-compliance. Whatever the choice, it is always better to approach SARS before they come knocking, whether the approach is by way of a formal VDP application or informally via normal SARS operational channels – with the assistance of a tax practitioner with recent experience in these matters.