With the substantial changes to the Organisation for Economic Co-operation and Development (OECD) taking place, countries across the world are anticipating what this will mean for them and their operating companies. This is one of the biggest changes in the tax landscape globally and South Africans need to be informed of what to expect for the future administration and management of their accounts and businesses.
The tax and exchange control amnesty of 2003 raised anything between R3bn and R7bn. At the time, foreign funds held by South African persons amounted to approximately R69bn, of which R48bn was held without authorisation. A recent report revealed that approximately R28bn (or 0.57% of South Africa’s GDP), was held by South African citizens in HSBC Swiss bank accounts, in more than 2000 accounts. Although this may seem significant, it only represents one report from one bank in one tax haven.
In terms of the Automatic Exchange of Information Agreement introduced by the OECD, South Africa and other tax authorities will be exchanging taxpayer information from 2017. To encourage compliance, the Minister of Finance, Pravin Gordhan, announced a Special Voluntary Disclosure Programme (VDP) in respect of offshore assets and income in his February 2016 Budget Speech. “This joint initiative of SARS and SARB 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 SA Tax system’s change from the residence to the worldwide basis of taxation, which commenced in 1997 and was further cemented in 2001,” states Ferdie Schneider, Head of Tax at BDO South Africa.
Provisions relating to the Special 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 Special VDP from 1 October 2016 to 31 March 2017. Individuals and Corporates may apply for the Special VDP, which initially can be done on a no-name 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,” continues Schneider.
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 for the Special VDP. Trusts will also not qualify for the Special VDP. If the scope of the audit or investigation is in respect of other areas, a person may still qualify for the Special VDP. However, settlors, donors, deceased estates, or beneficiaries of foreign discretionary trusts may, however, participate in the Special VDP if they elect to have the trust’s offshore assets and income deemed to be held by them. The Special 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,” says Schneider. “These levies will be based on the market value of the assets on 29 February 2016. The Special VDP will allow South African resident individuals and companies to disclose and regularise their exchange control contravention that occurred pre 29 February 2016. Individuals will not be allowed to claim their R10 million (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 Special VDP, a levy ranging between 10% and 40% will be imposed on the current market value (refer also to Shuttleworth case). The quantum of the imposition will depend on whether the funds are repatriated or not. The levy must be paid from foreign-sourced funds,” says Schneider. To the extent that local funds are used to pay the levy, an additional 2% levy will be imposed.
The Special VDP will grant tax relief of 50% of the total amount (‘seed money’) used to acquire offshore assets before 1 March 2015, to be included in taxable income. Only investment returns on those offshore assets received or accrued on or after 1 March 2010 will be included in taxable income. Investment returns that accrued prior to 1 March 2010 will be exempt. Interest on tax debts resulting from the disclosure will be payable from 1 March 2010.
“The Special 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 in 2017. In terms of the Special VDP, no understatement penalties will be levied and successful application will not result in criminal prosecution or imprisonment,” concludes Schneider.