By Keelen Snyders, Tax Trainee at BDO South Africa
The recent leak of the so-called ‘Panama Papers’ made headlines across the world and has implicated numerous celebrities, business leaders and politicians for not declaring their offshore assets and evading taxes. This has prompted investigations by revenue authorities across the globe to bring the culprits to book.
Legislative provisions are currently being introduced globally to encourage the automatic exchange of information, for example, the United States of America signed an agreement with South Africa to introduce the Foreign Account Tax Compliance Act (FATCA) in 2010. The purpose is that such information regarding the ultimate beneficial owners should be shared in order to track any illicit flows of funds or assets between countries. This kind of information being shared will ensure that it is easier to track illegal activities.
Even though taxpayers are entitled to structure their affairs in order to minimise their tax liabilities (Lord Tomlin in Duke of Westminster v IRC (1953) (at 520)), it is important that taxpayers ensure that they are not evading tax. Globally, a distinction is drawn between tax avoidance and tax evasion. Tax evasion is a deliberate illegal act, with the intention of not paying tax, whereas tax avoidance refers to taxpayers legally structuring their affairs to take advantage of legislative loopholes in tax codes.
Due to this leak of information through the Panama Papers, the South African Revenue Service (SARS) has stated that it will be investigating South Africans who have been implicated. This leak may also have the effect of widening the scope of SARS’ investigations to investigate other people, those not necessarily implicated in the Panama Papers but who may have been avoiding or evading tax by making use of offshore structures.
To the relief of those implicated in the Panama Papers and others finding themselves on the wrong side of the line, the Tax Administration Act (TAA) contains a Voluntary Disclosure Programme (VDP). The purpose of the VDP is to encourage taxpayers to disclose non-compliance to SARS by providing successful applicants with relief from understatement penalties and administrative penalties. SARS would also not pursue any criminal prosecution for criminal offences contained in a taxpayer’s VDP application.
In terms of the TAA, a VDP application must:
- Be voluntary;
- Involve a ‘default’ which has not been previously disclosed to SARS by the applicant or by a representative;
- Be full and complete in all material aspects;
- Involve the potential imposition of an understatement penalty in respect of the default;
- Not result in a refund due by SARS; and
- Be made in the prescribed form and manner.
A ‘default’ is described as ‘the submission of inaccurate or incomplete information to SARS, or the failure to submit information or the adoption of a “tax position”, where such submission, non-submission, or adoption resulted in an understatement’.
To apply for the VDP the applicant cannot be subject to an audit or investigation relating to the default. However, even if the audit or investigation relates to such default, SARS may still allow the VDP application if a senior SARS official is satisfied that the default would not have been detected during the audit or investigation and if the acceptance of the application would be in the interest of the good management of the tax system and the best use of SARS’ resources.
Successful VDP applications are recorded in a voluntary disclosure agreement between SARS and the applicant, which is a binding contract. The VDP agreement should include the following:
- The material facts of the default;
- The amount payable and the understatement penalty;
- The payment arrangements and dates; and
- The undertakings by SARS and the taxpayer.
Should a taxpayer be uncertain if they would qualify for VDP relief, the taxpayer may submit an anonymous VDP application to request a non-binding SARS private opinion.
In the 2016 Budget Speech, a Special Voluntary Disclosure Programme (Special VDP) was announced to give taxpayers additional relief. National Treasury issued a media statement on 12 April 2016 containing draft legislation on the Special VDP, which is open to comments until 29 April 2016. The relief provided by the Special VDP will apply for a limited period of six months from 1 October 2016 to 31 March 2017.
The primary difference between the Special VDP draft legislation and the current VDP relates to who may qualify for relief. Only certain persons may apply for relief under the special VDP, including:
- Individuals and companies; and
- Donors, deceased estates of donors or beneficiaries in relation to foreign discretionary trusts, if they elect to have the trust’s offshore assets and income deemed to be held by them. Trusts will not be eligible for the Special VDP. Neither will amounts that have directly or indirectly funded assets that have been disclosed to SARS in terms of the international exchange of information procedure. The special VDP will grant the following relief:
- Some 50% of the total amount used to fund the acquisition of offshore assets before 1 March 2015;
- Investment returns prior to 1 March 2010 will be exempt from normal tax, while investment returns after 1 March 2010 will be included in taxable income;
- Interest on tax debts to fund the acquisition of offshore assets or investment returns on those offshore assets will only commence on 1 March 2010; and
- No understatement penalties will be levied if a special VDP application is successful.
Some 50% of the total amount that was used to fund the acquisition of non-South African assets acquired prior to 1 March 2010 will be included in taxable income in the first year of assessment that ended prior to 1 March 2010.
SARS will not pursue criminal prosecution if a Special VDP application is successful, as is the case with the current VDP discussed above. The application process for a Special VDP is the same as the current VDP.
The Special VDP also contains provisions relating to the disclosure of Exchange Control Contraventions (ECR), 1961. The Financial Surveillance Department of the South African Reserve Bank (FinSurv) will provide taxpayers with an opportunity to regularise their exchange control affairs by providing relief from contraventions of the provisions of the ECR, which include ownership of unauthorised assets. Applications for exchange control relief under the Special VDP should be made under the ECR.
The TAA provides a list of situations whereby taxpayers are seen to be either directly or indirectly involved in tax evasion or obtaining an undue refund by fraud or theft, which constitutes a criminal offence.
In conclusion, the VDP is available to help non-compliant taxpayers. In light of recent events, it provides a real window of opportunity to come clean with minimum repercussions.