By September 2017, the first automatic exchange of information will have taken place between the South African Revenue Service (SARS) and the tax authorities of over 90 other jurisdictions which have agreed to comply with the Standard for Automatic Exchange of Financial Account Information (CRS) initiated by the OECD to tackle offshore tax evasion. 

National Treasury, in its effort to comply with its obligations under CRS, has introduced certain amendments in the Tax Administration Laws Amendment Act 2015 (TAA) to ensure the reporting by certain financial institutions on its account holders. In view of the exchange of information provisions contained in the TAA, which allows SARS to pass information to the South African Reserve Bank (SARB), this worldwide reporting requirement of financial institutions to SARS will also result in the discovery by SARB of those assets held offshore by South African residents in contravention of the exchange control regulations.

To give South African residents a last chance to regularise their unauthorised assets before the major disclosure in 2017, National Treasury has announced a Special Voluntary Disclosure Programme (Special VDP) which will be available for 6 months from 1 October 2016 to 31 March 2017 and will include an amnesty for exchange control and tax offences in respect of unauthorised foreign assets.
The proposed additional tax VDP (Additional Tax VDP) in respect of tax transgressions will be added to the existing tax VDP (Existing Tax VDP) currently available to non-compliant taxpayers.  The Additional Tax VDP will thus not replace the Existing Tax VDP which remains available.  In accordance with both the Existing Tax VDP and the Additional Tax VDP, the applicant will obtain relief against penalty charges (unless the transgression was as a result of gross negligence or intentional tax evasion) and criminal prosecution in exchange for reporting and settling their outstanding tax liabilities.

In terms of the proposed Additional Tax VDP, a person applying for the relief (Reporter) must include in his/her taxable income, “50% of the total amount used to fund the acquisition of assets” situated outside South Africa, which were acquired before 1 March 2010.  Furthermore, any foreign dividends, local dividends, interest, rental income and other investment income earned on those assets before 1 March 2010 will be exempt from tax, i.e. such income earned after 1 March 2010 will have to be treated in accordance with the normal provisions of the Income Tax Act.

There is significant uncertainty about the scope of application of the rule that requires the inclusion of 50% of the total amount used to fund the acquisition of assets. Presumably, it is intended to include 50% of the amount transferred offshore to acquire the offshore investment. However, if the Reporter had transferred an amount offshore to pay a portion of the cost of the investment and borrowed the balance of the purchase price, the rule could be applied to include the borrowed amount as well.  Furthermore, if the Reporter had transferred the full amount from after tax income, the inclusion of 50% of that amount could result in a very high effective tax in respect of that amount, especially in view of the meagre returns generated by offshore investments during the last 10 years (excluding currency gains).

Therefore, it is possible that the Additional Tax VDP may not provide additional relief as intended but potentially expose the Reporter to a much higher tax liability then he/she would have had under the Existing Tax VDP.

The proposed Special VDP offered for exchange control transgressions (Special Excon VDP) will limit the amount of the penalty which can be levied by the SARB in respect of unauthorised foreign assets or structures reported.  A 10% levy will be imposed on the market value (at 29 February 2016) of regularised assets or the sale proceeds thereof which are retained offshore, but if repatriated the levy will be 5%.

Currently, an offender of the Exchange Control Regulations may apply to SARB for the regularisation of unauthorised foreign assets under the provisions of Regulation 24.  However, there is no prescribed limit on the penalty which SARB could impose. Nevertheless, in our experience SARB has been very reasonable in imposing penalties and the penalties have not significantly exceeded the proposed level of penalties under the Special Excon VDP, depending obviously on the seriousness of the offence.

The decision to regularise offshore assets now or wait until October 2016 should thus be based on a Reporter’s potential tax exposure relating to the unauthorised offshore assets.  To date there has been no indication by National Treasury that any changes will be made to the draft tax legislation and thus assuming that none are made and/or no further explanation is provided, taxpayers planning to regularise their tax affairs are urged to calculate and compare their potential tax liability in terms of the Existing Tax VDP and the Additional Tax VDP to determine whether it will be in their best interest to rather declare their offshore assets now or wait until the Additional Tax VDP becomes effective.

Written by Simone Esch, Senior Tax Advisor, Bowman Gilfillan Africa Group