The announcement of another tax and exchange control amnesty in this year’s budget is keenly awaited by some South African taxpayers.
The looming implementation of the Common Reporting Standard for the automatic exchange of financial information between more than a hundred countries seems to be fueling the desire for another chance to come clean.
The Organisation for Economic Cooperation and Development (OECD) developed the standard, which is set for implementation by September next year. South Africa has been one of the first signatories of the agreement to exchange information.
South Africans received a tax and exchange control amnesty in 2003-04 which “cleaned-up’ funds to the tune of R65 billion. Some say that is just the tip of the iceberg.
Small businesses have also been offered a chance to come clean, and in 2010 there was another window period offered for taxpayers who had outstanding issues.
Johan van der Walt, committee member of the South African Institute of Tax Professionals (Sait), says the ideal is another “standalone process” to deal with exchange control and tax issues.
Currently, South Africa has a dual process: a statutory process through the Voluntary Disclosure Programme (VDP) run by the South African Revenue Service (Sars) for tax matters and a non-statutory discretionary process for exchange control contraventions.
Apparently a redesign of the process through the Davis Tax Committee was attempted some time last year. However, the secretariat of the committee said it was unaware of such a process.
Van der Walt says the tax VDP was never designed for the regularisation of offshore funds and undeclared income. “It can serve that purpose, but in most countries where tax residents have undeclared offshore income, they followed the route of a special dispensation.”
A single standalone process with a limited window where people could regularise their illegal offshore capital and undeclared income and exchange control violations, would be in line with international best practice, he adds.
Van der Walt says the current cost of coming clean acts as a disincentive. The knee-jerk reaction for many taxpayers is to look for a way to deal with the issue in a less “financially punitive way”.
“One should not underestimate the fact that people who have the means, and face the prospects of paying a substantial amount of their capital will consider leaving the country. They also have the option of dealing with the funds outside a VDP regularisation process, which they are advised not to do.”
Nel Schoeman, tax associate at Maitland, wrote at the end of last year that while the VDP process is clear-cut, the exchange control procedure is ad-hoc and the penalties “draconian”.
“The standard penalty ranges from 20% to 30% on the capital. This, on top of the tax, is beyond the pain threshold of most taxpayers and would result in many opting for emigration,” he wrote.
According to Sait, taxpayers can get a full or partial waiver of penalties through the VDP. The key issue is the interest. The interest charges often date back to mid-1990. The interest bill alone could wipe out the illegal savings, the institute notes.
Carmen Moss-Holdstock, tax executive at SizweNtsalubaGobodo, says in the absence of an amnesty she advises her clients to regularise their affairs in any event.
“The risk of not doing so will be more detrimental. Once Sars discovers contraventions based on the information they get through the exchange of information agreements, the taxpayer faces a criminal charge with a fine or imprisonment,” Moss-Holdstock says.
In addition, the taxpayer will be subject to the maximum penalty of 200% and interest on the amount. That is just on the tax side.