The rapid development in international tax transparency over the past two years in the form of the OECD (Organisation for Economic Co-operation and Development) Common Reporting Standard (CRS) has caused many South African taxpayers to consider regularising their offshore tax affairs via the South African Revenue Service (Sars) Voluntary Disclosure Programme (VDP).
The prospect of a ‘penalty-free’ VDP has recently emerged in the light of the proposals of the Tax Administration Laws Amendment Bill. The main impediment to regularisation at this stage seems to be the exchange control regime, although there may be some developments soon in this regard.
The CRS will give rise to an unprecedented level of automatic exchange of information between over a hundred countries (including Switzerland, Luxembourg, Liechtenstein and most western jurisdictions).
Early Adopters of the CRS (including SA, Luxembourg, Lichtenstein, the UK the British Virgin Isles, Isle of Man and Guernsey) have committed to exchanging information by the end of September 2017 (reporting deadline). Any accounts in existence as at December 31 2015 (balance-sheet-date) will have to be reported as part of the exchange.
A second group of countries (including Switzerland, Israel and Austria) has committed to exchange information by the end of September 2018. In their case, any accounts in existence as at December 31 2016 will have to be reported.
Trusts are not exempt from this regime, as trustees will be obliged to disclose the identity of the trust’s settlors and beneficiaries. For this purpose, a trust is treated as a ‘bank’ of which the beneficiaries and settlor are deemed to be ‘account holders’.
In plain terms, this means that Sars will start receiving information in relation to SA tax residents’ offshore bank accounts (which, in the context of offshore trusts, will include information in relation to trusts of which they are beneficiaries or settlors) by the respective reporting deadlines. For example, Sars will be furnished with the details of the Luxembourg bank account of an SA resident, as at the ‘balance-sheet-date’ (i.e. December 31 2015), by the reporting deadline (i.e. end of September 2017).
The purpose of the VDP is to encourage taxpayers to regularise their affairs with Sars on a voluntary basis. It is essential that the taxpayer approach the VDP unit before receiving notice from Sars of a pending audit.
In terms of the VDP, applicants are granted relief from criminal prosecution, as well as relief from the standard penalties for non-compliance. Without a VDP, an understatement penalty could be imposed at up to 200% of the tax due, whilst under the VDP it is capped at a maximum of 10%. In our experience, however, it has become evident that most applications, provided the necessary motivation is made, result in a 0% understatement penalty.
Relief is furthermore granted from all administrative non-compliance penalties, except the late payment (10% of tax due) and late submission penalties (a fixed penalty amount ranging from R250 to R16 000). The late submission penalty, however, only applies if the taxpayer failed to submit an income tax return timeously.
The prospect of a ‘penalty-free’ VDP has dawned recently with the release of the Tax Administration Law Amendment Bill, which proposes to eliminate the 10% late payment penalty. The applicant would therefore (apart from a possible fixed charge penalty, up to maximum of R16 000, due to the late submission of a tax return) be liable simply for the tax due and the interest thereon.
It is important to note that all information submitted as part of the VDP is ring-fenced. The VDP unit does not make disclosure to any other department within Sars, not to mention the Reserve Bank (i.e. the Financial Surveillance Authority). Fear of a VDP application giving rise to a ‘witch hunt’ is therefore ill-founded.
It is suggested that those seeking to explore their options in terms of the VDP consult with lawyers who are able to advise in this field. This is due to the protection afforded by legal privilege, which is only accessible when engaging an attorney who is practising with a registered law firm. Legal privilege allows the taxpayer to decide not to go ahead with the application, after having made full disclosure of their breach to the attorney, with no fear of prosecution. This is in contrast to the position where a taxpayer has made disclosure of his/her breach to an accountant, who would be obliged (by law) to report them should they decide not to go ahead with the VDP.
August 12 2015 deadline for VDP?
Sars recently released a statement in which it was said that South Africans with foreign bank accounts only have until August 12 2015 to make use of the VDP. This has caused considerable panic and alarm on the assumption that this cut-off date applies to all South Africans with foreign bank accounts.
The notice given by Sars is limited in its application. It, in fact, only applies to those residents whose undeclared offshore funds have become known to Sars. The ‘leak’ of HSBC account details, followed by intergovernmental exchange of taxpayer information, has been one of the main contributors in bringing a wave of undeclared offshore funds onto Sars’ radar.
Thus, those residents who have undeclared offshore funds whose breach has not yet been discovered by Sars, are not subject to the cut-off date and will continue to have open-ended access to the VDP.
At the moment the exchange control (excon) regime is acting as an impediment to taxpayers regularising their affairs. Whilst the VDP process is clear-cut, the excon 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.
There are strong indications that a final excon amnesty is being considered.
Nel Schoeman is an Associate at Maitland