Game over for tax dodgers?

Virtually no place to hide as automatic exchange of information is adopted.

JOHANNESBURG – Tax dodgers may soon find that there is virtually no place to hide as international jurisdictions step up efforts to increase the automatic exchange of information.

Against the background of an expanding global focus on cross border tax evasion, governments increasingly access more information to verify the scope of assets held offshore.

A fairly recent illustration of the automatic exchange of information was the introduction of the Foreign Account Tax Compliance Act (Fatca), a US piece of legislation that requires Foreign Financial Institutions to report on US account holders. The Act affects the majority of investment, corporate and wealth management firms – including South African corporates who operate in this space.

Although South Africa has no legislation comparable to Fatca, it is one of the “early adopters” of the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standards (CRS).

While there are structural and technical differences between Fatca and the CRS there are also similarities and the South African Revenue Service (Sars) will start to receive similar information from partnering jurisdictions.

Speaking to Moneyweb on the sidelines of a Global Tax Transparency Conference hosted by Maitland and The Fiduciary Institute of South Africa (Fisa), RC Terblanche, director at CRS Mondial, said more than 50 countries have already signed up to the CRS and the figure will grow.

Terblanche said the Global Forum currently drives the automatic exchange of information. The hope is that countries will receive financial account information, which can be used in their risk identification processes to determine if tax evasion or avoidance is taking place.

Game over?

But will the automatic exchange of information bring an end to tax evasion and avoidance? Or will funds likely be moved to jurisdictions like Panama, Ukraine, Belarus, Botswana and Zimbabwe that haven’t signed up?

Andrew Knight, partner at Maitland, said a “reportable account” is an account held with a financial institution in a country that has imposed reporting obligations. Thus, taxpayers may argue that they could find a financial institution in a country that is not subject to the reporting obligations.

But in practice the bank where the account is currently being held may be wary to assist the client in shifting funds to a country that will soon be “unwelcome” as far as the CRS is concerned, Knight said.

Other possibilities could be to hold cash, gold bullion or artwork, but each of these present practical difficulties.

Knight said while it would probably be possible to move to a country where there is no regulation at all, “the opportunities are limited and they are getting more and more limited”.

Additionally, the automatic exchange of information may not be restricted to financial account information.

Terblanche expects it to be expanded to include for example capital gains tax (CGT), properties and rental within the next five years.

With virtually no place to hide, taxpayers may have to seek refuge in the Voluntary Disclosure Program (VDP).

Nel Schoeman, associate at Maitland, said the main aim and purpose of the VDP is to encourage voluntary disclosure of previous tax non-compliance.

Sars is aware that a lot of people have undeclared funds and will be lenient where taxpayers divulge information about previous non-compliance of their own accord.

Schoeman said in terms of the VDP, taxpayers who meet the requirements wouldn’t be liable for the full scale of penalties that would normally apply (had Sars uncovered the non-compliance). Successful applicants would also be protected against criminal prosecution.

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This approach certainly does not increase the tax base!

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