SA clamps down on offshore tax evasion
Yesterday a reciprocal agreement was signed by Finance Minister Nhlanhla Nene and Patrick Gaspard, US Ambassador to SA that will force local financial institutions to report information about US account holders to the SA Revenue Service (Sars) who will in turn pass the data onto the US Internal Revenue Service (IRS).
The agreement was forged in a bid to promote transparency on tax matters between the two countries and to implement the Foreign Account Tax Compliance Act (FACTA).
FACTA was enacted by the US in 2010 to combat tax evasion after the IRS identified that US citizens were investing offshore and not reporting taxable income to the revenue service. The Act threatened to impose a 30% withholding fee on foreign financial institutions on all payments derived from US investments.
But, implementing the Act proved problematic because it contravened most countries’ regulation on data protection, including SA’s POPI, which makes it illegal (unlawful) for foreign financial institutions like banks, asset management companies and private equity firms to pass on sensitive data to a third party – in this case the IRS.
To circumvent this, the US government sought to enter into intergovernmental agreements with countries ,making it local statute to report the data to the country’s local revenue service, in South Africa’s case Sars, who then relays the information to the IRS without contravening local laws.
Finn Elliot, associate director of the corporate law advisory practice for KPMG, explains that FACTA was “always going to happen”, but in order to comply with local regulations and waive the withholding fee for foreign financial institutions, the two countries had to sign an intergovernmental agreement.
“FACTA is a regulatory burden so we have to comply. If South Africa didn’t enter into the intergovernmental agreement each financial institution would be liable to report to the IRS directly. Now, with the agreement, local financial institutions will no longer suffer the 30% withholding fee,” he says.
While there are no additional benefits for individual financial institutions, the agreement benefits Sars in that the IRS must now also pass on tax information pertaining to South African citizens living in the States.
“The exchange of information will improve international tax compliance,” Elliot says.