Tax on offshore investments: time to come clean
The South African Revenue Service (SARS) launched the Special Voluntary Disclosure Programme (SVDP) in October 2016, providing taxpayers with the opportunity to make good on any tax and/or exchange control contraventions of which they may be guilty in relation to offshore investments.
The nine-month window period opened on October 1, 2016 and closes on June 30, 2017, a period chosen to encourage disclosure before the institution of the new international Common Reporting Standards, which require the financial institutions of signatory countries to exchange information about the financial affairs of foreign taxpayers within their jurisdictions. SARS expects the automatic reporting of this information to begin in September this year, with the prospect of additional penalties and interest being imposed on South African taxpayers unless they come clean beforehand.
It’s important to note that the SVDP legislation had not been promulgated at the time of writing in November 2016, so it is possible that changes could yet be made – although SARS assures us that the draft bill reflects the outcome of the public consultation process and the proposals have been presented to Parliament’s Standing Committee on Finance. However, tax assessments based on SVDP disclosures will be concluded only once the final legislative framework has the approval of Parliament.
Although the SVDP makes provision for the disclosure of both tax contraventions and exchange control contraventions, not all taxes and not all taxpayers are covered by the programme, so it is important to understand the detail as it applies to your specific circumstances.
The tax SVDP covers receipts and accruals not declared to SARS (as required by the Income Tax Act and Estate Duty Act) from which an asset situated outside South Africa was derived, if the asset was held from March 1, 2010 to February 28, 2015. This wording is important. Amounts could have been sent offshore from earnings not declared to either SARS or the South African Reserve Bank (SARB), in which case those amounts, as well as any income arising from them, could have contravened the tax and exchange control legislation. Alternatively, the amounts may have been declared for tax purposes but taken offshore in contravention of exchange controls. In such cases, the amounts may be in contravention of exchange controls, but only the non-declaration of subsequent earnings gives rise to a tax contravention.
The receipts and accruals could have arisen before March 1, 2010, but will still be covered if they resulted in an asset, such as an investment, being held from March 1, 2010 to February 28, 2015. The draft legislation also makes provision for assets that may have been disposed of before March 1, 2010, in which case the taxpayer is permitted to treat the assets as if they were still held from March 1, 2010 to February 28, 2015. However, this is not permitted if the assets were donated to a trust or disposed of to a trust through a loan account. There are specific requirements for trusts (see below).
The tax required to be paid under the tax SVDP is calculated as follows:
1. Determine the market value in foreign currency of each asset that is subject to the SVDP for each year of assessment that ended on or after March 1, 2010 and before March 1, 2015. For individuals, this would be February 28, 2011, 2013, 2014 and 2015, and February 29, 2012.
2. In respect of each asset, translate the foreign currency into rands at the spot rate on the last business day on or before each year end. You can calculate historical rates by going to www.oanda.com.
3. Aggregate the market values in rands of each of the assets as calculated in Step 2 to determine one amount in rands for each year.
4. Determine which of the amounts is the highest across all of the years.
5. Apply a rate of 40 percent to the highest amount determined in Step 4.
6. The amount arrived at in Step 5 must be included in your taxable income in the first year of assessment that ended after March 1, 2014. For individuals, this is the tax year that ended on February 28, 2015.
7. Where the asset was disposed of before March 1, 2010, the value to be included at Step 1 is the asset’s highest value while it was actually held. SARS may accept a reasonable estimate of this value where it cannot be accurately determined.
Benefits of the SVDP
The primary benefit of the tax SVDP is that the declared receipts and accruals up to the 2014/15 tax year will be regarded as exempt for tax purposes, regardless of when they were earned – that is, even if such receipts and accruals were earned before March 1, 2010. No understatement penalty will apply and no interest will arise in respect of periods before the year of inclusion – in other words, the 2014/15 tax year for individuals.
It may seem obvious (or it may not) that your responsibilities don’t end with the regularisation of your assets. You should declare the income in all subsequent tax returns – that is, from the 2015/16 tax year (March 1, 2015 to February 29, 2016).
There are limitations to the SVDP – for example, it covers income tax and estate duty, but employees’ tax is specifically excluded. Income tax covers several taxes, such as capital gains tax (CGT), dividends tax and donations tax, and these are all covered. Value-added tax is not covered under the SVDP. Neither are contributions to the Unemployment Insurance Fund or the Skills Development Levy.
The tax SVDP may not be made by or on behalf of a trust. Special provisions apply to donors, deceased estates of donors and beneficiaries of discretionary trusts with offshore assets that meet the SVDP requirements and have not vested in a beneficiary. The relevant applicant (donor, deceased estate of a donor, or trust beneficiary) is deemed to have held the asset and received or accrued the income. Such applicants should consider the legislation carefully and obtain expert advice.
The open-ended VDP
It is worth noting that the existing Voluntary Disclosure Programme (VDP), set out in the Tax Administration Act, provides a separate mechanism for taxpayers to declare previously undisclosed tax irregularities. The VDP is open-ended and no end date is contemplated. It is wider than the SVDP in terms of the taxes and taxpayers covered, but potentially more punitive in terms of the tax payable.
There is no limit to how far back the taxes can be calculated, and penalties can be imposed up to 10 percent of the tax understated, with interest running for the full period of non-disclosure. However, if the undeclared taxable income is less than the deemed income under the SVDP (in other words, 40 percent of the highest market value of the assets), the VDP may provide a more cost-effective route. Importantly, the VDP does not cover exchange control contraventions.
If you suspect you might have failed to comply with exchange control regulations, it is important to ascertain exactly what contravention occurred, if any. In certain cases, what might be a contravention if it took place before a certain date might be condoned if it took place later, when exchange controls were relaxed. For example, South African residents who earned income outside South Africa before July 1, 1997 were required to repatriate the earnings to South Africa. With effect from July 1, 1997, such earnings could be left abroad. It is now possible to regularise non-repatriated income earned before July 1, 1997 without incurring any exchange control penalty, provided it is declared to an authorised dealer (one of the big commercial banks) before March 31, 2017 (note that this date may be extended to June 30, 2017 in line with the extension of the SVDP, but don’t delay, check with your bank).
Exchange Control Circular No. 6/2016 sets out what exchange control contraventions are subject to the SVDP relief and what contraventions can be regularised by disclosure. It is worth examining this document in detail.
The exchange control SVDP is open to all current and former South African residents, including individuals, sole proprietors, partnerships, deceased estates, insolvent estates, South African trusts, close corporations and companies. It is an opportunity to regularise unauthorised foreign assets held on or before February 29, 2016. It does not apply to bearer instruments. Applications must be made within the SVDP period. Applicants must make full disclosure of all unauthorised foreign assets (excluding bearer instruments) by providing the source of the assets and details of the manner in which the assets were transferred and retained offshore.
Where an exchange control contravention can be regularised only via the SVDP, a levy will be payable based on the market value of the assets on February 29, 2016:
• Five percent if the levy is paid from the foreign assets and the assets are repatriated to South Africa; or
• 10 percent if the levy is paid from the foreign assets and the assets are retained offshore; or
• 12 percent if the levy is not paid from the foreign assets.
Where the foreign assets are denominated in multiple foreign currencies, the currencies can be converted to United States dollars as at February 29, 2016 (using the conversion rates published on the SARB’s website).
It is possible to have a situation where an exchange control contravention can be regularised without incurring any penalty, or an apparent contravention turns out not to have been one – for example, when earnings were retained offshore after July 1, 1997. However, a tax liability may exist if such amounts were not declared to SARS, depending on the circumstances. South Africa moved from a sourced-based to a residence-based tax system on March 1, 2001, with the result that offshore income and capital gains accruing to South African residents came into the tax net.
In the case of undeclared taxes, it may be possible to use either the VDP or the SVDP. There does not seem to be anything in the various pieces of legislation to prevent a piecemeal approach. In other words, you can use the SVDP for both tax and exchange control, or you can use the VDP for tax and the SVDP for exchange control. Or you can use the VDP for tax and merely regularise the exchange control contravention by way of declaration if this is applicable to your situation … or any other combination.
Where a SARS or an exchange control investigation or audit is pending or under way, the SVDP relief is not available. All other eligible South African taxpayers who hold, or held, offshore investments should assess their position to determine whether all relevant tax and exchange control disclosures have been made. If doubt exists, they should take advice as to what course of action would be best to ensure that all disclosures and payments are in order to avoid significant penalties and possible criminal prosecution.
Going back several years and obtaining all the information to ascertain the best course of action and to support an application can be time-consuming. It is important to act sooner rather than later, so as not to miss the window period. However, it might also be a good idea to make the application only once the tax legislation has been promulgated. Deficiencies in the legislation may come to light, and it is still possible that changes could be made. For example, the tax SVDP does not seem to cater adequately for a situation where an asset was held on March 1, 2010, but disposed of shortly afterwards, before the end of the 2011 tax year. SARS’s SVDP guide specifies that such assets should be treated as if they were held during the five-year period that ended on February 28, 2015 for purposes of determining the deemed income inclusion for the tax SVDP. This seems at odds with the legislation, and no doubt other anomalies will surface as applicants prepare their calculations.
• The legislation setting out the tax aspects of the Special Voluntary Disclosure Programme (SVDP) is set out in sections 14 to 18 of the Rates and Monetary Amounts and Amendment of Revenue Laws Bill of 2016 and the Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill of 2016. The legislation can be downloaded from the South African Revenue Service (SARS) website. (Enter the title of the legislation in the search facility.)
• The SVDP Guide v1-2 contains useful information about the practical aspects of applying for the relief (which must be done via eFiling) and the information required to be disclosed. It also has helpful links to other documents and information. The guide is available on the SARS website (put “SVDP” into the search facility).
• Exchange Control Circular No. 6/2016 is available on the website of the South African Reserve Bank. (Enter the title in the search facility.)