Cross-border action raises tax risks
The rising exchange of information between countries is also leading to the disclosure of more details about these taxpayers’ affairs.
Along with other countries, SA is paying closer attention to its residents’ cross-border activities.
But while compliance is necessary, industry experts warn that overly aggressive tax enforcement in SA could fuel capital flight.
The leaking of details of account holders at HSBC’s Swiss arm and public scrutiny of companies, such as Google and Apple, which use complex structures to reduce their tax bills, have placed tax at the top of government agendas.
According to campaign group ActionAid, companies are using corporate structures in the Netherlands, Luxembourg and Ireland to reduce their tax obligations in other European countries.
Legislators in some countries are cracking down on this practice. At home, the South African Revenue Service (SARS) says it has completed the initial phase of matching information obtained through international exchange of information with its database. “The matching confirms that some account holders may have used their (HSBC) accounts to evade South African tax liabilities.”
SARS has also announced that South African residents have until August 12 to use the voluntary disclosure programme.
South African residents are taxed on their worldwide income which, subject to double taxation agreements with foreign jurisdictions, may include income held in HSBC accounts, says Graeme Palmer, director at Garlicke & Bousfield. “SARS have obviously identified South African residents who hold HSBC accounts through information sharing agreements with foreign tax authorities.
“Once the August deadline expires SARS will use its powers to obtain more information from the residents themselves. If funds exist and were not declared as income in SA, the taxpayer may have to pay interest and penalties on the undeclared income.
“In order to avoid prosecution and reduce the penalties payable, the taxpayer needs to make a voluntary disclosure before SARS conducts an audit,” Mr Palmer says.
The pilot voluntary disclosure programme in 2010 was so successful it was written into the Tax Administration Act, and rolled out as a permanent structure in 2012.
To date SARS has finalised close to 7,000 agreements, raking in an additional R8.82bn in tax revenue. But it says only a small portion of that figure has been linked to foreign-held funds of R705m.
Andrew Wellsted, head of tax at law firm Norton Rose Fulbright, says his firm is doing a lot of voluntary disclosure work, mostly for individuals.
On a recent trip to Zurich with his international partners, he says, Swiss banks made it clear that if the tax risk exposure in SA — due to the latest investigations, which include exchange control probes — became too high they would consider pulling out of the country.
HSBC, which has operated in SA since 1995, warned earlier this year it was considering moving its head office from London due to “regulatory and structural reforms” in the wake of the banking crisis. The bank would take account of the regulatory context when deciding where to base its business.
Late last year a survey by EY identified four sources of heightened risk for companies: reputational, legislative, enforcement and operational. These findings were based on responses from 962 tax and finance executives in 27 countries, including more than 130 chief financial officers.
For individuals, high tax risk might encourage them to take their capital elsewhere. New data from New World Wealth show SA’s outflows of high net worth individuals are among the highest in the world. High net worth individuals are people with net assets of $1m or more, excluding their primary residences. Between 2000 and last year, about 8,000 high net worth individuals in SA became tax residents of other countries.
Examples include information technology entrepreneur Mark Shuttleworth and former Pick n Pay CEO Sean Summers.