Tax disclosure programme has some flaws, say experts
HE Voluntary Disclosure Programme introduced in 2012 to encourage taxpayers to regularise their affairs has some flaws that need addressing to be able to expose the real amount of money that has left SA illegally.
Tax experts warn that the process in SA is relatively expensive, there are uncertainties because of a dual process, and the super rich have serious reservations about their own safety and that of their families if their real worth is exposed in public.
Since its inception in 2012 the programme has collected less than R5bn in revenue for the state. The South African Revenue Service (SARS) has received 4,485 applications through the programme, yet only 2,275 of the applicants were successful.
SARS spokesman Luther Lebelo says one of the reasons for the high rate of rejections is that applicants do not disclose any non-compliance.
SARS has recently extended an invitation to taxpayers with accounts at Swiss HSBC to use the voluntary disclosure programme (VDP) to declare undisclosed offshore assets to come clean before action is taken against them.
It is clear from newspaper reports that the amount of money still being kept under a veil of secrecy runs into billions. The previous tax and exchange control amnesty merely exposed the tip of the iceberg in terms of illegal offshore funds.
Johan van der Walt, head of dispute resolution and tax controversy at KPMG, has recently spent a week in Switzerland and held intensive discussions with Swiss private banks on how to assist South Africans to regularise their affairs.
“The amount of money that has flown from South in the past 50 years is staggering. Many people are still underestimating the true amount.”
Van der Walt says there are currently three major issues hampering the success of the VDP. The first issue relates to the dual process by SARS and the South African Reserve Bank (SARB).
The VDP process by SARS is statutory and part of the Tax Administration Act. Van der Walt played an instrumental role in establishing the process. The SARB process is informal and the rules of the game are more vague and uncertain.
“People who have been living with their secrets for 50 years have great hesitation in coming forward. They are uncertain and it takes time to come to a decision to come clean,” says van der Walt, who is also a member of the SA Institute of Tax Professionals (SAIT) committee on the administration act.
The process is considered to be “relatively expensive” since the taxpayer has to pay the outstanding taxes at a marginal tax rate of 40%, as well as the SARB levy of either 20% or 25%. This is a massive erosion of someone’s nest egg, says Van der Walt.
It was found (in countries where disclosure programmes worked well) that people saw it as a disincentive to declare illegal funds if the cost was more than 15% or 18%.
The disclosure processes in Turkey had limited success since taxpayers were forced to repatriate their funds, and in Germany they faced possible criminal prosecution.
In Italy the banks paid the levy on behalf of their clients who remained anonymous. In that case 90% of all illegal money was declared.
Van der Walt says people with massive amounts of undeclared funds experience great anxiety that they will become victims of crime in SA in the form of kidnappings, threats and armed robberies if their personal information is exposed or falls into the wrong hands.
The fear remains real despite assurances that there are confidentiality clauses in both SARS’ and the SARB’s processes.
Van der Walt says people who are no longer able to keep their money in Swiss bank accounts because they do not want expose their real worth will consider moving it to more risky jurisdictions. They can also decide to join their money and emigrate from SA.
Werksmans Tax director Ernest Mazansky says the major benefit of using the programme is that it effectively prevents SARS from applying the understatement penalties against a taxpayer.
In a standard case there are five levels of penalties, ranging from 10% to 150%, but under the VDP the first three levels have no penalties, and the final two levels are 5% and 10%.
Mazansky says it makes “all the sense in the world” to make a declaration in terms of the programme. Taxpayers who have been involved in blatant and the most egregious forms of tax evasion will face a maximum penalty of 10% under the VDP, and they acquire immunity from criminal prosecution.
Individuals are loath to apply under the VDP without coming clean with the Reserve Bank. However given the cost of paying the tax, interest and exchange control levy of 20% or 25% it acts as a disincentive for people to approach institutions, Mazansky says.
There is some recognition of the reservations and concerns from taxpayers by the authorities, and there is hope that greater clarity will be given soon, he says.