SA taxpayers have nowhere to hide

South Africans with undisclosed offshore accounts may feel exposed after their offshore Swiss bank account information found its way into the public domain this year. The theft of information relating to some 30 000 HSBC accounts – the biggest banking leak in history – actually took place five years ago but was only recently published, amplifying calls for crackdowns on offshore tax havens.

However with or without the leak, governments had already made significant strides towards enacting new laws that govern the exchange of tax information between countries. Tax authorities around the world are collaborating to expose those who go to great lengths to escape taxes and conceal millions of dollars of assets.

The South African Revenue Service (SARS) is one of the pioneers in this regard. SARS has now completed the initial phase of matching information obtained through international exchange of information procedures with the taxpayer database.

The result is that individuals with HSBC accounts had an opportunity until 12 August 2015 to approach SARS via its voluntary disclosure programme (VDP) to regularise their tax affairs. For others there is no deadline as yet, but citizens would be advised to note what is coming up in terms of international tax disclsoure.

Under the auspices of the Organisation for Economic Co-operation and Development, more than 90 countries including South Africa have committed to an inter-governmental tax reporting system, known as the Common Reporting Standard (CRS), which is modelled on the US Foreign Account Tax Compliance Act (FATCA).

What is CRS?

CRS requires information to be gathered and reported between signatory states on all persons involved in financial structures and the movement of funds. Any person who has bank or investment accounts in another jurisdiction (or has been declared as beneficial owner of such bank accounts) will need to consider the impact of CRS on those accounts, as will the settlor, protector and beneficiaries (discretionary and otherwise) of a trust. Thus, CRS is similar to FATCA but much more extensive in its geographical reach and the scope of its impact.

The impact

Implementation of CRS will have two major implications for SA tax residents. Firstly, the SARS is likely to discover any undeclared offshore funds, which would normally result in criminal prosecution and understatement penalties of up to 200%. The exchange control implications would depend on the facts.

The second implication is that SARS will gain access to an unprecedented volume and degree of information relating to SA tax residents’ offshore dealings and structures. Residents with such structures would be well advised to ensure they are compliant and seek legal advice where required.

The main aim of a voluntary disclosure

Application to SARS under its VDP, prior to the undeclared funds being discovered, would grant relief from criminal prosecution and reduce the understatement penalty to a maximum of 10%, depending on the circumstances. There will always be liability for interest. There are also certain administrative penalties, which cannot be waved. The main aim of a VDP is to encourage taxpayers to disclose, on a voluntary basis, previous non-compliance (undeclared information, transactions, income streams etc.) without the fear of severe penalties or criminal prosecution. This explains why the VDP unit strictly adheres to the policy that all information submitted to them remains ring-fenced.

Automatic exchange of taxpayer information

The first big wave of automatic exchange of taxpayers’ information sharing will be between the so-called “early adopters” of the CRS. The early adopters are about 60 countries (including Europe, South Africa, and international financial centres like Cayman and British Virgin Islands). The first intergovernmental reporting deadline will be on 30 September 2017, which would include information relating to “pre-existing” accounts as at 31 December 2015.

The existence of so-called financial accounts will in many cases give rise to CRS disclosure to the tax authorities in the country of residence of the account holder. In relation to discretionary trust beneficiaries, distributions made in the course of 2015 may already trigger some disclosure obligations.

International transparency is far-reaching

International transparency has obvious consequences for those who are not compliant, but even compliant taxpayers should pay attention. Any sharing of financial data could lead to enquiries regarding unreported or mismatched taxpayer information. Data sharing could potentially result in piecing together offshore structures. Practices thought to be compliant which have not been subject to review, will now be subject to scrutiny.

The extent of reporting will also be a surprise to some. A protector of a trust or a director of a company may have reports filed against their names in relation to structures where they assist but not qualify as such as beneficiaries.

Financial institutions and their clients must prepare for the first big CRS reporting wave and consider their options. If they are not ready to ride the wave they will face the consequences of being out in the tax ocean, faced by dangerous and potentially deadly challenges.