Saturday, 27 August 2016

2016 Special Voluntary Disclosure Programme: Tax and Exchange Control Relief

THE LAST OPPORTUNITY TO COME CLEAN

Introduction

During the course of the February 2016 National Budget presented to Parliament, the Minister of Finance announced a last opportunity for those South Africans holding funds abroad which are not known to the South African Revenue Service or the South African Reserve Bank to regularise those assets. 

Draft legislation was released during February and a subsequent draft was released during the course of April for public comment and more recently on 20 July the National Treasury released a further revised draft of the legislation dealing with the income tax aspects of the Special Voluntary Disclosure Programme (“SVDP”). Furthermore, on 13 July the South African Reserve Bank issued a Circular dealing with the exchange control aspects of the SVDP.

It is important for those prospective applicants to be aware of the implications and requirements relating to the SVDP and indeed whether that VDP is suited to their needs as opposed to the existing current Permanent Voluntary Disclosure Programme (“Permanent VDP”) contained in the Tax Administration Act No 28 of 2011 (“TAA”)

Before turning to the specific details contained in the draft SVDP legislation and Exchange Control Circular it is worthwhile setting out the requirements for the Permanent VDP contained in the TAA. Applicants need to weigh up whether the SVDP is preferable to applying under the current rules set out in the Permanent VDP. Generally the SVDP may be the preferred option but where the tax default relates to the non-disclosure, for a limited period, of foreign income derived by the taxpayer the Permanent VDP may be less costly. It depends on the applicant’s particular facts and circumstances.

Permanent VDP contained in the Tax Administration Act 

The Permanent VDP came into force on 1 October 2012, which is the date on which the TAA took effect. It must be noted that the Permanent VDP does not have a termination date and is thus open-ended and will exist so long as the provisions are contained in the TAA.

To qualify for relief under the Permanent VDP a person may apply, whether in a personal, representative, withholding or other capacity for VDP relief unless that person is aware of a pending audit or investigation into the affairs of the person seeking relief or an investigation or audit which has commenced has not yet been concluded. 

The law allows for SARS to direct that even though a person may be under an audit or investigation they may still apply for VDP relief where the default in respect of which a person wishes to apply for VDP relief would not otherwise have been identified during the audit or investigation and the application for Voluntary Disclosure relief is in the interest of good management of the tax system and the best use of SARS resources.

It must be remembered that a person is deemed to be aware of a pending audit or investigation if a representative of the prospective applicant, or in the case of a company, an officer or shareholder or member thereof has become aware of the audit or an investigation, or that the audit or investigation has commenced.

To apply for VDP relief under the TAA it is essential that the prospective applicant has committed a default which comprises the submission of inaccurate or incomplete information to SARS or has failed to submit information or has adopted a tax position where such submission, non-submission or adoption of a tax position resulted in the taxpayer not being assessed for the correct amount of tax or the correct amount of tax was not paid by the taxpayer or the taxpayer received a refund which they should not have received.

Section 227 of the TAA specifies the requirements for Permanent VDP relief and those are that the disclosure made by the prospective applicant must:

be voluntary;
involve a default which has not previously been disclosed by the prospective applicant;
be full and complete in all material respects;
involve the potential imposition of an understatement penalty  in respect of the default;
not result in a refund due by SARS and
be made in the prescribed form and manner.

It must be noted that SARS requires the prospective of applicant to make a full and proper disclosure of defaults committed by the prospective applicant. It must be remembered that South Africa migrated to a worldwide or residence tax system with effect from 1 March 2001, which is with effect from the 2002 tax year. 

Thus, where a person holds foreign assets and they have failed to declare the foreign income derived on those assets SARS will insist that the income and capital gains relating to those foreign assets are disclosed with effect from 1 March 2001. 

It must be pointed out that the income tax on the previously undisclosed foreign income will always remain payable together with interest thereon which can become significant particularly where the default goes back to the 2002 tax year. It must be noted that the Permanent VDP does not contain any cut-off period relieving prospective applicants from making disclosure regarding prior tax years.

The advantages of applying for VDP relief under the Permanent VDP and pursuant to the conclusion of a voluntary disclosure agreement are the following:

no criminal prosecution for any tax offence relating to the default committed by the prospective applicant;
in most cases the waiver of any understatement penalty that would otherwise have been imposed under the TAA. 
100% relief in respect of an administrative non-compliance penalty that was or may have been imposed under Chapter 15 of the TAA or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter, or in terms of a tax Act for the late submission of a return. Thus, a penalty which would otherwise have been imposed for the late payment of any tax may be waived under the Permanent VDP. 

The Permanent VDP contains a mechanism whereby a prospective applicant may seek a non-binding private opinion as to whether they qualify for relief under the TAA. Thus, prospective applicants may apply anonymously via the offices of a tax practitioner whether the person in question qualifies for VDP relief.

The prospective applicant will be required to be registered for e-filing as the application form for VDP purposes must be submitted utilizing e-filing. It will be necessary to quantify the amounts of income which previously should have been reflected and a covering letter is normally submitted together with the application motivating why the prospective applicant qualifies for the relief in question.

Once the prospective applicant has filed the VDP application form they will receive confirmation of receipt from SARS which will then review the information submitted.

Thereafter SARS will require the taxpayer to complete the so-called VDP tax returns which amends the income tax returns previously submitted by the taxpayer. Once those returns have been submitted they will be assessed by SARS and those assessments will reflect the income tax and interest payable by the taxpayer pursuant to the VDP arrangement. To conclude the VDP process the taxpayer and SARS must conclude a Voluntary Disclosure agreement as envisaged in the TAA. 

The agreements utilised by SARS must comply with the provisions of the TAA setting out the material facts of the default on which the Voluntary Disclosure relief is based as well as the amount of tax payable by the person which must separately reflect the understatement penalty which would otherwise have been payable as well as arrangements and dates of payment and any other relevant undertakings made by the taxpayer and SARS.

SARS is entitled to withdraw the Voluntary Disclosure relief if it subsequently discovers after conclusion of the Voluntary Disclosure agreement that the applicant failed to disclose a matter that was material for making a Voluntary Disclosure under the TAA. 

In such a case the relief that was granted under the VDP rules will be withdrawn and any amount paid will constitute part payment of any additional tax debt which may arise in respect of the defaults disclosed and furthermore, the taxpayer may be pursued criminally.

Furthermore, SARS is compelled to issue assessments to give effect to the Voluntary Disclosure agreement concluded by the taxpayer and SARS.

Special VDP – tax aspects

On 20 July National Treasury issue a media statement dealing with the revised draft tax bills which will regulate the SVDP. The SVDP is contained in the Rates And Monetary Amounts And Amendments of the Revenue Laws Bill as well as the Rates And Monetary Amounts And Amendment of Revenue Laws (Administration) Bill. The public had until 8 August time in which to make further representations regarding the legislation but in principle it does not appear that further significant changes will be made at this late stage taking account of the fact that the SVDP is intended to commence on 1 October 2016 and terminate on 31 March 2017.

The income tax aspects of the SVDP are primarily contained in the Rates And Monetary Amounts And Amendment of the Revenue Laws Bill at part 2 thereof, namely clauses 14 – 17.

It is specifically provided that the SVDP will include a trust as defined in section 1 of the Income Tax Act (“the Act”) and will include any similar arrangement formed or established under the laws of any foreign country.

Clause 15 of the revised draft bill provides that the amount of receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act for tax purposes, excluding for employees’ tax purposes, held outside South Africa during the period 1 March 2010 to 28 February 2015 will be exempt from tax. 

Thus no donations tax, estate duty or income tax will be payable on the undeclared foreign assets up to 28 February 2015. From 1 March 2015 taxpayers must account for income tax on the foreign assets and donations tax on assets donated thereafter. In addition, they will be subject to estate duty where the person holding the foreign assets passes away after 1 March 2015.

Any person who held an asset wholly or partly derived from receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act which was disposed of before 1 March 2010, other than by way of a  donation or disposal on loan account to a trust may elect that the asset is deemed to have been held for the period 1 March 2010 to 28 February 2015 on the basis that the value for the period in question will be equal to its highest value whilst actually held by the applicant. Where the applicant is unable to establish the amount with certainty SARS may agree to accept a reasonable estimate of that value from the taxpayer.

Clause 16 of the revised draft bill provides that an applicant must include in their taxable income in the first year of assessment ending on or after 1 March 2014, that is in the 2015 tax year an amount equal to 50% of the highest amount determined in respect of the aggregate value of all foreign assets referred to above, as at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March 2015.

It will therefore be necessary for taxpayers to ascertain the market value of all foreign assets held, not previously declared to SARS and to convert the foreign market value into Rands at the spot rate at the end of each year of assessment. SARS publishes the rates of exchange which should be used for these purposes.
One requirement for relief under the SVDP for exchange control is that 
the unauthorised  foreign assets for which administrative relief is required were held 
by the applicant on or before 29 February 2016
 Image purchased from www.iStock.com ©iStock.com/
"International currencies on businessman's hand" illustration by shutter_m 
Assume a taxpayer held foreign assets on which foreign income such as interest and dividends and capital gains had not previously been reported to SARS for the tax years set out below:

Year of assessment Market Value of foreign assets in Rands
28 February 2011  R1  000 000
29 February 2012 R1  200 000
28 February 2013 R1  500 000
28 February 2014 R1 600 000
28 February 2015 R1 400 000

By virtue of the fact that the market value of the foreign assets at 28 February 2014 was the highest in the amount of R1 600 000, 50% thereof, that is, R800 000 will be added to the taxpayer’s income in the 2015 tax year and taxed at the person’s marginal rate for that year which in most cases will be 41%. The tax charge will therefore amount to R328 000. Interest will no doubt be payable from 1 September 2015 until the date on which the tax is paid.

The draft legislation deals with foreign trusts whereby either a donor or the deceased estate of the donor or a beneficiary may elect that any asset located outside South Africa which was held by the discretionary trust from 1 March 2010 to 28 February 2015 be regarded as having been held by that applicant for purposes of all tax acts.

This means that the assets owned by the foreign trust will be regarded as forming part of the estate of the applicant for purposes of estate duty upon their death. The election available for foreign trusts applies in respect of foreign assets where such assets were acquired by the foreign trust by way of a donation and has been wholly or partly derived from any amount not declared to SARS as required by the Estate Duty Act or the Act and has not vested in any beneficiary of the foreign trust at the time that the election is made.

The legislation provides that where a person makes the election in respect of a foreign trust that person is deemed to hold the asset in question from the date on which the foreign trust acquired the asset and to have received  the same income and incurred the same expenditure in respect of the foreign asset which was received by the trust and deemed to have dealt with the asset in the same manner as dealt with by the trust. 

The deeming provisions set out in the draft bill operate until the asset is disposed of by the trust or alternatively the person would be treated as having disposed of the asset under the Act or in the case of a deceased estate, company or other juristic person the day before the person ceases to exist by operation of law. Where the deeming provisions cease to apply the applicant is regarded as having disposed of the foreign asset for consideration equal to the market value of that asset on the date of disposal. 

The draft legislation makes it clear that the deeming provisions set out in section 7(5), section 7(8) and 25B of the Act and the equivalent rules for capital gains, namely, paragraphs 70, 72 and 80 of the Eighth Schedule to the Act will not apply in respect of any income or expenditure or capital gain during the time that the asset is deemed to be held by the applicant.

It will be necessary for prospective applicants to obtain details of market values of the foreign assets held by them as at the end of February of each year for 2011 to 2015 so that they may undertake the calculation required under the draft legislation. Where, for example, a person received an inheritance from a deceased relative abroad and failed to declare the income derived therefrom over many years it would appear that should that person apply for SVDP relief they will be required to disclose the full amount of the market value of the assets such that the highest market value thereof in the five year period will be subject to tax on the basis that 50% thereof will be included in the applicant’s income in 2015. 

There is, therefore, unfortunately an element of double taxation that may arise in certain cases where applicants choose to apply for relief under the SVDP. This is the basis that the draft bill does not permit an applicant to apportion the foreign asset into its constituent parts of those amounts which may be inherently non-taxable and that which is income and thus taxable. An applicant must determine whether SVDP or the Permanent VDP is more appropriate in their particular circumstances.

It must be noted that any non-compliance in regard to value-added tax, employees’ tax, unemployment insurance fund contributions and skills development levies do not fall into the SVDP and relief for penalties relating to these taxes would need to be applied for under the Permanent VDP referred to above.

The SVDP will commence on 1 October 2016 and applications are required to be lodged no later than 31 March 2017. The application process for the existing Permanent VDP will be extended to the SVDP.

Applicants may also apply to SARS for a non-binding opinion on the same basis as the Permanent VDP.

As in the case of the Permanent VDP a person will not be able to apply for the SVDP if they are aware of a pending audit or investigation in respect of their foreign assets. Where the audit relates to domestic assets they would still qualify for relief under the SVDP.

No understatement penalties will be imposed and SARS will not pursue a criminal prosecution for a tax offence where an application under the SVDP is successful.

The Rates And Monetary Amounts And Amendment of Revenue Laws (Administration) Bill of 2016 makes it clear that in all cases the understatement penalty will be reduced to nil where a person applies for SVDP relief. Under the Permanent VDP there is a risk, depending on the circumstances, that the taxpayer may face a penalty of 5% or 10 % where SARS believes that the taxpayer was guilty of gross negligence or intentional tax evasion. However, in all cases applicants for SVDP will not on any basis face an understatement penalty.

Exchange Control aspects of the SVDP 

The Financial Surveillance Department of the South African Reserve Bank (“FinSurv) has confirmed that persons who wish to regularise any foreign assets held in contravention of the Exchange Control Regulations may apply for relief from 1 October 2016 until 31 March 2017. It is intended that the applications for exchange control relief will be filed electronically utilising the SARS e-filing system. 

The requirements for relief under the SVDP for exchange control are as follows: 

the unauthorised  foreign assets for which administrative relief is required was held by the applicant on or before 29 February 2016;
applications are made within the prescribed period;
the declaration made by the applicant is made voluntarily;
the applicant makes full disclosure of all unauthorised foreign assets in which the applicant stipulates the source of all unauthorised foreign assets and includes details of the manner in which such assets were transferred and retained abroad;
the applicant furnishes all documentation of information stipulated in the SVDP application form which information and documentation includes, but is not limited to:

the market value as at 29 February 2016 of the unauthorised foreign asset in the foreign currency of the country of which the asset is located;
a description of the identifying characteristics and location of such foreign asset; 
a valuation certificate by a valuator of the country where the unauthorised foreign asset is located or a valuation by a sphere of government where the asset is located or an original certified statement of account reflecting the balance or market value or any other form of proof of value of that foreign asset as the Treasury may on good cause shown allow to be submitted, and
a sworn affidavit or solemn declaration of the contravention.
the applicant furnishes any additional information relating to the unauthorised foreign assets as may be required in terms of the SVDP. 

The FinSurv has indicated that a levy of 5% will be payable on the value of the unauthorised foreign assets where the assets are repatriated to South Africa. The 5% levy is required to be paid from foreign sourced funds.

Where the applicant retains the foreign assets abroad, a levy of 10% is required to be paid and that must be sourced from foreign sourced funds.

Where the applicant does not pay the 10% levy from foreign sourced funds because the foreign assets are illiquid, the levy will be increased to an amount of 12% on the value of the unauthorised foreign assets.

It must be noted that the applicant will not be allowed to deduct the foreign investment allowance or any unutilised portion thereof from the leviable amount. The levy due is required to be paid within three months from the date of receipt of notification from FinSurv and in those cases where the 5% or 10 % levy is payable that levy must be repatriated to South Africa to an account held at a local Authorised Dealer, that is, a commercial bank, which must be converted in South Africa at the ruling exchange rate.

Once the applicant’s bank has received the payment of the levy they will be required to pay that over to an account held at the Corporation for Public Deposits.

The SVDP exchange control circular deals with foreign assets held in contravention of the exchange control Regulations and especially those arising from the sale, cession or assignment by residents of intellectual property owned or developed by South African residents without first having obtained the approval of the FinSurv. 

In these cases disclosure of the sale or assignment of intellectual property will be required including the identity of the parties involved and details of royalties paid by residents pursuant to any disposal of intellectual property.

In addition, where an applicant has incurred foreign liabilities to acquire foreign assets with recourse to South Africa without having obtained the obtained the requisite approval, disclosure of the underlying transactions relating to the liability will be required, including details of the liability itself for the parties involved. 

Finally, the acquisition of a direct or indirect interest in a foreign asset, including foreign cash balances as a result of foreign funds abroad which should have been repatriated to South Africa or having remitted funds from the country without prior approval fall into the SVDP for exchange control purposes. 

This will include the acquisition of foreign securities, the retention abroad of export proceeds, unauthorised spending on credit cards resulting in foreign assets and inheritances from South African deceased estates with unauthorised foreign assets. In these cases disclosure of the transaction including any underlying transactions are required to be provided. 

Where a South African has reinvested foreign assets into South Africa via a so-called loop structure or 74-266 structure those may also be unwound utilising the SVDP for exchange control purposes. 

Thus, where, for example, a South African resident has disposed of shares that they held in a domestic company to a foreign trust of which they are a beneficiary, that will be regarded as a loop and that structure is required to be unwound with a levy being payable to the FinSurv.
The FinSurv also sets out the rules relating to donors of funds to foreign discretionary trusts which are very similar to the rules relating to the tax aspects of the SVDP.

In such a case the applicant is deemed to hold the foreign assets owned by the foreign trust for purposes of the administrative relief available under the exchange control aspects of the SVDP and will be required to submit a copy of the trust deed to the authorities. The levy payable amounts to 5% or 10 % of the value of the foreign assets as at 29 February 2016.

The Circular issued by South African Reserve Bank sets out the procedures to follow in the case of those applicants who are dissatisfied with any decision made under the process.

The Exchange Control Circular also deals with administrative relief available outside of the SVDP. The authorities make it clear that in many cases foreign assets falling into the categories dealt with below will not generally attract any levy but merely requires disclosure being made to an Authorised Dealer. 

The disclosure must include confirmation of the source of the unauthorised foreign assets, details of the manner in which such assets were transferred and retained abroad as well as proof of the market value of the unauthorised assets at 29 February 2016. 

The categories of foreign assets dealt with relate to those persons who have immigrated to South Africa and who failed to declare their foreign assets upon immigration to an Authorised Dealer. The SVDP allows such immigrants to now place on record their foreign assets before 31 March 2017 thereby regularising the qualifying residents’ possession and retention abroad of the foreign assets concerned. 

Where a resident became entitled to a foreign inheritance from a bona fide non-resident estate, which excludes South African estates with foreign assets, before 17 March 1998 they were required to declare those foreign assets to an Authorised Dealer for consent to hold the assets abroad. Those persons who have not yet done so may now regularise those assets by way of declaration to an Authorised Dealer.

The Circular also deals with those cases of South African residents who became entitled to a foreign inheritance from the estate of another South African resident where those assets were held in compliance with the Exchange Control Regulations. Such persons may declare those foreign assets and apply for exemption from the provisions of the Regulations in question. 

The FinSurv  will allow the assets to be retained abroad subject to the condition that those assets are not placed at the disposal of any other resident or used to create loop structures and no levy will be payable by the resident beneficiary. In the event that the foreign assets inherited by the resident were held by the deceased in a manner contrary to the Exchange Control Regulations they must be reported to an Authorised Dealer who would require the assets to be repatriated and such a case no levy would be payable. If, the decision is made to retain the assets abroad the levy of 10 % will be payable.

Furthermore, the Circular also deals with foreign income which was required to be reported to the authorities where such income was generated prior to 1 July 1997 for permission to retain the funds abroad. All that is required in such a case would be a declaration which would regularise the qualifying resident’s possession and retention abroad of the foreign assets.

The exchange control Circular dealing with the SVDP also deals with contraventions which may have taken place by corporate entities regarding approved foreign investments and may have failed to comply with procedural requirements. 

Where corporate entities failed to supply the authorities with financial statements and progress reports regarding the proof of investment and other technical violations have incurred, they will be required to submit the outstanding information and in most cases no levy will become payable.

Those South African residents who do not apply for administrative relief under the SVDP and then make a full and frank and verifiable disclosure to FinSurv will be required to pay a settlement amount ranging from 10 % to 40 % of the then current market value of unauthorised foreign assets. 

Those persons who choose not to apply for SVDP relief nor voluntarily approach FinSurv for assistance to regularise their affairs  will face the full force of the law in which case FinSurv may recover the full amount of the contravention as a penalty from the person in question.

Conclusion

Those taxpayers holding assets in contravention of either the income tax or exchange control rules are encouraged to apply for VDP relief and need to evaluate whether to apply for relief under the Permanent VDP or SVDP. 

This decision will depend on the person’s particular circumstances and advice should be obtained from ENSafrica in this regard thereby ensuring the applicant enjoys legal professional privilege.

The relief available from the South African Reserve Bank is reasonable and requires payment of a levy of either 5% in the case of assets returned to South Africa or 10 % where the applicant chooses to retain the assets abroad. 

It is important that applicants start obtaining the required information as the timeframe to submit application is short, namely 6 months from 1 October 2016 to 31 March 2017.

Dr Beric Croome 
Tax Executive
ENSafrica

Monday, 8 August 2016

South African Revenue Service’s Powers to Collect Tax from Taxpayers

Once a taxpayer has submitted a tax return to the South African Revenue Service (“SARS”) they will receive a tax assessment reflecting either an amount refundable to them or an amount payable to SARS. 

Where an amount is reflected as payable the taxpayer is required by law to pay the tax due by the date specified on the notice of assessment. 

Failure to pay the tax on time will result in the taxpayer being subjected to interest on the late payment of the assessed tax and furthermore, SARS may then resort to the powers contained in the Tax Administration Act (“TAA”) to ensure that the tax is paid.

If a taxpayer receives an assessment and is unable to pay for whatever reason it is important that they engage with SARS failing which SARS will exercise the powers contained in the law to ensure that the tax is paid.

Under the provisions of the TAA and particularly section 179 thereof SARS is empowered to issue a notice to a person who holds or owes any money, including a pension, salary, wage or other remuneration for or to a taxpayer requiring that person to pay the money to SARS in satisfaction of the taxpayer’s outstanding tax debt and not to pay the funds over to the taxpayer.

SARS is therefore empowered to issue a notice, for example to a taxpayer’s bank or the taxpayer’s debtors and instruct that person to pay any monies due to the taxpayer not to the taxpayer but to SARS. 

The Courts have previously examined similar provisions and found that such powers do not violate the provisions of the Constitution as they are commonly found in democracies to ensure that taxpayers pay tax which is due to the fiscal authorities.

It must be noted that where a person receives a notice from SARS instructing them to pay over an amount  held by them to SARS and not the taxpayer they are precluded from informing the taxpayer of the receipt of such notice. 

The person in receipt of the notice is obliged by law to pay over whatever funds they hold to SARS failing which that person is personally liable for the amounts paid to the taxpayer instead of to SARS.

Furthermore, where a person chooses to disregard of the notice they can be convicted of a criminal offence under the provisions of section 234(n) of the TAA.
If your tax assessment shows you owe SARS, 
you are required by law to pay up by the date specified 
Image purchased from www.iStock.com ©iStock.com/"Business taxes in the text box" illustration by 
jack191 
SARS is required to issue a final demand to the taxpayer demanding payment of the tax due before the notice is issued to a third party instructing them to pay over whatever funds are held for the taxpayer to SARS. 

Inevitably, any person receiving a notice from SARS demanding that whatever amounts held by them for a person are to be paid over to SARS and not that person will not know if SARS has complied with its statutory obligation to have informed the taxpayer of the amount of tax due and to have in fact demanded payment of the tax from the taxpayer. 

Under section 179(5) of the TAA, SARS must issue a final demand at the latest 10 business days before the notice is issued to the person instructing them to pay over amounts held by them for the taxpayer to SARS and not that taxpayer.

Invariably the first time that a person will become aware of the fact that SARS has issued the notice to a bank or the taxpayer’s debtors is when they receive information that amounts have been paid over to SARS instead of the taxpayer concerned.

In the case of a notice received by a bank, it is submitted that where the taxpayer is in overdraft the bank is not obliged to pay monies over to SARS such that the taxpayer’s overdraft facility is increased on the basis that the bank does not actually hold funds due to the taxpayer.

The notice issued by SARS remains valid until the amount is paid over to SARS or until SARS withdraws the notice. In addition to appointing a third party to pay over amounts held for the taxpayer to SARS, SARS  can also file a statement with the Court which constitutes a judgment against the taxpayer which will impair the taxpayer’s credit rating and can be used as a basis on which to liquidate or sequestrate the taxpayer, as the case may be.

Previously SARS collected the tax debts due to it by utilising its own staff but it has recently outsourced the collection of certain tax debts to third party debt collectors who are independent of SARS. 

Where taxpayers owe SARS tax they may therefore receive a call or other communication from a person employed by NDS Credit Management, CSS Credit Solutions or Lekgotla Trifecta Collections acting on instructions of SARS to collect tax debts. 

The debt collectors appointed by SARS are legally obliged to adhere to the confidentiality provisions contained in the TAA and will be remunerated by SARS for debts collected by them from taxpayers. 

It does appear surprising that SARS has resorted to the appointment of external debt collectors who have to be paid for their services whereas previously SARS staff would appear to have been quite efficient in collecting tax debts due by taxpayers.

It is important though that taxpayers who are indebted to SARS make arrangements to pay the tax due failing which SARS will utilise the draconian powers contained in the law to ensure the payment of tax due to SARS.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, August 2016


Monday, 11 July 2016

Burden of Proof in Tax Dispute

Prior to the coming into force of the Tax Administration Act (‘TAA’) on 1 October 2012, the burden of proof in tax matters was regulated by way of section 82 of the Income Tax Act (‘the Act’). 

Under section 82 the burden of proof was on the taxpayer to show that an amount was either taxable or exempt or that any deduction was allowable under the Act. Historically when a taxpayer challenged the imposition of additional tax the burden of proof effectively fell on the taxpayer. 

With the introduction of the TAA this changed by virtue of section 102 of that Act which now provides that the burden of proof regarding facts on which the South African Revenue Service (“SARS”) based the imposition of an understatement penalty under chapter 16 of the TAA is on SARS. Clearly, where a tax dispute relates to whether an amount is deductible or not or is exempt or not otherwise taxable, the burden of proof remains on the taxpayer.

However, where SARS imposes the understatement penalty, the burden of proof lies on SARS and in a tax dispute before the Tax Court, SARS is required to commence the proceedings where after the taxpayer is entitled to respond. In all other disputes, the burden of proof lies on the taxpayer and the taxpayer is required to commence proceedings.

In the case of Mrs X v The Commissioner for the South African Revenue Service, case number: 13380 decided by the Tax Court in Johannesburg on 27 January 2016 as yet unreported, an appeal was lodged against the imposition of the penalty of R5 456 484.60 imposed under section 76 of the Act. In this case the penalty was imposed prior to the coming into force of the TAA as the penalty related to the 2009 year of assessment but the dispute was regulated by section 129(2)(b) of the TAA. 

The Tax Court had to deal with points in limine before considering the merits of the case. The two points in limine argued by the parties related to the incidence of the burden of proof pertaining to the imposition of additional tax and whether the duty to commence illegal proceedings was on the applicant, that is the taxpayer or on SARS. As indicated above, the penalty was imposed under section 76 of the Act, and that Act was repealed with effect from 1 October 2012 by way of section 270(2)(d) of the TAA. Section 270(2)(d) of the TAA contains transitional rules regulating the conclusion of actions or proceedings taken or instituted under the provisions of a tax act repealed  by the TAA but not competed by 1 October 2012 and states clearly that the acts or proceedings must be continued or concluded under the provisions of the TAA as if they were taken or instituted under that Act.

SARS subjected the taxpayer to 100 % additional tax in terms of section 76 of the Act and that decision was made by SARS in terms of the law as it was prior to 1 October 2012. The objection, disallowance of objection and appeal were all lodged prior to 1 October 2012 when the TAA came into force. 

Prior to the coming into force of the TAA the burden of proof was always on the taxpayer under section 82 of the Act. The Court reviewed various cases dealing with the position where one statute is repealed and replaced by another. SARS sought to argue that the transitional provisions in the TAA required the taxpayer to discharge the onus of proof regarding the imposition of the penalty. 

The Tax Court did not agree with SARS’s argument in this regard and noted that the appeal was only being dealt with three years after the TAA took effect. The Court therefore decided that the provisions of section 102(2) and 129(3) of the TAA dealing with the burden of proof is applicable when dealing with penalties imposed and apply to the dispute under consideration.
Prior to the coming into force of the TAA 
the burden of proof was always on the taxpayer 
Image purchased from www.iStock.com ©iStock.com/"conflict" by alexskopje
 
The Tax Court noted that the provisions of section 102(2) of the TAA have reversed the onus and that SARS has to prove the case regarding the imposition of the penalty. It was pointed out that the sole issue before the court and the present appeal related to the imposition of the additional tax and thus the Court found that the burden of proof pertaining to the imposition of additional tax is upon SARS under the provisions of the TAA and that it has the duty to commence the proceedings in the dispute.

If the dispute related to whether an amount was subject to tax or not or whether a deduction was lawfully claimed the onus of proof would have been on the taxpayer and the taxpayer would have been required to commence the proceedings in the Tax Court. However by virtue of the fact that the dispute related only to the imposition of additional tax SARS was required to commence the proceedings relating thereto.

The Court considered the imposition of the penalty by SARS and the reduction thereof from 100 % to 50 % and taking account of SARS evidence as well as the taxpayers’ arguments decided to reduce the penalty to 35 %.

Furthermore, counsel for the taxpayer contended that SARS should pay the costs of the litigation on an attorney and client scale. Pretorius J decided that SARS had not acted vexatiously or wrongly by contesting the taxpayer’s appeal and therefore decided that no order should be made as to costs.

It must be noted that section 130 of the TAA regulates the award of costs by the Tax Court. Generally, the parties to a tax dispute namely, the taxpayer and SARS, will pay their own legal costs unless the requirements set out in section 130 are met where the court is entitled to award costs to a party.

It is important that taxpayers take note of this decision and remember that where penalties are imposed the onus of proof in litigation lies on SARS insofar the imposition of the penalty is concerned and not on the taxpayer.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, July 2016

Monday, 13 June 2016

Court Orders Taxpayer to Respond to Sars Request to Complete the Lifestyle Questionnaire

The Eastern Cape Division of the High Court delivered judgment on 5 May in the case of Commissioner for the South African Revenue Services v J Brown, case no 561/2016, as yet unreported, directing the taxpayer to submit a response to the Lifestyle Questionnaire submitted to him by the Commissioner for the South African Revenue Service (“SARS”).

According to the judgment, Mr Brown was not registered for tax purposes and had never submitted tax returns to SARS. SARS made an application to the court requesting that the court direct the taxpayer to respond to the Lifestyle Questionnaire and the taxpayer contended that he had shown just cause for his refusal to respond to the Lifestyle Questionnaire.

SARS submitted the Lifestyle Questionnaire to the taxpayer on 19 October 2015, and the taxpayer was required to submit the completed questionnaire to SARS within 21 business days. The letter indicated that the period of investigation covered the 2011-2015 tax years and that SARS was in the process of reviewing the taxpayer’s file and that the information was requested in terms of section 46(1) of the Tax Administration Act (‘TAA’).

The court indicated that the Lifestyle Questionnaire comprised 26 pages and that the first page thereof draws the taxpayer’s attention to the provisions of section 72(1) of the TAA which provides that a taxpayer may not refuse to complete and file a return on the basis that to do so may incriminate the taxpayer. 

The information requested by SARS related to the taxpayer and his wife’s personal particulars and circumstances, personal and private investments and assets as well as properties owned by him and his spouse together with income received during the period under review and any expenses incurred. 

The taxpayer’s attorneys responded to SARS letter on 5 November 2015 and in that letter reminded SARS of its statutory obligations towards taxpayers and requested confirmation that SARS will keep the respondent informed of the progress and findings of any audits and that he will be given a reasonable opportunity to respond to the findings thereof. 

The taxpayer’s attorneys also required the following information before the taxpayer would reply to SARS’s questionnaire:
  • “In terms of which sections of which law the respondent was obliged to submit the relevant material;
  • If this is for administration of any tax law, the relevant subsection of that definition in section 3(2) of the Act, must be quoted, supported by the underlying facts and circumstances that make the enquiry foreseeably relevant with the reasonable specificity as required by the Act;
  • Adequate reasons for the questionnaire, investigation and audit and why it is being conducted, including the underlying risk analysis for the industry  the taxpayers is in, on which this audit is based; and
  •  Copy of the SARS id’s and letters of the of the SARS assessors as well as the line manager involved in the matter.”
SARS was informed that the taxpayer would also submit a formal request for the above information under the Promotion of Access to Information Act. (‘PAIA”)

SARS subsequently replied to the taxpayer’s letter reminding his attorney’s about the taxpayer’s statutory obligation to pay the prescribed fee under PAIA and stating that the request for information under the law would not be processed until the prescribed fee had been paid. 

Further correspondence passed between SARS attorneys and the taxpayer’s attorneys with SARS reminding the taxpayer’s attorneys that the taxpayer had a duty to respond to SARS request for information.

The taxpayer‘s attorneys indicated that the request to complete the questionnaire constituted administrative action and was subject to the principle of legality and that the taxpayer had just cause not to respond to the request because the information requested by him had not been provided to him and thus he was entitled to assume that the exercise of a power in terms of section 46 of the TAA had not been properly authorised.  
The court directed the taxpayer to submit a proper response
to the Lifestyle Questionnaire within two weeks 

Image purchased from www.iStock.com ©iStock.com/"gavel and book" by khz
The taxpayer indicated that he would only reply to SARS’s request for completion of the Lifestyle Questionnaire once the information requested in terms of PAIA had been supplied by SARS.

SARS agreed to supply copies of the SARS identification cards but refused access to the remainder of the records and information required by the taxpayer. SARS declined the request of that information on the basis that disclosure thereof would jeopardise the effectiveness of SARS auditing procedures and methods used by SARS to identify taxpayers.

It was argued by SARS that the provisions of section 46 are peremptory and that a taxpayer has no choice but to submit the information where SARS calls for information under that section. SARS raised various reasons contending why the taxpayer was obliged to supply the information requested. 

The taxpayer in return contended that SARS was seeking to conduct an unlawful fishing exhibition and was not entitled to the information as the request constituted an infringement of the taxpayer‘s constitutional rights set out in the Bill of Rights.

The court reviewed the arguments raised by SARS and the taxpayer, and came to the conclusion that the issuing of the Lifestyle Questionnaire was done in the course of the administration of a tax Act andwas therefore satisfied that all of the jurisdictional facts contained in section 46 had been complied with. 

The taxpayer contended that the request for information constituted administrative action which was protected by the right to just administrative action. SARS argued that the request for information under section 46 of the TAA constituted a preliminary investigation by SARS which may or may not result in a more formal inquiry into the taxpayer’s affairs. 

The court decided that it is only once the information has been received by SARS and it has been established that a further inquiry is required that the principles of administrative justice must be observed. 

The court concluded that SARS had provided sound reasons for its decision to issue the Lifestyle Questionnaire particularity taking account of the fact that the taxpayer was not registered and had failed to submit tax returns. The Court decided that the refusal by SARS to make information available to the taxpayer under PAIA was justified.

The court directed the taxpayer to comply with section 46 of the TAA and submit a proper response to the Lifestyle Questionnaire within two weeks of granting of the order in question. The court further ruled that should the taxpayer fail to submit the completed Lifestyle questionnaire, he would be held in contempt and will be committed to imprisonment until such time as he complies with the court order. 

In addition, the taxpayer was also ordered to pay SARS costs of the suit on the party and party scale.

Thus, taxpayers who decide not to submit information requested to do so by SARS under section 46, need to be aware that such behaviour will not be condoned by court.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, June 2016

Thursday, 5 May 2016

News Update

IMPORTANT ANNOUNCEMENTS


I'm delighted that Juta Law ‪Tax‬ Administration 2nd edition
is now a prescribed text
 for Unisa's College of Accounting Masters students 


I'd like to thank my clients, my empoyer ENSafrica, 
my colleagues and professional associates, 
and my family and friends for the overwhelming support 
and encouragement during my recent illness. 
I have returned to work part-time and
look forward to soon being back at full strength.
Social Media and Blog posts should return to normal from July 2016
***

Monday, 11 April 2016

Special Voluntary Disclosure Programme: The Last Chance To Regularise Unauthorised Foreign Assets

The Minister of Finance released details of the proposed Special Voluntary Disclosure Programme (“SVDP”)  when he introduced his budget on 24 February 2016. The SVDP will allow those taxpayers who hold assets abroad which are not known to the South African Revenue Service (“SARS”) and/or  the South African Reserve Bank (“SARB”) to regularise those assets on reasonable terms.

The world has become a smaller place since 9/11 and also as a result of the automatic exchange of information for tax purposes internationally. South Africa is regarded as an early adopter of the Common Reporting Standard (‘CRS’) which comprises the standard for the automatic exchange of financial account information developed by the OECD. 

South Africa will start
  •  to report financial information during the first half of 2017 in respect of accounts held as at 31 December 2016. The remaining countries which include, for example, Monaco, Switzerland and others will implement the CRS with effect from 1 January 2017 and require their first reports to be made in the first half of 2018 in respect of the period from 1 January 2017. 
  • to receive information from Switzerland and other countries, other than the early adopters, in 2018 regarding financial information relating to accounts held in that country. 
Thus, the SVDP announced by the Minister represents the last opportunity for taxpayers to regularise unauthorised assets held abroad before SARS receives information from foreign revenue authorities regarding funds held offshore.

The SVDP is contained in the 2016 Rates and Monetary Amounts and Amendment of Revenue Laws Bill, and deals with both the income tax and exchange control aspects of the regularisation process.

Currently, the Tax Administration Act contains as a permanent feature of law a Voluntary Disclose  Programme (‘VDP”), but that does not deal with exchange control issues, nor does it have any cut off insofar as interest payable by taxpayers is concerned, nor does it restrict the period for which taxpayers are required to go back to.

The SVDP is attractive in that those amounts that were removed from South Africa without income tax being paid thereon will not be fully taxed, such that only 50 per cent of the capital amount removed from the country is liable to tax in the first year of assessment ending after 1 March 2010 – that is the 2011 tax year. 

Where, for example, a taxpayer removed pre-tax amounts totalling R1 million over an extended period of time before 1 March 2010, 50 per cent thereof, that is R 500 000 will be liable to tax in the 2011 tax year at the rate of tax applicable then. 

The remaining R 500 000 will effectively not be taxed. Furthermore, interest payable on the amounts previously taxed will run form 1 March 2010 which is better than the current VDP where there is no limiting of the interest that may become payable by a taxpayer.

Those persons applying for relief under the SVDP must note that all amounts of dividends, foreign dividends, interest or other similar investment income received accrued on or after 1 March 2010 must be disclosed and will be liable to tax. However, any investment income derived before 1 March 2010 is effectively exempt and not liable to tax.

Any natural person (including the deceased estate of a natural person), a close corporation or company is entitled to apply for the SVDP where that taxpayer held a foreign asset on 29 February 2016, the value of which related to any unauthorised asset which comprises an amount not previously known to SARS or to the SARB .

 Persons who hold hidden funds abroad urged to utilise the SVDP
to regularise their affairs in South Africa

Image purchased from www.iStock.com ©iStock.com/
Maxiphoto
Foreign trusts are not able to apply for SVDP directly but the person who made funds available by way of a donation to a foreign trust will be entitled to apply for relief where that applicant accepts that the assets owned  by the foreign trust are deemed to be held by that applicant for tax income purposes only. This is very similar to the provisions which applied at the time of the amnesty which was available in 2003.

Where a person has removed funds from South African in contravention of the Exchange Control Regulations they may regularise their position with the SARB by paying a levy of 5 per cent on the market value of the foreign assets as at 29 February 2016 where those assets are returned to South Africa. If the applicant chooses to retain their assets abroad, the levy payable is increased to 10 per cent of the value of the foreign assets held abroad. 

It must be noted that the foreign investment allowance, currently an amount of R10 million per person per year, is not deducted from the value of the foreign assets liable to the levy. Where the applicant is unable to settle the exchange control levy from foreign based funds, the levy will be increased by 2 per cent to the extent that local assets are utilised to pay the levy due to the South African Reserve Bank.

Those persons who choose to utilise the SVDP will be in a favourable position in that they can regularise their affairs with both SARS and the SARB without any fear of a criminal prosecution and on what I believe is a reasonable basis. 

Applicants may lodge applications from 10 October 2016 and must adhere to the deadline and closing date of the SVDP of 31 March 2017. Those persons who hold funds abroad which are not known to the authorities in South Africa are urged to utilise the SVDP to regularise their affairs in South Africa. Failure to do so will result in the authorities becoming aware of the funds held abroad as a result of the automatic exchange of information and in such a case those taxpayers will be liable to the significant understatement penalties which may be imposed under the Tax Administration Act and could face criminal prosecution. 

In the case of violations of exchange control  those persons who choose not to regularise their affairs could be required to pay levies ranging from 10 - 40 per cent of the current market value of the unauthorised foreign assets they own. Persons wishing to apply for relief under the VDP need to start collating financial information sooner rather than later for submission to SARS and SARB that they can meet the tight deadline.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, April 2016.