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.
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.
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