Monday 18 April 2011

Bite the Bullet with Voluntary Offshore Disclosure

The Voluntary Disclosure Programme and Taxation Laws Second Amendment Act contains the provisions whereby a taxpayer who is in default of his tax obligations may apply for relief.

The exchange control (excon) aspects of the voluntary disclosure programme (VDP) began on November 1 2010 and applications need to be submitted no later than October 31 2011.

The tax aspects of the VDP began once the required notice appeared in Government Gazette No 33731 as Government Notice 1026 on November 5 2010, and will also end on October 31 2011.

Persons who have contravened the exchange-control regulations ("the regulations") may regularise their affairs by submitting an application with either an authorised dealer or the exchange-control department, subsequently renamed the Financial Surveillance Department, of the Reserve Bank.

Where an applicant has removed funds from SA in contravention of the regulations a levy of 10% is required to be paid, utilising foreign funds, on the value of the assets as at February 28 2010. When the levy can no longer be paid from funds held offshore the amount of the levy is increased to 12%.

Where the applicant failed to submit an application to retain certain amounts offshore — that is, so-called "technical breaches" of the regulations that did not in any way impair SA’s reserves by the unlawful export of capital — the violation may be regularised by the submission of a declaration only and no levy is required to be paid to the authorities.

Therefore, insofar as excon aspects of the VDP are concerned the levy payable to the authorities is not unreasonable and is fairly similar to what was required to be paid under the 2003 exchange control and tax amnesty. Under the 2003 rules persons who held funds in contravention of the regulations were required to pay a levy of 10% when that person chose to retain the assets offshore, or when the person chose to repatriate the funds to SA a levy of 5% was required to be paid.

It will be recalled that insofar as violations of the fiscal laws is concerned, amnesty applicants were required to pay the 2% domestic tax levy for violations of all breaches of fiscal laws. Under the VDP, applicants are required to make full and proper disclosure of defaults and remain liable for tax due on the amount not previously reflected for tax purposes.
The advantage of applying for VDP is that the Commissioner for the South African Revenue Service (SARS) will not seek to prosecute defaulters and, furthermore, no additional tax may be levied on the amounts not previously known to SARS. When the applicant is not subjected to an audit or investigation by SARS all interest that would otherwise have been levied must be waived under the VDP process. Where the applicant is subject to an audit or investigation and satisfies SARS that they should still be allowed to apply for VDP relief, the interest relief is reduced to 50% of what it would otherwise have been.
It is clear, therefore, that the VDP does not constitute an amnesty but rather an opportunity for taxpayers to regularise violations of their fiscal obligations. However, the underlying principal tax debt remains payable.
Some taxpayers have felt aggrieved with the manner in which the VDP has been introduced, particularly because the underlying tax remains payable.
It is appropriate to refer to the rules relating to the 2011 offshore voluntary disclosure initiative introduced in the US. Under the US initiative taxpayers remain liable to payment of a penalty.

Therefore, US taxpayers are required to pay a penalty equal to 25% of the amount held in an offshore foreign account or entity, or the value of the foreign assets in the year with the highest aggregate asset value covering the periods from 2003 to 2010. The penalty may be reduced to 12,5% when the taxpayer’s foreign assets did not exceed $75000 in any calendar year covered by the programme. Furthermore, the penalty may be reduced to 5% for taxpayers who did not open the foreign account and for foreign residents who were unaware that they were US citizens.
Persons who have contravened the exchange-control regulations may regularise their affairs by submitting an application to the required authorities
The US initiative requires filing of original and amended tax returns and the payment of taxes, interest and an accuracy related penalty by no later than August 31 2011.From a review of the US commentary on the initiative it would appear that participants in that country who consult an attorney will benefit from the protection of attorney-client privilege, which is not available to accountants and other professionals in the US.

It must be noted that clients of accountants do not enjoy legal professional privilege in SA, whereas VDP applicants who seek advice from attorneys and advocates would be protected by legal professional privilege.

Those taxpayers who failed to apply for amnesty in 2003, or even those persons who did apply for relief under the amnesty rules, should now take advantage of the VDP process to regularise any defaults of fiscal obligations and violations of the regulations.
As pointed out above, taxpayers seeking relief under the VDP will always remain liable to pay the underlying tax due to SARS but will be secure in the knowledge that SARS cannot institute a criminal prosecution where VDP relief is granted and, furthermore, no additional tax may be levied and, in most cases, 100% of interest that would otherwise have been payable is waived. It is unfortunate that the VDP did not deal specifically with the late payment penalties applicable to value-added tax (VAT) or employees’ tax (PAYE).
Taxpayers, who are in default with their VAT or employees’ tax affairs should still apply for relief to ensure that no additional tax or interest is levied. It must be remembered that SARS has an inherent discretion to waive the late payment penalty that would otherwise be levied for late payment of VAT or PAYE.
Those persons considering applying for relief under the VDP need to be aware of the communication issued by the Financial Intelligence Centre (FIC), which makes it clear that advisers may assist and advise clients on the VDP process without the obligation to file reports with the FIC under the Financial Intelligence Centre Act.
The FIC recognises the benefits of the VDP and, therefore, encourages persons to seek the relief available and therefore places no specific obligation on professional advisers to report clients to the FIC who choose to seek advice or apply for VDP relief.
Advisers must still adhere to the ‘know your client’ rules.
Those persons, who have identified defaults under the fiscal legislation should consider seriously taking advantage of the VDP in order to regularise their affairs with the fiscal authorities and, where the regulations have been violated, to regularise those breaches as well.
•Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day Business Law and Tax Review 11 April 2011.   Free Image from ClipArt

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