Monday 13 February 2012

Not All Smooth Sailing for Tax Defaulters

The Voluntary Disclosure Programme (VDP), enacted by way of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, 2010, came to an end on 31 October 2011. 

It is unclear, at this stage, how many persons applied for relief in respect of tax defaults administered by the Commissioner:  South African Revenue Service and for exchange control relief from the Financial Surveillance Department of the South Africa Reserve Bank.

It is appropriate to refer to the process which applicants will face insofar as the fiscal aspects of the VDP are concerned.

Voluntary Disclosure Programme
hits bump in the road as yet
more paperwork required
Persons applying for relief under the VDP had to submit a VDP application form electronically to SARS via e-Filing with the appropriate supporting documents.  

The legislation stated that the Commissioner would evaluate the applications lodged and that a voluntary disclosure agreement would be prepared to give effect to the relief under the programme. Once the agreement has been concluded, SARS is compelled to issue assessments to the applicant, giving effect to the document.

However, it now appears that SARS requires taxpayers, who applied for relief under the VDP, to re-submit the tax returns previously submitted in respect of the 2005 to 2009 years of assessment. 

It does not appear that this process is contained in the legislation. However, taxpayers have received e-mails from the VDP Unit at SARS, containing blank copies of tax returns for 2005 to 2009, which are required to be re-submitted. 

Unfortunately, the returns forwarded by SARS to applicants are in .pdf format, which means that the only way in which the tax returns can be completed is manually and that it is not possible to submit amended returns via e-Filing. 

It is unfortunate that SARS did not advise taxpayers, at the time that the VDP commenced, that this would be a requirement or, in fact, require the returns to have been submitted at the same time that the VDP application was filed.

It must be remembered that the VDP only dealt with tax defaults, which occurred prior to 17 February 2010. Those taxpayers who applied for VDP relief and have not yet filed their 2011 income tax returns, will need to take account of income derived from off-shore or other income not previously disclosed to SARS when completing those returns. 

If the 2011 tax return has already been submitted and assessed, VDP applicants should approach SARS to amend those returns to take account of income which was not previously reflected in the tax return.

The formal VDP process came to an end on 31 October 2011 and it is, therefore, not possible to apply for relief under the provisions of the legislation. 

Those taxpayers who, for whatever reason, chose not to apply under the legislation which operated from 1 November 2010 to 31 October 2011 and now wish to regularise their tax affairs, are required to approach their local branch office of SARS.

It does not appear that SARS has a formal process in place at the local branch offices to deal with those taxpayers who wish to rectify prior defaults. It would be important, though, for those taxpayers to have identified the matters which require rectification, including the quantum.

Once the Tax Administration Bill, 2011 has been enacted, taxpayers will be in a position to apply for relief under a formalised VDP. 

The VDP contained in the Tax Administration Bill  is not as generous as that which ended on 31 October 2011, by virtue of the fact that the process will allow for the waiver of additional tax, but not interest which would otherwise have been levied on the late payment.

Where VDP applicants are involved with, say, so-called “loop structures” in violation of the Exchange Control Regulations, Reserve Bank requires that these be unwound.  

Applicants must remember that the unwinding of such structures will give rise to adverse consequences in South Africa in the form of, possibly, capital gains tax (CGT), secondary tax on companies (dividends tax after 1 April 2012) or securities transfer tax, depending on the nature of the asset to be transferred from the off-shore structure to the South African resident.

It is not possible, in this article, to evaluate the various structures which exist and comment in detail on the fiscal consequences which may arise from unwinding “loop structures.”

Those applicants who applied for VDP relief from the Reserve Bank will be required to pay the levy on the unauthorised foreign assets within the period allowed by the Reserve Bank .  Where the foreign assets are owned by a foreign trust, it will be necessary for the foreign trust to make an award of funds to the resident personally so that they can pay the levy due to  the Reserve Bank .  

It is not possible for the foreign trust to pay the levy directly to the Reserve Bank , with the result that the off-shore structure will need to make an award equivalent to the levy payable by the resident, to the resident so that they can pay the amount over.

The Taxation Laws Amendment Act, 2011, repeals Part XIII of the eighth schedule to the Income Tax Act, 1962.  That part of the act required taxpayers, in receipt of funds from off-shore, to calculate the capital gain or capital loss which arose on the conversion of amounts in foreign currency into South Africa Rand.  

Fortunately, the legislation has repealed that part of the act with effect from 1 March 2011 and in respect of years of assessment commencing on or after that date. Therefore, any foreign exchange gain or loss, which may arise as a result of the award by the foreign trust of funds to the resident to pay the levy due to the Reserve Bank, will no longer be liable to CGT as was previously the case.

Those persons who chose not to apply for relief under the formalised VDP process, and wish to regularise prior transgressions of the exchange control regulations, will be required to approach the investigations division of the Reserve Bank with a view to regularising their exchange control affairs. 

Where persons applied for relief under the VDP, a levy of 10% was required to be paid on the value of the foreign assets held as at 28 February 2010 in excess of the foreign investment allowance available to natural persons. 

Where persons seek to regularise their exchange control affairs outside of the VDP, the Reserve Bank will impose a levy of up to 25% of the value of the assets at the time that the person applies for regularisation of the unauthorised foreign assets.

Once the applicant has received relief under the VDP administered by the Reserve Bank, they may not utilise the foreign assets to acquire assets in South Africa, or to advance loans, directly or indirectly, to any other South African resident.

Furthermore, should either the Reserve Bank or SARS discover that the VDP applicant did not make full and proper disclosure of their affairs in the VDP application, the authorities are entitled to withdraw the approval granted under the VDP.

It would appear that it is going to take many months for both the Reserve Bank and SARS to process all of the VDP applications received.  Applicants for VDP have no choice but to wait for the authorities to contact them to advise as to the status of their applications.

Dr Beric Croome is a Tax Executive at EDWARD NATHAN SONNENBERGS INC. This article first appeared in the Business Day Business & Law Review February 2012.