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

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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.