As a result, most of the member countries of the Organisation for Economic Co-operation and Development and a number of non-member countries, including South Africa, signed an agreement for the automatic exchange of tax information, known as the Common Reporting Standard (CRS).
The information will start flowing in 2017.
In order to allow South African residents (and former residents in certain circumstances) the ability to come clean ahead of the flow of information, which will commence in 2017, a Special Voluntary Disclosure Programme (SVDP) will operate from 1 October 2016 to 31 March 2017.
There are two elements to the programme:
- Exchange control
The system of exchange controls regulates the holding of foreign assets by South African exchange control residents. South African residents holding foreign assets in contravention of the Exchange Control Regulations (the Regulations) are exposed to the risk of criminal prosecution and possible confiscation of the assets.
In terms of the SVDP document issued by the Financial Surveillance Department (FinSurv) of the South African Reserve Bank, residents (individuals, sole proprietorships, partnerships, deceased estates, insolvent estates, South African trusts, close corporations and companies) and former residents may come forward and disclose details of their foreign assets held at 29 February 2016 in contravention of the Regulations and apply for relief. Persons who are under investigation or pending investigation by FinSurv are not eligible for relief.
The SVDP Unit, constituted jointly by FinSurv and SARS, will adjudicate applications, which will need to be submitted on the SVDP form using the SARS eFiling platform.
Administrative relief will be granted provided various conditions are met, including:
- The unauthorised foreign assets must have been held on or before 29 February 2016
- Applications must be submitted within the SVDP period
- The applicant must make a voluntary declaration, furnishing full details (including market values, description and location) of all unauthorised foreign assets (excluding bearer instruments which are excluded from the ambit of the SVDP), the source of the unauthorised foreign assets and the manner in which they were transferred abroad
- The provision of all required information and documentation including a sworn affidavit or solemn declaration of the contravention
Successful applicants will be liable to pay a levy, based on the market value of the assets held on 29 February 2016 in contravention of the Regulations subject, inter alia, to the following:
- A levy of 5% on the value of the unauthorised assets or sale proceeds if the foreign assets are repatriated to South Africa
- A levy of 10% on the value of the unauthorised assets if the foreign assets are retained abroad – in which case the levy must be paid from foreign-sourced funds
- A levy of 12% on the value of the unauthorised assets if the foreign assets are retained abroad and the levy is not paid from foreign-sourced funds
- No exchange control allowance or remaining portion may be deducted from the leviable amount
- The levy must be paid within three months of notification by FinSurv
- Where assets are held in multiple foreign currencies, the levy may be paid in United States Dollars based on the conversion rates at 29 February 2016
Special rules apply for persons who have set up so-called loop structures (structures set up by residents which created the ability to directly or indirectly export capital from the Republic). Typically a non-resident entity (Offshore Structure) would be set up to hold shares in a South African company. Such structures are in contravention of the Regulations and the shares or other interest in the South African company must be disposed of by the non-resident to a South African resident within 180 days of the lodging of the application. Levies must be paid on the total of funds used to establish the Offshore Structure, funds exported to the Offshore Structure (such as dividends) and the increase in value of the funds exported.
Donors to discretionary trusts
Special rules also apply for donors to discretionary trusts. They may elect that assets held by the trust at 29 February 2016 that were acquired by the foreign trust by donation from the South African resident be deemed to be held by that resident. The requirements to make the election are that the foreign asset must have been acquired by the discretionary trust by way of donation by the South African resident beneficiary, be wholly or partly derived from any unauthorised asset or from any amount not declared to the Commissioner for SARS as required by either the Income Tax Act or the Estate Duty Act and, at the time of the election, not have vested in any beneficiary.
Where the election is made the South African resident will be deemed to have held the foreign asset until it is disposed of to any other person. Any disposal so made will be deemed to take place at market value.
The trust founding document including any amendments, codicils and addenda thereto must accompany the application.
The levy payable will be 5% or 10% (depending on whether the unauthorised assets are repatriated).
Administrative relief outside of the SVDP
Disclosures of the following take place outside of the SVDP and are made to FinSurv via an Authorised Dealer – the SVDP application form on the SARS e-filling platform need not be completed.
Immigrants are required to make a declaration to an Authorised Dealer whether they are possessed of foreign assets and to give an undertaking not to place those assets at the disposal of a third party normally resident in the Republic. For those immigrants who have not yet done so, the making of the declaration before 31 March 2017 will regularise their possession and retention abroad of their foreign assets. No levy will be payable.
Foreign inheritances and legacies from non-resident estates
Inheritances of foreign assets by residents from non-resident estates prior to 17 March 1998 were required to be declared to FinSurv. Residents who have not made such declaration may do so before 31 March 2017. The declaration will regularise their possession and retention abroad of their foreign assets. No levy will be payable.
Foreign inheritances and legacies from resident estates with foreign assets
Inheritances of foreign assets by residents from resident estates held in compliance with the Regulations were required to be declared to FinSurv. Residents who have not made such declaration may do so before 31 March 2017. The declaration will regularise the possession and retention abroad of their foreign assets. No levy will be payable.
Disclosure of inheritances of foreign assets by residents from resident estates not held in compliance with the Regulations must be reported to FinSurv before 31 March 2017 who will require the assets to be repatriated – with no levy payable. If the assets are to be retained abroad a levy of 10% will be payable to FinSurv. The declaration will regularise the possession and retention abroad of their foreign assets.
Foreign earned income
Income earned abroad by South African residents prior to 1 July 1997 was required to be repatriated to the Republic. For those persons who failed to repatriate such income, the declaration of such income before 31 March 2017 will regularise their possession and retention abroad of their foreign assets. No levy will be payable.
Companies and approved foreign investments
The approval of foreign investments by South African residents is usually accompanied by significant administrative compliance requirements, such as lodging of share certificates, annual submission of financial statements and progress reports, declaration and repatriation of dividends prior to 26 October 2004 etc.
For those who have failed to comply with some or all of the administrative compliance requirements, the disclosure and compliance with the conditions prior to 31 March 2017 will regularise such contraventions and, in most cases (apart from certain contraventions relating to the failure to declare dividends), no levy will be payable.
Consequences of failure to utilise the SVDP
Residents who do not make application under the SVDP or the accompanying administrative relief, and who subsequently come forward and make a ‘full, frank and verifiable disclosure directly to FinSurv’ will be required, at the discretion of FinSurv, to pay a settlement amount ranging from 10% to 40 % of the market value of their unauthorised foreign assets.
Residents who neither make application under the SVDP nor come forward ‘may face the full force of the law’. The document warns: ‘In this regard the FinSurv is mandated to, where appropriate, recover the full amount of the contravention.’
The comments below are based on the SVDP provisions as contained in the draft 2016 legislation released on 20 July 2016. It is anticipated that, following the receipt of comment by National Treasury, there may be changes to the legislation before being enacted.
Trusts are excluded from the ambit of the relief provisions.
No understatement penalties will apply to applications submitted under the SVDP.
Relief is granted to persons coming forward during the period 1 October 2016 to 31 March 2017 by the exemption from tax of receipts and accruals not declared to the Commissioner from which an asset situated outside the Republic, held during the period 1 March 2010 to 28 February 2015 was wholly or partly derived.
Taxes such as employees’ tax, value-added tax and customs duty fall outside of the relief.
In order to access the relief, 50% of the highest value of foreign assets held outside the Republic at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March 2015 (for individuals - the 2011 to 2015 tax years) will be included in taxable income in the first year of assessment ending after 1 March 2014 (for individuals - the 2015 tax year). The value referred to above is the market value determined in the relevant foreign currency and translated to South African Rand at the spot rate at the end of each year of assessment. The highest ZAR value of the tainted foreign assets at the end of each of the 2011 to 2015 years
For an individual who is on the maximum marginal rate of tax for 2015 of 40%, the inclusion of 50% of the value of his/her assets will result in an effective tax rate of 20% of the value of the assets.
Applications will be required to be made pursuant to the provisions of the Tax Administration Act and will require the entering into of a written voluntary disclosure agreement.
Election provisions relating to trusts
A donor or beneficiary of a non-resident discretionary trust may elect that any asset situated outside the Republic which was held by the discretionary trust during the period 1 March 2010 to 28 February 2015, be deemed to have been held by that person for purposes of all tax Acts, if that asset—
(a) had been acquired by the trust by way of a donation or is derived from such a donation;
(b) has been wholly or partly derived from any amount not declared to the Commissioner as required by the Estate Duty Act or the Income Tax Act; and
(c) has not vested in any beneficiary of that trust at the time that election is made.
Where a person makes an election as contemplated above, that person must be deemed to have—
(i) held the asset contemplated in that subsection from the date on which the discretionary trust acquired the asset;
(ii) received the same income and incurred the same expenditure in respect of that asset as the trust received or incurred; and
(iii) dealt with the asset in same manner as the trust dealt with that asset.
Such deeming provisions will apply until—
- the asset is disposed of by the trust;
- the person would be treated as having disposed of the asset in terms of the Income Tax Act; or in the case of a deceased estate, company or other juristic person, the day before that person ceases to exist by operation of law.
When the deeming provision ceases to apply, the person must be treated as having disposed of that asset for consideration equal to the market value of that asset on the date of disposal.
The SVDP is likely to be the last opportunity for persons holding unauthorised foreign assets, or who have not disclosed income from which their foreign assets were derived, to come forward and regularise their affairs. Although the opening date of the SVDP is still some weeks away, it would be opportune to commence the process of gathering together all relevant information and documentation for the preparation and lodging of an application.
Bernard Sacks, Partner at Mazars Cape Town