Pretoria - The proposed special voluntary disclosure programme aimed at encouraging taxpayers to get their tax transgressions in order has been severely criticised.
Commentators say it is unfair, unworkable and extremely unattractive. It may even succeed in speeding up emigration and forcing people to going further underground to protect their wealth from government.
Dan Foster, head of international private clients at law firm Webber Wentzel, says taxpayers already have a moral objection to paying taxes to the South African government because of the huge amount of corruption and waste and total lack of service delivery.
“People have other options, they can emigrate. A lot of people have already done that... If people are placed before a choice of giving half of their wealth to the South African government or take their chances with the UK, I know what most people will rather do.”
The special disclosure programme (SVDP) was announced in the February budget and offers taxpayers the chance of paying tax and interest on undeclared income from 2010 until 2015. All income tax violations before 2010 will be forgiven as well as exchange control violations under a parallel process.
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In exchange for this relief, the Draft Revenue Laws Bill proposes that 50 percent of the amount used to acquire offshore assets should be included in the taxpayer's taxable income.
“That is extremely unattractive. That was never a requirement of the prior VDP. In fact, government is creating a new charge, and a retrospective tax on amounts that may already have been taxed. It could be money that they have already paid tax on in SA, before moving it overseas.”
South African Revenue Service (SARS) spokesman Sandile Memela explains the 50 percent requirement seeks to eliminate any technical legal disputes on whether the seed was pre- or post-tax.
He says for the purpose of the SVDP it will be assumed that the seed monies were pre-tax. "Taxpayers who are able to prove that the seed money was post-tax, must use the normal VDP to disclose their affairs. The 50 percent and the investment return cap operate together, aiming to provide a cost-effective way for taxpayers to regularize their tax affairs."
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Heinrich Louw, senior associate in the tax and exchange control practice at Cliffe Dekker Hofmeyr, says the elimination of all understatement penalties and the fact that certain income received from unauthorised assets prior to 1 March 2010 will be exempt from tax should be lauded.
“However, it remains to be seen whether the proposed relief will be a sufficient incentive for people to make use of the special VDP given the fact that 50 percent of the amount that was used to obtain the assets will be subject to tax.”
Memela says at the top end, the combined SARS and South African Reserve Bank bill will average around 28 percent of the total current value of the foreign assets.
PKF partner Paul Gering says South Africa is in dire need of additional revenue. “We need these funds to avert a 2 percent VAT increase. That is essentially what is at stake,” he says.
The 2002-2003 tax and exchange control amnesty brought assets worth R65 billion into the tax net. The South African Revenue Service (SARS) has already collected R6.3 billion since the launch of the existing VDP in 2012.
Yet, Gering says the special VDP is more complicated than it is supposed to be, and is riddled with problematic technical uncertainties. “There are alternative ways to make the process less problematic, which will be easier to administer [for applicants] and [taxes] quicker to collect [for SARS].”
Over and above the technical issues, there is uncertainty why applications on behalf of trusts are not allowed, why not all taxes (such as VAT, estate duty, donations tax) are included and what happens when SARS become aware of undisclosed amounts during the “window period” for applications.
Hugo van Zyl, cross-border tax and exchange control adviser at Breytenbachs Cross-Border Advisory, says it is unclear whether SARS will issue letters to taxpayers listing the amounts in respect of which no applications may be filed.
The window period of the applications will be between October this year and March next year. He says there must be a cut-off date for the exclusion of amounts if SARS becomes aware of these.
Foster, also vice-chairman of the personal income tax committee of the South African Institute of Tax Professionals, says the traceability of some of the documentary proof needed to apply is going to be “extremely difficult”.
“People have not kept all the records. Many of the assets might have been bought in cash, but since then they have bought bonds and shares, sold shares and bought property. The question is how they are going to trace all that,” he warns.
He adds that, perhaps government is not all too concerned about the effort it will require. The Common Reporting Standard for the Automatic Exchange of Financial Information becomes effective next year and SARS will receive a lot of offshore account data.
“It is far easier and cheaper to collect tax on these assets through a VDP than to undertake audits,” Foster says.
Memela says its experience with the HSBC cases (where SARS became aware of South Africans using their offshore bank accounts to evade tax) shows that traceability is not a problem.
"The HSBC accountholders knew exactly where the money came from. We have no reason to believe that the rest of the foreign bank accountholders are in a different position."
TLA Wealth Advisory director Tenk Loubser says the 2002-2003 amnesty showed how difficult and expensive it was to obtain the information.
Despite this cost and effort, he warns that it will be extremely irresponsible not to make use of the SVDP, especially if the undisclosed amounts are significant.
“People have to compare the issues with which they feel unhappy with - the inclusion of 50 percent of the initial funds - with the situation they will find themselves in when they are caught by the authorities.”
Loubser says international tolerance for tax avoidance has evaporated. “One has to ask the question whether it is worth passing the risks on to your beneficiaries. If the opportunity is not taken now, future beneficiaries will not be able to benefit openly from the accumulated wealth.”
He adds offshore banks are under increased pressure to ensure that the affairs of their client base are in order. “The threat is that they will close your account if you are not compliant.”
Memela says bank statements are readily available, sometimes in real time, online. If gathering the necessary documentation is going to take time, people should start doing so now, he says.
“The draft legislation is extremely unattractive and unworkable. It will drive money further underground and encourage emigration,” Foster says.
Memela says the perception that people will be giving half their wealth away requires correction. "The SVDP worst case scenario works out at 28 percent of the foreign assets."
National Treasury has allowed for comments on the draft bill until April 29.
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