The revised draft legislation on the special voluntary disclosure programme (SVDP) proposes to simplify how tax will be calculated on offshore assets derived from undeclared income.
However, some aspects of the SVDP are not entirely clear, and tax lawyers hope that public comment will result in National Treasury addressing them.
The SVDP, which was announced in this year’s Budget speech, will provide taxpayers who have been dodging tax on their offshore assets or who have contravened the country’s exchange-control regulations with a final opportunity to come clean with the authorities before September 2017, when governments globally will step up sharing information about their citizens’ financial affairs (see “New global reporting standard”, below).
The SVDP will run for six months, and applications must be submitted between October 1 this year and March 31 next year.
National Treasury recently published the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which includes revisions to the SVDP following comments received on the initial draft legislation.
The key proposed change will affect taxpayers who disclose offshore assets derived from undeclared foreign receipts and accruals, such as commission, consulting fees, remuneration, rental and the sale of capital assets (for example, a property).
The initial draft legislation required taxpayers to calculate two amounts and to include them in their taxable income: 50 percent of the total amount they used to fund the acquisition of offshore unauthorised assets (referred to as the “seed capital”) before March 1, 2015 and any returns on that “seed capital” over the five years to February 28, 2015.
The latest draft legislation proposes that the calculation will consist of one amount, which is 50 percent of the highest value between March 1, 2010 and February 28, 2015 of a taxpayer’s total offshore assets that were derived from undeclared receipts and accruals. The value of the assets is their market value in the relevant foreign currency converted into rands at the end of each of the 2011 to 2015 tax years – in other words, on the last day of February of each of those five tax years. Fifty percent of the highest value of the assets in any of those five tax years will be included in the taxpayer’s taxable income and taxed at his or her marginal rate of income tax in the February 2015 tax year.
Ernest Mazansky, the head of the tax practice at Werksmans Attorneys, says a taxpayer will effectively pay tax of 20 percent on the assets, because it is safe to assume that he or she was on the highest marginal rate of 40 percent on February 28, 2015.
The undeclared income that originally gave rise to the assets will be exempt from income tax, donations tax and estate duty for all years before February 28, 2015, the explanatory memorandum released with the draft legislation says. However, future income will be fully taxed, and the assets will be liable for donations tax or estate duty in the future if the taxpayer donates these assets or passes away while holding them.
Taxpayers whose applications in terms of the SVDP are successful will not have to pay penalties for understating their tax, and SARS will not prosecute them.
Mareli Treurnicht, a senior associate in the tax and exchange control practice at law firm Cliffe Dekker Hofmeyr, says the draft legislation does not make it clear whether or not successful applicants will be liable for interest, and if they are, how it will be calculated.
Hanneke Farrand, the head of the private clients department and a director in the tax department at law firm ENSafrica, says the proposal to change the calculation to one amount should simplify matters for taxpayers. She says there had been uncertainty about what constituted “seed capital” – in particular, whether it included a loan used to acquire offshore assets.
The latest draft legislation proposes that the SVDP excludes contraventions with respect to value-added tax and employees’ tax, skills development levies or contributions to the Unemployment Insurance Fund.
It also proposes that taxpayers who disposed of any undeclared offshore assets before March 1, 2010, but who are worried that they might be identified as a result of information leaked online or information-sharing among revenue authorities may apply for the SVDP. Where the value of the assets cannot be determined, the Commissioner for the South African Revenue Service may agree to accept a reasonable estimate of that value.
Individuals and companies that are not aware of any current or pending audits or investigations in respect of their undeclared foreign assets or taxes are eligible for the SVDP.
Treurnicht says it seems that both South African trusts and foreign trusts are excluded from the SVDP for tax purposes. However, donors (or the deceased estate of a donor) or beneficiaries of a foreign discretionary trust may apply if they choose to have assets held by the trust between March 1, 2010 and February 28, 2015 deemed to be held by them for tax purposes.
Exchange control
The SVDP also provides relief for current or former South African residents who contravened the country’s exchange controls either by taking assets out of South Africa without authorisation or by failing to repatriate foreign assets when they were required to do so.
Successful applicants will be required to pay a levy of five percent of the current market value of the unauthorised foreign assets if they repatriate the assets, or the proceeds from the sale of the assets, to South Africa. This levy will be 10 percent of the market value at February 29, 2016 if the assets, or the proceeds, remain abroad. Both levies must be paid from foreign funds. If your foreign assets are not sufficiently liquid to pay the 10-percent levy and you use local assets to settle it, you will pay an additional levy of two percent.
You cannot use your R10-million foreign capital allowance (or any unused portion thereof) to reduce the amount on which the levy is calculated, and you cannot deduct fees and commission from the levy.
The unauthorised foreign assets for which relief is sought must be held on or before February 29 this year.
Individuals, sole proprietorships, partnerships, deceased and insolvent estates, South African trusts, close corporations and companies may apply for the SVDP for exchange-control purposes, provided they are not being investigated by the South African Reserve Bank.
The levy must be paid into an account held at a local authorised dealer, such as a bank, and must be converted into rands at the ruling spot exchange rate on the date of payment. If the assets are denominated in different foreign currencies, you can calculate the levy by converting the foreign currency amounts into United States dollars using the ruling exchange rate on February 29, 2016.
Advantages of the SVDP
The SVDP has two main advantages over the “permanent” VDP provided for in the Tax Administration Act, Farrand says.
First, with regard to assets derived from undeclared receipts and accruals, the years of assessment do not go back further than March 1, 2010, whereas the VDP does not specifically place a limit on how far back a taxpayer must disclose offshore income and assets. In terms of the SVDP, interest on the assessed tax is likely to apply only from October 1, 2015, whereas, in terms of the VDP, interest is charged on all assessed tax years. Therefore, depending on the circumstances, the SVDP could enable a taxpayer who has not declared offshore income for many years to pay less tax.
Second, with regard to contraventions of the exchange-control regulations, taxpayers can be certain that they will pay a levy of either five or 10 percent, Farrand says. The levy in terms of disclosure to the South African Reserve Bank outside of the SVDP is between 10 percent and 40 percent and subject to negotiation with the bank officials.
The revised draft legislation can be downloaded from National Treasury’s website, www.treasury.gov.za. The closing date for comments is August 8.
NEW GLOBAL REPORTING STANDARD
A new standard for exchanging information about financial accounts among tax authorities around the world will take effect in September 2017. The common reporting standard (CRS) will require governments to obtain “detailed” information from financial institutions about accounts held by individuals and entities, such as trusts, National Treasury says in the explanatory memorandum on the Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill.
The information, which includes balances, interest, dividends and proceeds from sales, will automatically be exchanged annually with other jurisdictions, the memorandum says.
It says the CRS is intended to help governments detect tax evasion by providing the tax authorities in a taxpayer’s country of residence with information about his or her non-resident financial affairs.