A reduction in tax rates thanks to CRS?

Hylton Cameron Hylton Cameron

With the Minister of Finance expected to receive some additional funds soon, we are inclined to suggest a tax-rate reduction.

This funding is expected to flow from the Common Reporting Standards (CRS) that will soon be introduced and will apply to offshore accounts. The implementation is not specific to South Africa however, and bar a few exceptions, these are being implemented throughout the world.

To give the full picture of CRS, it is best to start at the beginning or near it at least. In recent years, many countries around the world have been concerned with tax evasion or, at the very least, tax non-compliance. To counter such action, certain countries have introduced, in various forms, an automatic exchange of information with other countries.

The OECD has taken this idea forward and rallied many countries, including non-member countries, to agree to the automatic exchange of information for tax purposes.

What does this mean to you?

Your bank or financial institution will in future use information from the “Know Your Client” process and other specific requests, to provide a report regarding your account to their in-country central tax office, who in turn will hand the information over to the South African Revenue Service (SARS).

South Africa is part of the first wave of what is termed “The Early Adopters Group,” and this means that if you have a foreign investment account at 31 December 2015 (referred to as pre-existing accounts), or open one subsequently (new accounts), your information will be reported to SARS by the end of September 2017. Certain countries, among them Switzerland, are part of the second wave and will only report on foreign investment accounts held by non-residents by September 2018.

The consequence of this reporting will be that financial institutions in countries that have adopted the CRS will require their clients to complete forms endorsed by their tax advisor (either an accountant or lawyer) that confirm the funds held abroad via off off-shore structures or in their individual names, are fully tax compliant in the client’s country of residence. Information about the foreign funds, together with the tax advisor’s declarations will then be handed to the foreign revenue authority and made available to SARS.

If you are a beneficiary of a trust or foundation, you are equally affected and cannot “hide” behind these legal structures as the foreign trusts and foundations and South African beneficiaries will be reported.

We have seen that certain foreign banks are already requiring this information by the end of 2015, which is well ahead of their reporting deadlines. In addition, there is talk that the banks may “soft block” accounts under certain circumstances by not allowing you to perform certain transactions; e.g. you may not be allowed to move funds to another related bank and thereby delay or avoid reporting. 

In light of this future disclosure, taxpayers are therefore advised to seek advice if they are in any doubt about the compliance of their offshore funds.

Cost of non-compliance

If the funds held offshore are not fully compliant, disclosure through the CRS may lead to assessments being made for either or both:

  1. Exchange control penalties (by the Financial Surveillance Department of the South African Reserve Bank); and /or
  2. Unpaid taxes, penalties and interest by SARS.

Currently, taxpayers can regularise non-compliant tax affairs through the Voluntary Disclosure Programme (VDP), which should substantially reduce any penalties.

However, in terms of Financial Surveillance Rules, there is currently no amnesty for exchange control contraventions. The cost of regularising exchange control transgressions could range from 20% - 25% of the amount in question, or more depending on the circumstances and is subject to negotiation depending on the facts. Usually, there is a 5% discount to the normal penalty (note that is a 5% discount and not a 5% penalty) when non-compliant funds are returned to South Africa.

Tax VDP would be based on fact, but as this program requires full disclosure, a detailed analysis will have to be submitted. In deciding whether to submit a tax VDP application or not, the following should be considered:

  1. For non-disclosure, there is no statute of limitations that could apply, potentially making the payment of arrear taxes and interest substantial.
  2. Records are only available for limited periods in most jurisdictions, e.g. between 5 and 10 years, and SARS is aware of this.
  3. For trusts, the VDP requirements will require disclosure regarding the funding of these structures to assess any potential liability for donations tax, transfer pricing and the possible application of attribution rules taxing trust funders/donors that could have material consequences.
  4. There are some interesting practical issues concerning deceased settlors and South African resident beneficiaries, for example, should the deceased settlor have been taxed it would need to be ascertained whether the beneficiaries have been declaring any vested income or gains.

From initial indications, even though there was an Exchange Control Amnesty and a Tax Amnesty, and now an effective although limited tax disclosure programme, it seems there may still be significant undeclared funds offshore.

What must you do?

In our view, there are only three realistic courses of action for taxpayers with undeclared funds abroad. Note however that we suggest that only option three below will really allow you to sleep well at night:

  1. Emigrate before 31 December 2015; or
  2. Move your funds to another jurisdiction. This will allow you to have another year to devise a plan of action. Alternatively find a jurisdiction that is not part of the CRS, although there is the risk that your funds are then appropriated; or
  3. Come clean, apply for a tax VDP, and negotiate with the Financial Surveillance department for reduced penalties in terms of any exchange control transgressions.

For more information about the CRS and how it may affect you, please contact your nearest Grant Thornton office. As far as the tax-rate reduction goes, we will keep you up to date with developments as changes occur and certainly when the annual Budget is read on 24 February 2016.