Nowhere to Hide
13 May 2014
Posted by: Author: Beric Croome
Author: Beric Croome
On 21 February 2014 the Convention on Mutual Administrative
Assistance in Tax Matters, (‘the Convention’) as amended, by the provisions of
the Protocol amending the Convention on Mutual Administrative Assistance in Tax
Matters which entered into force on 1 June 2011 was published in the Government
The Convention was approved by Parliament in terms of
section 231 of the Constitution and the Convention
took effect on 1 March 2014 in South
Africa. 64 Countries have signed either the original Convention or the amended
Convention and ultimately the Convention will apply in all 64 member states
once domestic procedures have been completed in the various signatory states to
adopt the Convention.
The purpose of the Convention is to increase the co-operation
amongst tax authorities around the world and to combat tax avoidance and tax
evasion on an international level.
South Africa has elected that the Convention will apply to
the following taxes:
tax on royalties
on foreign entertainers and sportspersons
- turnover tax on
tax on interest, effective from 1 March
Chapter 3 of the Convention sets out the forms of assistance
which states are expected to provide to each other. Article 4 regulates the
exchange of information between states which have adopted the Convention and
article 5 deals with the exchange of information on request. Article 6 of the
Convention sets out the manner in which information should be exchanged
automatically and this is intended to meet the standard set by the Global Forum
on Transparency and Exchange of Information for Tax Purposes (‘Global Forum’).
In addition, the treaty provides for the spontaneous
exchange of information and simultaneous tax examinations whereby a taxpayer
residing in states which have adopted the Convention may simultaneously conduct
an examination of the taxpayers’ affairs.
Article 11 of the Convention regulates the recovery of tax
claims by one state on behalf of another. Certain of the double taxation
agreements concluded by South Africa with other states have specific provisions
allowing for South Africa to request assistance from its treaty partners to
assist in the collection of South African tax and allows at the same time for
other countries to seek assistance from the South African Revenue Service
(‘SARS’) to collect taxes owing to the other state. In the case of HMRC and
another v Ben Nevis (Holdings) Ltd the English High Court held that HMRC was
empowered to assist SARS in the collection of tax allegedly due by Ben Nevis.
More recently, in the case of M Krok v Commissioner: South
African Revenue Service the High Court held that SARS was entitled to assist
the Australian Tax Office (‘ATO’) in recovering taxes allegedly due by Mr Krok
to the ATO.
Under article 11 of the Convention South Africa could seek
assistance from other signatories to the Convention to assist in the recovery
of taxes due to SARS out of assets owned by a South African taxpayer in a state
which is a signatory to the Convention. Similarly, other countries can request
that SARS assist in the collection of taxes due to other countries out of
assets located in South Africa. The Convention sets out the manner in which
signatory states are required to assist each other in the collection and
recovery of taxes owing to another state.
The Convention also regulates the service of documents which
may emanate from an applicant state which relate to a tax covered by the
Convention such that South Africa would be required to assist the other state
in the service of those documents.
As indicated above, the Convention entered into force in
South Africa on 1 March 2014 and will apply to all those states which have
adopted the Convention and have complied with domestic legislative requirements
to adopt the Convention.
The purpose of the Convention is to counter global tax
avoidance and evasion and to allow for revenue authorities to co-operate and
assist each other in the collection and recovery of tax and also in the
obtaining of information with a view to assessing their residents correctly to
The coming into force of the Convention must be viewed in
the light of the work of the Global Forum and the intention to ensure that tax
information will be exchanged automatically. On 12 October 2013 it was
announced that South Africa would join the pilot scheme for the automatic
exchange of tax information launched by the United Kingdom, along with France,
Germany, Italy and Spain.
This move flows from a decision taken by the G20 countries
to enhance transparency and exchange of tax information to benefit both
developed and developing countries. On 13 February 2014 a common reporting
standard for the automatic exchange of information between tax authorities was
unveiled. The standard requires jurisdictions to obtain information from their domestic
financial institutions and to exchange that information automatically with
other tax jurisdictions on an annual basis.
The South African Revenue Service has entered into
negotiations with the United States Department of the Treasury to conclude an
Inter-Governmental Agreement (‘IGA’) with respect to the United States of
America’s Foreign Account Tax Compliance Act (‘FATCA’). It has been confirmed
that the wording of the draft IGA has been agreed upon and will be signed at
governmental level shortly. Once the IGA has been signed the United States
Treasury will regard South African financial institutions as being generally
compliant with FATCA.
South Africa’s financial institutions will be required to
report certain specific information to SARS which will then exchange that
information with the United States under the legal framework provided by the
double taxation agreement in place between South African and United States. The
first reporting period is 1 July 2014 to 28 February 2015 and the required
information will have to be submitted to SARS by June 2015.
Financial institutions will be required to submit
information to SARS annually for every tax year ending February of each year.
SARS has proposed a business requirements specification (‘BRS’) to deal with
the automatic periodical reporting of specified information by financial
institutions. SARS will publish a Public Notice in terms of section 26 of the
Tax Administration Act requiring a return as specified in the BRS requiring the
record keeping of the required information.
It must be noted that South Africa will be entitled to
exchange information with any other party that has adopted the Convention
referred to above even where no double taxation agreement exists with that
country. SARS will therefore require information from financial institutions
for purposes of exchange of tax information under the IGA and the Convention
based on the OECD common reporting standard on financial accounts and to obtain
information that will be used by SARS under domestic statutes to tax source
based income derived by non-residents.
Taking account of developments in the international arena,
those taxpayers whose tax affairs are not in order should seek to regularise
their position under the Voluntary Disclosure Programme available under the Tax
Administration Act, failing which such persons will in all likelihood be
identified by SARS as a result of the international initiatives under way to
enhance tax compliance.
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This article originally appeared on bericcroome.com.