Nowhere to hide
19 August 2014
Posted by: Author: Dr Beric Croome
Author: Dr Beric Croome (ENSafrica)
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 Gazette. 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:
- income tax
- withholding tax on royalties
- tax on foreign entertainers and
- turnover tax on microbusinesses
- dividends tax
- withholding tax on interest, effective from 1 March 2015
- capital gains tax
- estate duty
- donations tax
- transfer duty
- value-added tax
- excise tax
- securities transfer tax
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 that 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 tax.
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 13February 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.
This article first appeared on the August/September edition on Tax Talk.