New rules for international cooperation on taxpayer’s affairs
26 January 2016
Posted by: Author: Ferdie Schneider
Author: Ferdie Schneider (BDO)
Greater transparency will expose undeclared
Globalisation has dramatically increased cross-border
financial activities.This necessitated enhanced co-operation and understanding between
tax authorities to curb tax evasion and to ensure a fair allocation of taxes among
the jurisdictions in which the activities take place.
The Organisation for
Economic Co-operation and Development (OECD) developed a Common Reporting
Standard (CRS) for the automatic exchange of information relevant to tax. Over
50 jurisdictions have agreed to comply with the CSR, including South Africa,
committing to exchange data in September 2017. Other jurisdictions will participate
The bottom line of the
reporting standard is: "I will show you
mine if you will show me yours.” The effect is that the UK, for example ,is
obliged to report all financial accounts held in the UK by the South Africans
It forms part of the
initiative by the G20 leaders to address base eriosion and profit shifting by
multinational companies engaged in cross-border activities. It aims to promote
greater fairness and trust in the international tax system.
South African tax
residents who have relied on offshore bank-secrecy rules to keep their financial
matters beyond SARS’ reach are left with a small window of opportunity to
regularise their tax position before SARS starts knocking on their doors.
SARS is likely to
discover undeclared offshore funds given the greater transparency due to the
reporting standard. This may result in criminal prosecution and understatement
penalties. However, an application to SARS under the Voluntary Disclosure
Program (VDP), prior the undeclared funds being discovered could grant relief
from criminal prosecution, depending on the circumstances.
All financial institutions have
to provide SARS with the financial data of their clients who are residents of
other countries participating in the exchange of information process. This data
includes interest in trusts and other entitities. This information can readily
be imported into the taxpayer database of each participating country, by using
a standard reporting format. It will flash out taxpayers who have evaded or
avoided paying tax, as well as those who may have made an error when submitting
their tax returns.
This initiative, in
conjunction with other legislations such as the US Foreign Account Tax
Compliance Act (FACTA) and the EU Savings Tax Directive, aims to build and strengthen
tax transparency and reporting globally. FACTA is aimed at forcing non-US
financial institutions (including banks, investment managers and even trusts)
to report on US citizen account holders.
For a developing
country like South Africa the common global reporting standard may be
counterproductive as more resources are required to set up the relevant
structures. In South Africa we may not have the capacity as yet to take on the
extra reporting. Furthermore, the privacy of the collected and submitted
information is not clearly stated.
Implementing the CSR
will place significant responsibilities on financial institutions. Clear
communication with clients is paramount for effective management of these new
responsibilities. All customers will have to be informed of the new reporting
requirements regarding their documentation.
It is vital that
clients and customers are warned of the potential tax consequences of not
reporting under the CRS and that the penalties could be high.
This article first appeared on the January/February 2016 edition on Tax Talk.