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Tax bind about foreign assets remains

09 March 2016   (0 Comments)
Posted by: Author: Johan Troskie
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Author: Johan Troskie (BDlive)

Leaving aside the issues of downgrades and whether last month’s budget will get SA out of trouble, the media release dealing with the so-called Special Voluntary Disclosure Programme (VDP) that was issued by the Treasury on budget day, clarified some issues, but at the same time, left others in the air and introduced new uncertainties.

As before, regularisation by South African residents follows a two-pronged process — regularisation with the Reserve Bank and a VDP with the South African Revenue Service (SARS) in terms of the Taxation Administration Act.

Before the media statement of February 24, there were a number of uncertainties with regard to the regularisation processes, posing considerable difficulties for residents in the past. As far as the Reserve Bank process was concerned, it was uncertain what penalties could be imposed, as these have ranged between 5% and 25% of the value of the undisclosed foreign assets.

As far as SARS was concerned, there were three main areas of uncertainty:

  • How far back SARS would look. Although the VDP unit at SARS in practice often used a five-year look-back period, there was often inconsistent application of the rules.
  • How SARS would apply interest on unpaid taxes, and for what period.
  • The application of late-payment penalties, since SARS has sometimes waived these to make the process easier.

It appears from the media statement at least there will now be clarity on many of the previous uncertain aspects of the regularisation processes.

It seems clear that the Reserve Bank penalties will now either be 10% of the value of offshore assets should the transgressors elect to retain the assets offshore, or 5% where the assets are repatriated to SA.

As far as the SARS VDP is concerned, the previous three main uncertainties seem to have been clarified. The look-back period will by and large be five years, interest will be imposed only for those five years on unpaid taxes, and no penalties will be imposed by SARS in respect of the previously unpaid taxes. Sadly, the media release also introduces a few new uncertainties that, in fairness, may well be clarified or resolved when the Taxation Administration Amendment Act is released.

The first concerns the limited window period available for the VDP, namely that regularisation submissions and VDP disclosures can only be made between October 1 and March 31 next year. What is uncertain is what happens between now and October. Surely, a moratorium on investigations by both the Reserve Bank and SARS would have been fair? In addition, what is to happen with people who have started either the Reserve Bank or the SARS process and may now face a higher cost of regularisation than under the new regime? Again, it is suggested that the Reserve Bank and SARS should allow people the benefit from the new, more favourable regime.

The most uncertain aspect of the media release is the following: "Only 50% of the total amount used to fund the acquisition of offshore assets ("seed money") before March 1 2015, if the applicant failed to comply with a tax act administered by SARS, will be included in taxable income and subject to normal tax."

The concept of seed money is not a tax concept. It is not clear exactly what this paragraph means or is intended to include. Does the paragraph mean that 50% of all foreign assets should be included in taxable income or simply of money that has not previously been taxed in SA? I believe the latter interpretation is the only sensible one, as any other interpretation would result in double taxation, which is simply unfair.

Of course, the proverbial devil will be in the detail when the bill is signed into law. Perhaps we can use the time until then to engage with Treasury to clarify some of these matters before the law is promulgated. Until that time, it is a matter of wait and see.

  •  Troskie is an independent international tax lawyer.

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