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Voluntary disclosure: No place to hide

Thursday, 18 June 2015   (0 Comments)
Posted by: Author: Fiona Forde
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Author: Fiona Forde (Financial Mail)

Alongside a busy stretch of road close to the Brooklyn circle in Pretoria is a non descript redbrick building, devoid of the usual neon corporate signage. And it’s to this discreet structure that errant taxpayers come to seal agreements on unpaid taxes, be it on foreign-held capital or domestic assets or income.

It is the home of the Voluntary Disclosure Programme (VDP), a successful unit of SARS, but it is housed a few blocks away from the agency’s headquarters and operates independently of it in all respects to ensure maximum confidentiality and discretion for its thousands of clients.

The VDP was the brainchild of Johan van der Walt, a tax lawyer who joined SARS in the late 1980s and who felt the environment wasn’t conducive to the distrusting man or woman who wanted to settle their dues.

"I know this system and I know the fear people can have of the tax authorities. What was lacking was a discreet and confidential process through which people could regularise their affairs in a voluntary way, but also in a low-key manner, pay whatever was owing and move on with their lives."

SARS agreed to try it out for a year and VDP 1 commenced in November 2010, but by then Van der Walt had left for the private sector where he now provides a similar service at KPMG on behalf of clients who would prefer to be represented by a tax lawyer when settling their bills.

However, the pilot project was enormously successful — so much so that it was written into the Tax Administration Act a year later and rolled out as a permanent structure in 2012.

To date it has sealed more than 7 000 successful agreements, on the back of which more than R8,819bn has been raked in in fresh tax revenue.

But only a small portion of that figure has been linked to foreign-held reserves or profit shifting, with about R705m of taxable income so far identified in those areas, not counting the potential pot exposed through the HSBC files.

Instead, the bulk of the VDP revenue is drawn from corporate income tax, personal income tax, Vat and other smaller taxes like estate duty or transfer duty (see graphic).

"It’s the likes of the employer who hasn’t disclosed the taxable salaries of individuals working for them, for example; or on the Vat side, a Vat vendor who hasn’t fully disclosed his supplies; or a company that may have underdeclared its financials," says Faizal Ally, who heads the division.

"A significant portion of the applications have come from people who have not yet been audited by SARS but who know something is approaching," believes Vlok Symington, head of SARS legal and policy division, to which the VDP reports.

However, once an e-application is filed and a full and complete disclosure is made, the system assigns a number to the applicant, which automatically ring-fences them from any audit relating to the disclosure that could take place within SARS.

"Even if one is under audit, you can still join the VDP if the income or asset you want to disclose is not related to the subject of the existing SARS audit," says Symington.

The programme’s selling point is that while it forces the applicant to cough up whatever tax is due, either in one lump sum or in staged payments, it grants immunity from criminal prosecution as well as a relief from what are called understatement penalties and certain administrative penalties, which range between 0% and 200%.

Take the man or woman who has US$1m or so in their HSBC account that they may not have declared. If he or she joins the VDP, they pay tax on the capital, which on that amount would probably be at the higher rate of 40%, as well as tax on the revenue earned from that capital over the years.

But if SARS comes banging on their door first, as they are about to start doing, the HSBC holder (or anyone else) would be slapped with a hefty penalty anywhere from 150% to 200% for tax evasion and he or she is also likely to be criminally prosecuted. All that in addition to their tax bill.

One doesn’t even have to do the maths to see the benefits of voluntary disclosure.

"But one important thing to add is that if we find out later that you haven’t made a full and complete disclosure that is material to the VDP agreement, the VDP benefits disappear immediately," Symington says.

"We cancel the agreement. And at that stage your information has been in the possession of SARS, because assessments have been done. But I can count on two hands the number of agreements we have had to cancel for that reason."

Times are changing, however, and the days of Swiss and Guernsey banking havens are long gone. Not because of the HSBC leaks, but because of the automatic exchange of information programme initiated by the Organisation for Economic Co-operation & Development, due to come into effect in 2017. Though it will not bring down the curtain immediately on tax defaulters, it will become infinitely more difficult to "hide" one’s foreign assets in the future.

Those who are determined to do so will surely try to shift their funds to more obscure banks and opaque jurisdictions. "But this in itself is risky," says Van der Walt, "as it could result in the actual loss of capital and diminished investment returns, seeing that such clients cannot openly and optimally manage their overseas investments."

The HSBC is one of several banks now forcing their clients to regularise ahead of 2017 and those who don’t are being shown the door. The message is very clear now. You simply have to pay.

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