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Exchange controls: Now is the time to declare

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

The HSBC files have introduced a new layer of wealth into SA society: a significant number of high net worth individuals who until now have managed to steer clear of every rich list.

But the contentious bank data has also become synonymous with tax evasion and, considering SARS comment elsewhere on these pages (that only "some" of the account holders are tax compliant), that is perhaps not an unfair judgment.

What is overlooked in it all, though, is the exchange control side of the coin. And if it is the case that the bulk of the account holders have defaulted on their tax, it’s perhaps safe to say they have also defaulted on the exchange control levies enforced by the SA Reserve Bank.

"I’m very concerned that the impression is created that everybody whose name is on the [HSBC] list held those assets without exchange control approval, as it’s not necessarily the case," says Charles van Staden, who used to be the deputy head of the Bank’s exchange control division, which is now called the Financial Surveillance Unit, or Finsurv. He currently works at law firm Hogan Lovells, assisting individuals to place on record with the Bank any unauthorised foreign bank accounts they hold and generally specialising in all aspects of exchange control.

However, while SARS is offering an olive branch by way of the Voluntary Disclosure Programme (VDP), not just to the HSBC account holders but to all individuals with unregularised off-shore assets, allowing them to declare their wealth and pay the outstanding taxes, without being subject to penalties, a major impediment to the VDP is that the Bank has not come to the party.

Some of those dealing with the Bank on behalf of clients say its policy is undocumented, its approach is adversarial and often the penalties it seeks to impose cause people to consider taking desperate measures, such as emigrating.

The bank’s response is that there were opportunities in the past to declare foreign assets; the first was the 2003 amnesty and the second was in 2010/2011 when a drastically reduced levy of 10% on the foreign-held capital was applied to anyone who came forward at that time.

The current levies range between 20% and 30% of the capital for private individuals. If one chooses to liquidate and repatriate their funds, he or she is obliged to pay a 20% penalty if they haven’t previously declared their assets. If they choose to keep the money abroad they are slapped with a 25% levy on the capital or 30% if they cannot pay the amount from the foreign-held amount and pay it locally instead.

Van Staden’s view is that it no longer makes sense to contravene the exchange control regulations anyhow, considering that an individual’s foreign capital allowance is now R10m per calendar year since April, up from R4m a year.

"And that allowance caters for 96% of all SA households," he argues, based on income figures and access to wealth. "So there is simply no need to expatriate funds illegally."

That said, much of the SA accounts held overseas were opened many years ago, long before the current thresholds were put in place and when there was a rush to get money out of the country.

In addition to that, both Van Staden and Charles van der Walt (who works with KPMG and also negotiates with the Bank on behalf of clients) point to the "game changer" in 2017 when the Organisation for Economic Co-operation & Development’s automatic exchange of information between tax authorities and reserve banks comes into effect, and insist now is the time to declare any foreign assets held in contravention of the SA Reserve Bank Act.

Still, the penalties are hardly attractive, and discussions are now taking place between the Bank and national treasury to ascertain if a lower levy is not possible to lessen the blow for those who want to come in out of the dark.

It was Van Staden in a master’s thesis in the early 2000s who argued that some of the provisions in the act, along with the regulations, are in fact unconstitutional. Trevor Manuel was finance minister at the time and while he appreciated Van Staden’s arguments, it was agreed then that no changes would be made for fear of it sending the wrong message out to the world on much-needed foreign direct investment.

Independent of Van Staden’s thesis, it is understood that new rules and regulations have been drafted that are expected to overhaul the way Finsurv does business with its clients, but they will not be released until such time as the constitutional court delivers its judgment on Mark Shuttleworth’s challenge.

As is well documented, the tech entrepreneur was forced to pay R250m in levies when he wanted to transfer R1,5bn of his wealth to the Isle of Man when he was emigrating some years back. His challenge has been through the supreme court of appeal and the constitutional court’s judgment is expected in the coming months, if not weeks. Most observers believe he stands a good chance of winning and therefore of having his R250m reimbursed, with interest.

Even if he wins, that is unlikely to pave the way for a flurry of appeals to follow — for two reasons, as Van Staden points out: Shuttleworth’s payment was made under protest; and there is also the issue of prescription, which is a three-year period.

But if it is the case that the Bank is keeping an eye on the Shuttleworth judgment before releasing the new rules, it begs a fundamental question: why do new rules have to be drafted if the present rules are fit for purpose?

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