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The impact of information sharing on undisclosed foreign investments

Tuesday, 17 November 2015   (0 Comments)
Posted by: Author: BDO South Africa
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Author: BDO South Africa

South Africans today have access to a number of offshore investment opportunities, with foreign banks making it much easier to diversify your currency exposure.

"Allocating a portion of your investment offshore is a great option for investors, as your risk is spread across different economies and regions. This opens up the possibility of earning returns under different conditions," informs Kezia Talbot, Legal Adviser at BDO Wealth Advisers.

"While it is wise to consider a diversified portfolio, there are numerous undisclosed foreign investment accounts which, if remain undisclosed, could result in the investor incurring severe penalties," advises Talbot. There are various ways that South Africans are illegally channelling money out of the country, the most common are:

  • Of funds in bank accounts in perceived 'tax havens'.
  • Undisclosed monies placed in offshore trusts, possibly in tax haven jurisdictions.
  • Use of so-called 'blind trusts' to shelter funds. The settlor, purpose and true beneficiaries of these types of trusts are virtually impossible to identify.
  • Money laundering.

In order to prevent and also reduce the number of undisclosed offshore accounts, the SARS Voluntary Disclosure Programme (VDP) and information sharing aims to track down those who are avoiding tax, so as to promote fairness, transparency and trust in the international tax system. It also aims to counter evasive tax schemes and discourage use of perceived tax havens.

The enablers and catalysts for information sharing are: 

i. European Union Savings Tax Directive (STD) which came into effect in July 2005, and is perhaps the first enabler for information sharing. The STD affects residents of member states, who earn interest or savings income on deposits or investments in their own name in another EU member state, third country or territory in the directive.

ii. The following needs to be disclosed:

  • a.   Tax identification number in country of residence
  • b.   ID and residence of beneficial owner
  • c.   Name and address of paying agent (bank)
  • d.   Account number of beneficial owner
  • e.   Interest paying data
Legislation such as the Foreign Account Tax Compliance Act (FATCA) and globally coordinated information sharing agreements have ensured that banks (globally) are quite strict, and even reluctant to open accounts for non-residents. The intention behind FATCA is to prevent tax evasion by US citizens and residents through use of offshore accounts. "It is particularly applicable to South Africa, as an intergovernmental agreement was signed between the countries in June 2014," Talbot says. 

In order to disclose your offshore accounts, South African institutions are to provide the following information to US institutions:

  • Name, address, and the US tax identification number of the US person who is the account holder
  • Account number
  • Name and Identifying number of the South African institution
  • Account balance at the end of the calendar year immediately before closure.
  • US institutions are required to provide the above information to the South African institution in return.

Failure by South African institutions to comply will result in penalties being imposed on the institutions in question.

Furthermore, the Organisation of Economic Corporation and Development (OECD) has developed the standard for Automatic Exchange of Financial Account Information in support of the G20, and many other countries. "The first reporting period will commence on 1 March 2016 through to 28 July 2017, and amendments have been proposed to the Taxation Administration Act in order to implement the standard efficiently," advises Talbot.

This standard is intended to supplement the EUSTD and FATCA, not to replace them. It will assist in providing for the automatic exchange of income between the source country and residence country.

With the new standards, "All types of investment income, account balances and sales proceeds from financial assets will be reported on, for both individuals and entities, including trusts and foundations," she states. The financial institutions in jurisdictions with which South Africa has either multinational exchange agreements, double taxation agreements or tax information exchange agreements will be obliged to report on and exchange tax information of a broad scope. In the case of trusts particularly, information on settlors, trustees and beneficiaries will need to be reported by the respective countries. The information which is to be reported is set out in the agreements with the respective countries. 

Overall, these standards will encourage greater co-operation between countries, and aid in tightening loopholes. This will ensure that investors will not be able to hide assets in foreign jurisdictions while under the radar.

"Foreign trust arrangements should also be carefully reviewed to ensure compliance. Persons and entities, including trusts that have undisclosed foreign assets, would be advised to take steps to regularise this income, through mechanisms such as SARS VDP, as soon as possible," encourages Talbot. Failure to do so may result in the imposition of understatement and other penalties.

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