(written exclusively for Bloomberg BNA, Tax Planning International, European Tax Service, volume 16, number 7, July 2014)
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by the US to target non-compliance by US taxpayers using foreign accounts. FATCA essentially requires foreign financial institutions to report information about financial accounts held by US taxpayers, or by foreign entities in which such taxpayers hold a substantial ownership interest, to the IRS.
Until now, FATCA has largely impacted US taxpayers with specified foreign financial assets.
However, the recent Inter-Governmental Agreement (IGA) entered into between the US and South Africa, entitles South African Revenue Services (SARS) to receive reciprocal information from the US in relation to South Africans who hold US investments.
SARS has also indicated that it will use the information that it will obtain from South African financial institutions (FIs) for purposes of reporting to the IRS, to expand its tax base and to share the information with its other treaty partners.
II. Inter-governmental agreement between the US and South Africa
On June 9, 2014, The Agreement to Improve International Tax Compliance and to Implement the Foreign Account Tax Compliance Act between the United States and South Africa (IGA) was signed. However, the IGA is not yet in effect as it must still be ratified by Parliament.
The IGA seeks to ensure that "Reporting South African Financial Institutions" (for example, a depository institution or an investment entity in South Africa) will report information about US taxpayers to SARS. SARS will, in turn, relay that information, by means of automatic exchange of information (AEOI), to the IRS, under the double taxation agreement already in force between the US and South Africa. The IRS will in turn provide similar information about South African account holders in the US, to SARS.
On June 27, 2014 two government notices (GN) were published in the Government Gazette in terms of the Tax Administration Act 28 of 2011 (TAA), in order to facilitate FATCA compliance.
GN 508, published in terms of sections 29 and 30 of theTAA, provides that a "Reporting Financial Institution" is required to keep the records, books of account or documents that enable the institution to demonstrate that it has observed the requirements to be specified in the business requirement specification (BRS): FATCA AEOI return.
GN 509, published in terms of section 26 of the TAA, provides that a Reporting FI is required to submit a return:
- in the form of a BRS: FATCA AEOI data file;
- containing the information referred to in the IGA as further specified in the BRS: FATCA AEOI return; and
- in respect of a person who is a US taxpayer that holds a financial account with a South African FIand a non-US entity that is identified as having one or more controlling persons that is a US taxpayer.
The first reporting period is July 1, 2014 to February 28, 2015 and the required information will have to be submitted to SARS by June 30, 2015. Information will thereafter be submitted annually for every tax year ending February.
In terms of the SARS Media Release dated April 3, 2014, the purpose of the information flow under the proposed BRS, extends beyond mere compliance with FATCA and is, in fact, threefold:
- to obtain information required by SARS for purposes of exchange of information under the IGA;
- to allow for automatic exchange of similar information on a reciprocal basis with South Africa's other treaty partners, based on the OECD common reporting standard on financial accounts; and
- to obtain information that will be used by SARS under domestic law to tax source based income from non-residents.
III. Whose information must be reported under the IGA?
In the case of the US, in terms of Article 2 of the IGA, information is required to be obtained and exchanged by the IRS with SARS with respect to a "Financial Account" maintained by a Reporting U.S. FI if:
- in the case of a Depository Account, the account is held by an individual resident in South Africa and more than $10 of interest is paid to such account in any given calendar year; or
- in the case of a Financial Account other than a Depository Account, the account is held by a resident of South Africa and that resident (which could include an entity) earned certain US sourced income.
In the case of South Africa, information is required to be obtained and exchanged by SARS with the US in respect of a Financial Account maintained by a Reporting South African FI in respect of the following:
- a US citizen or resident individual, a partnership or corporation organised in the US or under the laws of the US or any State thereof;
- a trust if:
(i) a court within the US would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust; and
(ii) one or more US persons have the authority to control all substantial decisions of the trust; or
- an estate of a decedent that is a citizen or resident of the US.
IV. What information will be reported to the IRS and SARS?
The information required to be obtained and exchanged in terms of Article 2 of the IGA is essentially as follows.
Information reported to SARS by the US and obtained from a Reporting US FI in relation to a qualifying account in the US held by a South African resident:
- the name, address, and South African taxpayer identifying number of any person that is a resident of South Africa and is an "Account Holder" of the account;
- the account number (or the functional equivalent in the absence of an account number);
- the name and identifying number of the Reporting US Financial Institution;
- the gross amount of interest paid on a Depository Account;
- the gross amount of US source dividends paid or credited to the account; and
- the gross amount of other specified US source income paid or credited to the account.
Information reported to the IRS by SARS and obtained from a Reporting South African FI in relation to a qualifying account held in South Africa by a US person:
- the name, address and US federal taxpayer identifying number;
- the account number;
- the name and identifying number of the Reporting South African Foreign Institution;
- the account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure;
- in the case of any Custodial Account:
- the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and
- the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting South African Foreign Institution acted as a custodian, broker, nominee or otherwise as an agent for the account holder.
- in the case of any Depository Account:
- the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period.
- in the case of any account not constituting a Custodial Account
or a Depository Account:
- the total gross amount paid or credited to the account holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the Reporting South African Foreign Institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the calendar year or other appropriate reporting period.
In terms of SARS Media Release dated June 9, 2014, the IGA has been implemented to promote transparency between the US and South Africa on tax matters, and furthermore underscores growing international cooperation in the endeavour to end tax evasion worldwide. The SARS Media Release states that South Africa is committed to automatic exchange of information for tax purposes and to thereby make the world a more transparent place from a tax perspective. This is demonstrated by the stated threefold purpose of the information flow under the proposed BRS. Accordingly it is incredibly important that a South African taxpayer ensures that he/she has made all the necessary disclosures to SARS in relation to his/her offshore assets. Should she/he fail to do so and this is uncovered by SARS, the taxpayer could face criminal charges as well as interest and penalties. In this regard, taxpayers should remember that there is a Voluntary Disclosure Program provided in the TAA which taxpayers can use to regularise their position with respect to their offshore assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.