On 21 February 2014 the Convention on Mutual Administrative Assistance in Tax Matters, ('the Convention') as amended, by the provisions of the Protocol amending the Convention on Mutual Administrative Assistance in Tax Matters which entered into force on 1 June 2011 was published in the Government Gazette. The Convention was approved by Parliament in terms of section 231 of the Constitution and the Convention took effect on 1 March 2014 in South Africa. 64 Countries have signed either the original Convention or the amended Convention and ultimately the Convention will apply in all 64 member states once domestic procedures have been completed in the various signatory states to adopt the Convention.
The purpose of the Convention is to increase the co-operation amongst tax authorities around the world and to combat tax avoidance and tax evasion on an international level.
South Africa has elected that the Convention will apply to the following taxes:
- income tax
- withholding tax on royalties
- tax on foreign entertainers and sportspersons
- turnover tax on microbusinesses
- dividends tax
- withholding tax on interest, effective from 1 March 2015
- capital gains tax
- estate duty
- donations tax
- transfer duty
- value-added tax
- excise tax
- securities transfer tax
Chapter 3 of the Convention sets out the forms of assistance which states are expected to provide to each other. Article 4 regulates the exchange of information between states which have adopted the Convention and article 5 deals with the exchange of information on request. Article 6 of the Convention sets out the manner in which information should be exchanged automatically and this is intended to meet the standard set by the Global Forum on Transparency and Exchange of Information for Tax Purposes ('Global Forum'). In addition, the treaty provides for the spontaneous exchange of information and simultaneous tax examinations whereby a taxpayer residing in states which have adopted the Convention may simultaneously conduct an examination of the taxpayers' affairs.
Article 11 of the Convention regulates the recovery of tax claims by one state on behalf of another. Certain of the double taxation agreements concluded by South Africa with other states have specific provisions allowing for South Africa to request assistance from its treaty partners to assist in the collection of South African tax and allows at the same time for other countries to seek assistance from the South African Revenue Service ('SARS') to collect taxes owing to the other state. In the case of HMRC and another v Ben Nevis (Holdings) Ltd the English High Court held that HMRC was empowered to assist SARS in the collection of tax allegedly due by Ben Nevis. More recently, in the case of M Krok v Commissioner: South African Revenue Service the High Court held that SARS was entitled to assist the Australian Tax Office ('ATO') in recovering taxes allegedly due by Mr Krok to the ATO.
Under article 11 of the Convention South Africa could seek assistance from other signatories to the Convention to assist in the recovery of taxes due to SARS out of assets owned by a South African taxpayer in a state which is a signatory to the Convention. Similarly, other countries can request that SARS assist in the collection of taxes due to other countries out of assets located in South Africa. The Convention sets out the manner in which signatory states are required to assist each other in the collection and recovery of taxes owing to another state.
The Convention also regulates the service of documents which may emanate from an applicant state which relate to a tax covered by the Convention such that South Africa would be required to assist the other state in the service of those documents.
As indicated above, the Convention entered into force in South Africa on 1 March 2014 and will apply to all those states which have adopted the Convention and have complied with domestic legislative requirements to adopt the Convention.
The purpose of the Convention is to counter global tax avoidance and evasion and to allow for revenue authorities to co-operate and assist each other in the collection and recovery of tax and also in the obtaining of information with a view to assessing their residents correctly to tax.
The coming into force of the Convention must be viewed in the light of the work of the Global Forum and the intention to ensure that tax information will be exchanged automatically. On 12 October 2013 it was announced that South Africa would join the pilot scheme for the automatic exchange of tax information launched by the United Kingdom, along with France, Germany, Italy and Spain. This move flows from a decision taken by the G20 countries to enhance transparency and exchange of tax information to benefit both developed and developing countries. On 13 February 2014 a common reporting standard for the automatic exchange of information between tax authorities was unveiled. The standard requires jurisdictions to obtain information from their domestic financial institutions and to exchange that information automatically with other tax jurisdictions on an annual basis.
The South African Revenue Service has entered into negotiations with the United States Department of the Treasury to conclude an Inter-Governmental Agreement ('IGA') with respect to the United States of America's Foreign Account Tax Compliance Act ('FATCA'). It has been confirmed that the wording of the draft IGA has been agreed upon and will be signed at governmental level shortly. Once the IGA has been signed the United States Treasury will regard South African financial institutions as being generally compliant with FATCA.
South Africa's financial institutions will be required to report certain specific information to SARS which will then exchange that information with the United States under the legal framework provided by the double taxation agreement in place between South African and United States. The first reporting period is 1 July 2014 to 28 February 2015 and the required information will have to be submitted to SARS by June 2015.
Financial institutions will be required to submit information to SARS annually for every tax year ending February of each year. SARS has proposed a business requirements specification ('BRS') to deal with the automatic periodical reporting of specified information by financial institutions. SARS will publish a Public Notice in terms of section 26 of the Tax Administration Act requiring a return as specified in the BRS requiring the record keeping of the required information. It must be noted that South Africa will be entitled to exchange information with any other party that has adopted the Convention referred to above even where no double taxation agreement exists with that country. SARS will therefore require information from financial institutions for purposes of exchange of tax information under the IGA and the Convention based on the OECD common reporting standard on financial accounts and to obtain information that will be used by SARS under domestic statutes to tax source based income derived by non-residents.
Taking account of developments in the international arena, those taxpayers whose tax affairs are not in order should seek to regularise their position under the Voluntary Disclosure Programme available under the Tax Administration Act, failing which such persons will in all likelihood be identified by SARS as a result of the international initiatives under way to enhance tax compliance.
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.