Worldwide: Undeclared Offshore Investments Are Criminal

Why the South African investor should take note of the Common Reporting Standards

The release of the Panama Papers has once again shone the spotlight on the offshore finance industry and many have commented and criticised. While it appears that the firm in question was not applying international standards of transparency and due diligence, in terms of the Common Reporting Standards (CRS) regulations now being implemented by the Organisation for Economic Co-operation and Development (OECD), the exposure of this company's clients has simply been brought forward. The question now is: what do these CRS regulations mean for South African investors?

At the 2016 G20 Hangzhou Summit, the OECD said that Panama was back-tracking on its commitment to automatically exchange financial account information, and described it as "the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities".

But, by the end of 2017, the OECD's CRS will have been introduced, and around 100 jurisdictions will start to exchange financial information. While the method of the exchange is still to be worked out, it will require all banks and offshore service providers to supply details of individuals and companies that do business with them – including those not resident in the jurisdictions in which the assets or investments are held.

Jacques Scherman, a Senior Consultant at Sovereign Trust South Africa, explains that the ramifications for SA citizens with undeclared offshore investments could be criminal: "We have always advised our clients with overseas assets to disclose them to the relevant tax authorities. While our experience leads us to believe that more South African assets being held offshore are legitimate and declared than not, it is a legal imperative that such assets are declared to SARS."

In his 2016 Budget Speech, Minister of Finance Pravin Gordhan announced a Special Voluntary Disclosure Programme (SVDP) – a final opportunity for non-compliant taxpayers with undisclosed assets abroad to voluntarily disclose and regularise their offshore assets and income. The SVDP allows for the regularisation of historical tax defaults as well as exchange control contraventions. Scherman comments that the SVDP also provides a mechanism to 'legalise' assets that were purchased with undisclosed income.

In terms of the SVDP, undeclared income that gave rise to assets will be exempt from income tax and estate duties. However, future income arising from these assets will be taxed in full. The calculation is as follows: 50% of the highest value of the aggregate of all assets held by a taxpayer outside SA's borders from 1 March 2010 to 28 February 2015 must be declared as taxable income.

While the SVDP legislation is still being prepared, the application window runs from 1 October 2016 to 31 March 2017.

Scherman points out that South Africans can still use offshore structures to reduce taxes and effect proper succession planning: "CRS does not mean that offshore structures will no longer be effective or useful. But we have been telling clients for years that if they cannot afford to have the details of their financial arrangements revealed to their tax authority, they should not be making these arrangements". Nevertheless, in circumstances where clients need help in regularising their affairs, we can be of assistance.


Controlled Foreign Company rules mean that, in most cases, offshore structures will not effectively reduce taxes unless the investors "forget" to declare the underlying income.

There is nothing illegal about a taxpayer setting up an offshore structure or commissioning an agent such as Mossack Fonseca (MF; the company implicated in the Panama Papers) to assist with this. But in fact MF rarely deals with the end-user client; it is a wholesaler that habitually provides companies to other financial intermediaries, particularly Swiss banks.

Historically, Swiss banks have had many clients who were not correctly declaring the income from these accounts. When the EU Savings Directive required the banks to reveal details of individual EU taxpayers who had accounts in Switzerland, the banks 'suggested' that these clients transfer their accounts into corporate names in order to avoid being reported.

(Later, the directive was expanded to catch all accounts by EU residents even if these accounts were held in the name of trusts or companies but many of the banks then suggested that their clients transfer their accounts to Singapore.)

It transpires from the Panama Papers that MF knew why Swiss banks were ordering large numbers of companies for their clients. But, MF was not advising these clients directly, nor was it was encouraging them to sign incorrect tax forms. It might be argued that the Swiss banks were complicit in tax evasion but, ultimately, all taxpayers are responsible for their own tax affairs and neither MF nor the Swiss banks had (or indeed, have) any duty to check that their clients are signing off correct and complete tax forms.

Another case could be made that both MF and the Swiss banks were complicit in a conspiracy to defraud foreign revenue authorities – although this is undoubtedly arguable and different levels of guilt could be attributed to both parties.

What is certain, subsequent to the Panama Papers, is that within about 18 months every tax authority in the world will have access to information that will ensure it is no longer possible for people to evade tax by failing to declare taxable income arising from offshore investments and 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.

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