South African tax residents are subject to taxation on their worldwide income and are required to disclose that income to the South African Revenue Service (SARS). For those taxpayers who choose (or have previously chosen) not to disclose, this decision could soon become a problem. Why?
SARS is finally now using the data it receives under the Standard for Automatic Exchange of Financial Account Information in Tax Matters – more commonly known as the Common Reporting Standard (CRS) – to investigate the offshore assets of South African tax residents.
The CRS, developed by the OECD in response to a 2014 request by the G20 group of leading nations, calls on countries and jurisdictions to obtain financial account information on non-residents from their financial institutions and automatically exchange that information with other countries and jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Nearly 100 countries carried out automatic exchange of information in 2019, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets of €10 trillion. This represents a significant increase over 2018 – the first year of such information exchange – where information on 47 million financial accounts was exchanged, representing €5 trillion.
This growth stems from an increase in the number of jurisdictions receiving information, as well as the wider scope of information exchanged. Automatic exchange of information is a game changer. This system of multilateral exchange is providing countries around the world with a wealth of new data, empowering their revenue authorities to ensure that offshore accounts are being properly declared.
The benefits were seen even before the exchanges began. According to the OECD, voluntary disclosure programmes, offshore tax investigations and related measures, both before and after the start of automatic exchange in 2017, have already led to the identification of more than €100 billion of additional tax revenues worldwide.
It could be that SARS has been building up capacity to be able to use the new data or that, in light of the current COVID-19 crisis, SARS is now being forced by budget constraints to investigate previously untapped pools of revenue. Whatever the motivation, it is clear that SARS is now issuing notices to South African taxpayers based on information it has received from foreign jurisdictions under the CRS.
These notices inform taxpayers that, in the interests of administrative justice, SARS intends to initiate a review of their tax affairs. It asks them to confirm that they have offshore assets and requests detailed information as to the location, the amount and the nature of the investments.
The notice further requests an explanation as to why the offshore holdings were not previously disclosed on tax returns and asks the taxpayer if they intend to file an application under the SARS Voluntary Disclosure Programme (VDP). The notice concludes by reminding the taxpayer that they have less than a month to respond and that failure to do so constitutes a criminal offence.
If there is any uncertainty about your reporting and tax obligations in relation to any international structures in which you have an interest, we suggest that you should contact your nearest Sovereign office to discuss your arrangements and the need for obtaining tax advice, said Sovereign Trust (SA) Director Coreen van der Merwe.
If you have undisclosed offshore assets and you have not yet received a SARS notice, it would be irresponsible to think that you have fallen through the cracks in the system. It is best to be pro-active and discuss the need for a VDP application with a tax advisor. This might protect you against criminal prosecution and tax penalties. Also remember that your interest in the offshore structure might be of such a nature that no reporting to SARS is required. If you have any uncertainty, speak to an expert.
We also suggest that any South African taxpayer who is currently contemplating setting up any new international structure should ensure that they are working with a reputable management company that has an understanding of the local reporting and tax issues, and which will also be able to connect you with a tax advisor in the jurisdiction where you are tax resident.
Originally Published by The Sovereign Group, February 2021
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.