Automatic exchange of information between various revenue authorities worldwide is now a reality. As a result, the South African Revenue Service ("SARS") is able to obtain financial information on any South African tax resident from various countries. This allows SARS to verify whether taxpayers have accurately reported their taxable income. Based on these information-gathering abilities, SARS has recently started to notify taxpayers that it intends to review their tax affairs, specifically in relation to taxpayers' offshore holdings.

In the 2021 Budget Speech, the Minister of Finance, Tito Mboweni, announced that the National Treasury and SARS intend to tackle tax avoidance more vigorously. The additional ZAR3-billion that has been allocated to SARS - to aid in both the identification of non-compliance and increased collections - suggests that the minister is willing to walk the talk.

SARS has been very vocal on its intended focus, too. Corporates, mining companies, high net worth individuals, complex tax structures, and transfer pricing are all in the firing line. SARS' enforcement and collection drive will be made possible by expanding its specialised audit and investigative skills, and modernising its IT infrastructure.

The introduction of the automatic exchange of information model, together with the bolstering of SARS' capacity, may be particularly problematic for taxpayers with undisclosed foreign assets. It is of course so that South African taxpayers are taxed on their worldwide income. A failure pay income tax on worldwide income will attract understatement penalties of up to 200%. Perhaps more pressing than this, it may lead to a criminal investigation, conviction and possibly jail-time. In some instances, negligently failing to comply is all that's required.

The Voluntary Disclosure Programme

One way to get around this is to make a voluntary disclosure to SARS in terms of the Voluntary Disclosure Programme ("VDP") as provided for in the Tax Administration Act, 2011.

Under a successful VDP application, all administrative non-compliance and understatement penalties that would otherwise have been imposed will be waived (unless gross negligence or intentional tax evasion is involved). Criminal prosecution for a tax offence may also be avoided. However, the taxpayer would still be liable to pay the tax and the interest thereon.

In order to qualify for such relief, the VDP application must:

  • be voluntary;
  • involve a default that has not occurred within five years of the disclosure of a similar default by the applicant;
  • be full and complete in all material respects;
  • involve the potential imposition of an understatement penalty in respect of the default;
  • not result in a refund due by SARS; and
  • be made in the prescribed form and manner.

The Purveyors judgment: a possible hurdle

The requirements for a valid VDP application appear misleadingly straightforward. A recent example is the Purveyors South Africa Mine Services (Pty) Ltd v CSARS. In that case, the court dealt with the meaning of the "voluntary" and "disclosure" requirements of a VDP. The facts were that the applicant had approached SARS to obtain a view on its tax liability. SARS informally advised the applicant that it was indeed liable and that, as a consequence for not paying this tax, certain penalties may be imposed. Consequently, the applicant made a VDP application to SARS. SARS, however, declined to grant relief on the basis that the application was neither "voluntary", nor constituted "disclosure", and thus failed to comply with the requirements for a VDP. (Please see a link to a summary of the judgment here, and a link to the full case here).

The term "voluntary" is not defined in the VDP provisions. In the Purveyors case, Fabricius J held that "a disclosure is not made voluntary where an application has been made after the taxpayer has been warned that it would be liable for penalties and interest owing from its mentioned default." The judge went on to explain that, because the applicant had submitted its application in fear of being penalised, there was an element of compulsion. On that basis, the application could not have been made voluntarily.

In the same case, Fabricius J opined that when the applicant made the VDP application, SARS already knew of the default because it has previously informed SARS when clarifying its liability. As such, the court ruled that "there can be no disclosure to a person if the other already has knowledge thereof."  

The precedent set in this regard is concerning as it means that any VDP made in fear of being caught is not voluntary and is thus improperly made. In recent interviews with the Commissioner of SARS, Edward Kieswetter, and retired Judge Dennis Davis, taxpayers were encouraged to make use of the VDP. However, in light of the Purveyor's case, any and all VDPs made as a result of these warnings may not be "voluntary", since they will be made out of fear and not pure benevolence. Declaring that a VDP made without an altruistic motive is involuntary, and thus improper, defeats the purpose of the VDP programme and renders it largely futile.

Furthermore, the meaning of "disclosure" was not dealt with in enough detail and the consequent findings narrow the meaning detrimentally. For example, should SARS reject the taxpayer's VDP application, the taxpayer will not be in a position to rectify the application and resubmit it. This is because SARS would already be aware of the default; it would no longer constitute "disclosure" according to the Purveyor's case.

 In our view, this finding of the court in the Purveyors case is misplaced too. The TAA does not prescribe that the information must be "new". The court in the Purveyors case seems to have read requirements into the legislation that are not there.

The Supreme Court of Appeal has granted the taxpayer special leave to appeal the judgment in the Purveyors case, leaving us hopeful that this, in our view, misplaced precedent will be reversed.

Additional issues with a VDP application

There are also other issues that plague the VDP process. For example, it takes on average more than a year for a VDP application to be finalised. There is also a lack of clear guidance on the interpretation of the VDP requirements. In our experience, SARS' application of the requirements is inconsistent. As a result, failing to navigate through the requirements successfully will lead to a rejection of the VDP application and as noted above, the taxpayer would arguably not be able to correct the application and resubmit it (unless the appeal of the judgment in the Purveyors case is successful).

SARS' external guide confirms that any information and supporting documents provided through the VDP process are ring-fenced to the VDP Unit and will not be shared with any other SARS division. However, whether this is so is not something that most taxpayers will be keen to gamble on. Moreover, there has been an increased rejection rate of VDP applications. The VDP investigation process has begun to resemble an audit with increased requests for supporting documentation. Consequently, taxpayer sentiment in relation to the VDP process consists of frustration, scepticism and regret. SARS needs to reassess their approach to the VDP process and realign it with their initial stance characterised by a "disclose and no questions asked" attitude. But SARS knows this: it has started engaging with various stakeholders to determine how they can improve this programme. We are cautiously optimistic.

Think you may have something to disclose?

While the VDP application procedure may look deceivingly simple, it is evidently a complex, yet critical process for taxpayers with undisclosed assets, income and other tax defaults. We recommend that any taxpayer who may think it has anything to disclose to SARS should first consult with an experienced tax advisor to confirm whether there is in fact a default and if so, advise on the remedies available to make the necessary disclosures and rectify the default.

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.