South Africa's Special Voluntary Disclosure Programme (SVDP) provides a final window of opportunity for taxpayers to regularise both their tax and exchange control affairs for a limited period before automatic exchange of information under the OECD's Common Reporting Standard (CRS) gets underway from September 2017. The SVDP application period opened on 1 October 2016 and will close on 31 August 2017.
The SVDP is available to South African resident individuals and companies who have not in the past disclosed tax and exchange control defaults in relation to offshore assets. South African trusts will not qualify to make use of the SVDP, but settlors, donors, deceased estates and beneficiaries of foreign discretionary trusts may participate if they elect to have the trust's offshore assets and income deemed to be held by them personally, for Income Tax and Estate Duty purposes.
The SVDP focuses on assets derived wholly or partly from receipts or accruals not declared as required in terms of the Income Tax Act or Estate Duty Act, which were held by a person or company during the period 1 March 2010 to 28 February 2015. Special deeming provisions apply for assets held and disposed of prior to 1 March 2010.
The SVDP provides that 40% of the highest aggregate market value of the unauthorised assets, as at the last day of February of each year between 2011 and 2015, will be included in the taxpayer's taxable income for 2015 and be subject to tax in South Africa. Accordingly, at a personal tax rate of 40% (in 2015), the effective tax rate on the SVDP declaration will be 16% of the aggregate market value of the unauthorised assets.
If an application is successful, the assets are deemed to be regularised and any prior tax liabilities that may have arisen are "forgiven" for income tax, donations tax and estate duty purposes. No understatement penalties will be levied and SARS will not pursue criminal prosecution for a tax offence, although interest on the tax liability will run from 1 October 2015. Future income will be fully taxed, and declared assets will remain liable for donations tax and estate duty in the future, should the applicant donate these assets or die in possession.
There is also a permanent programme available, the Voluntary Disclosure Programme, which requires the actual income to be disclosed for each of the contraventions, without limitation to the period, and the resulting additional tax will be payable with interest. However, similar to the SVDP programme, in most cases no understatement penalty is charged, and SARS will not pursue criminal prosecution. Whereas the SVDP results at most in an effective 16% charge of the highest value of the assets over the last five years, the VDP can possibly result in a lower rate, where the funds consist predominantly of post-tax or regularised funds, and only the minor income on the funds need to be declared to SARS.
The South African Revenue Service (SARS) and the South African Reserve Bank (SARB) have established a joint application process utilising the SARS eFiling website. The SVDP will not be open to individuals and companies if an audit or investigation in respect of foreign assets or foreign taxes is underway or pending. Amounts in respect of which SARS has obtained information under the terms of any international exchange of information procedure will also be ineligible.
The SDVP will also apply to exchange control contraventions that occurred before 29 February 2016. Successful applicants for exchange control relief may have to pay a levy based on the market value of the foreign assets as at 29 February 2016. The following percentages will apply:
- 5% of the leviable amount if the regularised assets or sale proceeds are repatriated to South Africa; and
- 10% of the leviable amount if the regularised assets are kept offshore.
The levy must be paid from foreign-sourced funds. Where insufficient liquid foreign assets are available and local assets are used to settle the levy, an additional 2% will be added. Individuals will not be allowed to deduct their R10 million foreign capital allowance (or any remaining portion) from any leviable amount.
South African residents currently under investigation by the Financial Surveillance Department (FinSurv) of SARB will not qualify. South African residents who do not apply for exchange control relief under the SVDP and opt to make disclosure voluntarily directly to FinSurv may, at FinSurv's discretion, face a settlement levy ranging from 10% to 40% of the current market value of their unauthorised foreign assets. Residents who do not make use of the SVDP may face the full force of the law and FinSurv is mandated, in appropriate circumstances, to recover the full amount of the contravention.
Excon regulations are complex and defining whether or not one is in contravention may be difficult. All South African banks act as agents of the SARB and are responsible for implementing Excon regulations. If you are uncertain as to whether or not you are in contravention of Excon regulations, contact us and we can refer you to a reputable advisor.
With the impending worldwide implementation of the automatic exchange of information between governments, details of offshore assets are going to become freely known to both SARS and SARB. Should offenders then be caught, the penalties levied would be far more onerous and there is also the possibility of criminal prosecution.
The CRS provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations.
The OECD recognised the importance of offering taxpayers the opportunity to become compliant before the implementation of automatic exchange of information and encouraged governments to enable people who want to regularise their tax affairs to declare the income and wealth they have concealed in the past.
The disclosure programmes offer taxpayers the opportunity to regularise their affairs on highly beneficial terms when compared to the penalties available to the authorities outside the programme. Equally important, the SVDP provides taxpayers with an opportunity to ensure that they will be able to continue to access quality service providers and financial institutions. Such firms will be unable or unwilling to assist clients with unauthorised assets in the future.
The SVDP is only available until 31 August 2017, so we would advise any clients who are unsure if their offshore assets are authorised to contact us as soon as possible on whether they should apply and we can refer them to a reputable advisor.
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.