South Africa: Special Voluntary Disclosure Programme In Respect Of Offshore Assets And Income

In his Budget Speech on Feb 24 2016, the South African Minister of Finance announced what has been called a “Special Voluntary Disclosure Programme”. The program looks very similar to previous amnesties offered in respect of offshore assets and applies in respect of both Income Tax and Exchange Control, although it is not quite as generous. We have set out the program in full below and have highlighted a couple of points to note together with our comments at the end.
We have summarised the main points below:
The VDP applies from 1 October 2016 to 31 March 2017;
Approaches may be made on a no name basis and in a representative capacity;
Only individuals may apply which would include Settlors and beneficiaries of foreign trusts if they deem the trusts assets to be held by them;
Individuals may not apply if they are already being audited or are aware of an audit;
Income Tax Relief granted includes:
  • 50% of amount used to fund the offshore asset if not in compliance with the tax Act will be included in taxable income and taxed;
  • Investment returns pre 2010 will be exempt and those after 2010 will be taxable in full;
  • Interest on tax due will run from 2010 and not earlier;
  • No penalties will be levied;
  • SARS will not pursue any criminal prosecution it may be entitled to.
Exchange Control Relief granted includes:
  • Levy will be charged based on unauthorised offshore assets based on the market value of assets as at 29 February 2016 as follows:
  • 5% of the leviable amount if the regularised assets or the sale proceeds thereof are repatriated to South Africa;
  • 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, an additional 2% will be added, to the extent that local assets are utilised to settle the levy; and
  • The R10m local allowance may not be used to pay the levy;
  • Post the amnesty the normal rules would apply.
Commentary:
The amnesty is reasonably generous although the combination of tax and exchange control penalties could still add up to a sizeable amount. A rough calculation shows that a contravention in 2010 of both Tax and Exchange Control would result in a penalty of about 45% of the assets.
We note that at the time of the last amnesty several of the more common exchange control contraventions were removed, for example offshore income can now remain offshore.  We suspect therefore that a lot more of the amounts held offshore are legitimate in terms of exchange control.
To the extent that anybody remains in breach of these provisions, we would encourage them to make use of the amnesty and to seek domestic advice in that regard.
The full wording of the VDP is as follows:
“The South African Revenue Service (SARS) and the South African Reserve Bank (SARB) are working jointly to ensure that applications for the Special Voluntary Disclosure Programme are assessed through one joint process for both tax non-compliance and exchange control contraventions.
TAX RELIEF 
 
Window period of Special Voluntary Disclosure Programme 
  • Applications for relief under the Special Voluntary Disclosure Programme will apply for a limited window period of six months starting on1 October 2016 and closing on 31 March 2017.
 
Persons that may apply for the Special Voluntary Disclosure Programme 
  • Individuals and companies may apply for the Special Voluntary Disclosure Programme on the same basis as for the existing Voluntary Disclosure Programme contemplated in Part B of Chapter 16 of the Tax Administration Act, 2011. That is to say, an initial “no-name approach” may be made, applications may be made in a representative capacity, etc.
  • Trusts will not qualify to apply for the Special Voluntary Disclosure Programme.
  • Settlors, donors, deceased estates or beneficiaries of foreign discretionary trusts may, however, participate in the Special Voluntary Disclosure Programme if they elect to have the trust’s offshore assets and income deemed to be held by them.
  • Persons may not apply for the Special Voluntary Disclosure Programme if they are aware of a pending audit or investigation in respect of foreign assets or foreign taxes or an audit or investigation in respect of foreign assets or foreign taxes has commenced.  However, if the scope of an audit or investigation is in respect of other areas (other than foreign assets or foreign taxes, e.g. in respect of PAYE), persons may still qualify to apply for relief under the Special Voluntary Disclosure Programme.  
  • Amounts in respect of which SARS obtained information under the terms of any international exchange of information procedure will not be eligible for the Special Voluntary Disclosure Programme.
Relief granted under the Special Voluntary Disclosure Programme 
  • Only 50 per cent of the total amount used to fund the acquisition of offshore assets (“seed money”) before 1 March 2015, if the applicant failed to comply with a tax Act administered by SARS, will be included in taxable income and subject to normal tax.
  • Investment returns in respect of those offshore assets received or accrued only from 1 March 2010 onward will be included in taxable income in full and subject to normal tax. · Investment returns prior to 1 March 2010 will be exempt.
Interest charged in terms of the Special Voluntary Disclosure Programme 
  • Interest on tax debts arising from the disclosure of amounts used to fund the acquisition of offshore assets or investment returns in respect of those offshore assets will commence only from 1 March 2010.
Waiver of penalties under the Special Voluntary Disclosure Programme 
  • No understatement penalties will be levied where an application under the Special Voluntary Disclosure Programme is successful.
Exemption from criminal prosecution under the Special Voluntary Disclosure Programme 
  • As is currently the case in the existing Voluntary Disclosure Programme, SARS will not pursue criminal prosecution for a tax offence where an application under the Special Voluntary Disclosure Programme is successful.
Application process under the Special Voluntary Disclosure Programme 
  • The application process for the existing Voluntary Disclosure Programme will be extended to the Special Voluntary Disclosure Programme. 
EXCHANGE CONTROL RELIEF 
 
Disclosure of Exchange Control Contraventions under the Special Voluntary Disclosure Programme 
 
  • The Financial Surveillance Department of the South African Reserve Bank (FinSurv) will be offering an opportunity to South African residents to regularise their exchange control affairs by applying for relief under the Special Voluntary Disclosure Programme of contraventions of the provisions of the Exchange Control Regulations, 1961 and which contraventions include, inter alia, the ownership of an unauthorised foreign asset(s).
  • Applications for relief for Exchange Control under the Special Voluntary Disclosure Programme are to be made pursuant to the provisions of Regulation 24 of the Exchange Control Regulations, 1961.
  • South African residents (individuals and entities) will be allowed to disclose and regularise their exchange control contraventions that occurred prior to 29 February 2016.
  • South African residents who are the subject of any current and/or pending investigation by FinSurv into their contraventions of the provisions of the Regulations will not qualify for Exchange Control relief under the Special Voluntary Disclosure Programme.
Window period of the Special Voluntary Disclosure Programme 
  • Applications for Exchange Control Relief under the Special Voluntary Disclosure Programme will commence on 1 October 2016 and will continue until 31 March 2017
Exchange Control Relief under the Special Voluntary Disclosure Programme 
  • Applicants who are granted administrative relief in respect of unauthorised foreign assets and/or structures (of whatever nature, excluding bearer instruments) may have to pay a levy based on the current market value thereof as at 29 February 2016.
  • The following conditions will apply:
  1. 5% of the leviable amount if the regularised assets or the sale proceeds thereof are repatriated to South Africa;
  2. 10% of the leviable amount if the regularised assets are kept offshore;
  3. The levy must be paid from foreign-sourced funds. Where insufficient liquid foreign assets are available, an additional 2% will be added, to the extent that local assets are utilised to settle the levy; and
  4. Individuals will not be allowed to deduct their R10 million foreign capital allowance or any remaining portion thereof from any leviable amount and the levy may not be reduced by any fees or commissions.
Exchange Control Relief post the Special Voluntary Disclosure Programme 
  • South African residents who do not apply for Exchange Control Relief under the Special Voluntary Disclosure Programme and voluntarily make a full disclosure directly to FinSurv outside of the Special Voluntary Disclosure Programme shall, at the discretion of FinSurv, have to pay a settlement ranging from 10% to 40% on the current market value of their unauthorised foreign assets. The determination of the final settlement amount will, inter alia, depend on whether the applicant elects to retain the funds abroad or repatriate such funds.
  • South African residents who neither applied for Exchange Control relief in terms of this Special Voluntary Disclosure Programme nor voluntarily approached the FinSurv for assistance may face the full force of the law. In this regard, the FinSurv is mandated to, where appropriate, recover the full amount of the contravention.
Treatment of disclosure and regularisation 
  • Further information on the treatment of disclosures and declarations in respect of specific transactions conducted by natural persons, corporates and donors of discretionary trusts will be made public in due course.
TAX LEGISLATION AND EXCHANGE CONTROL REGULATIONS 
Provisions regarding tax relief under the Special Voluntary Disclosure Programme will be made available in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016, the Rates and Monetary Amounts and Amendment of Revenue Laws (Administration Bill), 2016 and under the Exchange Control Regulation 24 of 1961.