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Beware, beware, the tax man's here
by Andrew Duncan
The third tax amnesty in seven years has been announced. Following the Exchange Control Amnesty (which closed in February 2004) and the Small Business Amnesty (May 2007) we now have a “Voluntary Disclosure Programme”, to last from 1 November 2010 to 31 October 2011.
The memorandum dealing with the Taxation Laws Second Amendment Bill explains that “… In line with greater international cooperation over bank secrecy and enhanced measures to prevent money laundering, the VDP will also enable taxpayers with unreported banking accounts overseas to fully disclose such untaxed revenue. Although penalties and interest will be waived for successful applicants, the full amount of tax will remain due.”
Defaulting taxpayers will be granted relief subject to three provisions: that disclosure is complete; that SARS was not aware of the default; and that a penalty would have been imposed had SARS discovered the default in the normal way.
From the memo it is clear that Treasury knows there are massive amounts of monies held offshore. During the 2004 amnesty I estimated that probably 80% of the persons holding monies offshore sought amnesty, but they held probably only 20% of illegal foreign assets. The 20% who did not declare, did not, I think, fully realize what the tax consequences would be. The sophistication of SARS and other tax collectors, national and international, is now so extensive that to hide income becomes a sweaty past-time.
And no longer can anyone say “Aha, except in Switzerland”. The cornerstone of Swiss financial pre-eminence has been the secrecy that their banks offered customers. No longer. Last year, the Swiss bank UBS avoided prosecution in the USA by transferring €780 million together with data on more than 250 American clients. Now, following a Settlement Agreement with the US, Swiss law has breached its foundational rule and has authorized UBS to furnish data on some 4,450 clients.
South Africa is not alone in its high recent rate of tax amnesties. Italy's third amnesty in 8 years ended – after an extension – in April this year, netting €5.6 billion. Our new amnesty follows this one in sweeping up relatively modest pickings while warning the bittereinders of many sleepless nights coming up.
Who may apply? There is slight confusion in that our new Amnesty refers to a person as defined in the Income Tax Act (which includes an insolvent estate, a deceased estate and a Trust). But the Interpretation Act, which applies to the Income Tax Act, has a broader idea of “person”, including any Company and indeed any body of persons. So anyone and everyone can apply!
This tax relief programme will work side by side with an Exchange Control Amnesty and Voluntary Disclosure Programme which was posted to the Reserve Bank's website on 1st July, 2010. Public comment is sought on it until 2nd August 2010. It follows the lines of the 2004 Amnesty save that an Applicant will have to pay 10 - 12% on funds illegally offshore in excess of R4 million. It is a wider amnesty in that it also applies to companies and legal entities (mostly) technical infringements such as not repatriating dividends or selling off foreign assets without reporting the sale which will only require a declaration to regularize the position without payment of a levy.
For individuals as with the previous Amnesty there is likewise a Declaration for technical type infringements such as monies inherited before 17th of March 1998, or immigrants' assets held prior to 1st July 1997 but not disclosed with no levy being imposed. Keeping the balance of travel allowances off shore or donating undisclosed assets to Trusts, or being involved in a “loop structure” however will be subject to the levy and a similar formal application process. To be entitled to apply, a contravention will have to have taken place before the end of February 2010, when the measures were first mulled.
Once this process is over it is in my view is the end of Exchange Control for individuals. The thesis appears to be that one cannot legalize “off-shore naughty business” at the stroke of a pen unless those who have profited from it have first come clean and paid up and if you don't, then beware the Taxman!
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