South Africans with illegal assets offshore have been given a once-off opportunity to come clean and must decide before 30 November 2003 whether or not to take advantage of Finance Minister Trevor Manuel’s amnesty offer.
In response to this development, Cliffe Dekker has established Amnesty Task Teams in Sandton and Cape Town. Those individuals wrestling with the question of their eligibility for amnesty, or in need of assistance in evaluating the practicalities of the amnesty policy and in processing their applications, can rely on Cliffe Dekker's Amnesty Task Teams for expert advice. Our Amnesty Task Teams have specialised knowledge with regard to the application of the amnesty and will work in close association with Matthew Lester, Professor of Tax Studies at Rhodes University, Grahamstown.
The contact details for members of the Amnesty Task Teams can be found at the end of this newsletter.
The Parameters of International Tax Planning for the South African Investor
The 2003 Budget Speech saw the announcement of an offer by the South African Revenue Services (SARS) and the Reserve Bank of an amnesty to South Africans with offshore assets who have violated exchange control regulations and tax legislation.
There has been much debate concerning the terms and conditions attached to the amnesty. Over the past three years, many South Africans, knowing that SARS has started getting the upper hand, have called for an amnesty.
The bottom line is that there is an amnesty proposal on the table and those with offshore money must decide whether they are going to accept the amnesty offer. This decision needs to be made soon, as the amnesty is only available from 1 June to 30 November this year. In arriving at this decision, the taxpayer needs to assess the pros and cons of the amnesty, taking into account new trends in international tax administration and, more specifically, where SARS will be in five years time.
South Africans all too often judge the future by the behaviour they have been able to get away with in the past. Little regard is taken of developments within the last three years, let alone recognition of the fact that the rebuilding of SARS has only just begun. South Africans have only seen the first salvo of the war against tax evasion. Yet, even as things stand today, the level of discomfort has already reached unacceptable levels for most taxpayers. Today, the average investor cannot cope with the stress associated with living with tax evasion. The advisor who is prescribing structures that are causing the client massive anguish, is really doing the client no favours at all.
It is important to look at the future and identify the prospects of “keeping money on the run” and then to ask the question: “Is it worth it?”
A changing international environment
Prior to the 1980’s playing with offshore money was a sport that was reserved for extremely wealthy South Africans. The expense of having to travel overseas to administer offshore investments, coupled with the lack of appropriate contacts, meant that the average South African had little prospect of joining the offshore club.
During the 1980’s, the tax haven administrators (the Suits) found gold in South Africa, with lots of clients who would buy into anything offered offshore (regardless of price) and little prospect of interference from a totally disorganised SARS and Reserve Bank.
Offshore structures were prescribed that the average South African with the odd $100 000 did not fully understand and could not afford to properly administer. This left gaping holes in many offshore structures that to this day have not been fully challenged by SARS.
Things have changed for the Suits in recent years. Even before World Trade Centre, the international tax authorities were cracking down on the tax havens and life for the Suits was getting tricky. Since September 11, their lives have become a nightmare of regulation.
Today the Suits are diving for cover and suddenly many of them are conspicuous only by their absence from South Africa. The problem facing the Suits is that most South African money in the tax havens is grey and they have no idea as to its origin, which could get them into enormous difficulties if things go wrong in the future. For the amount involved, South African clients are not worth the risk.
The South African taxpayer now faces the prospect of getting little personal attention from the Suits and massive attention from SARS.
But the concern for the South African taxpayer does not end there.
The financial services sector has identified fraud and insolvency as being two of the biggest threats facing investment in the next 10 years.
South Africans are not asking questions such as: “What happens if my administrator is defrauded or my offshore life company goes bust?” The risks are there and cannot be ignored. The South African who lands up with a problem could well lose the lot.
There is a further issue to consider. During the 1980’s and 1990’s, the Suits gained their introductions and pedigree through local professionals who would do all that they could to ensure the safety of their clients' offshore funds. As regards grey money, it is now safe to assume that comfort has been lost in light of the recent money laundering legislation in South Africa.
Back at home
There were previously some fundamental aspects of the offshore game that gave South Africans huge comfort in playing offshore, which have changed and now need to be reconsidered.
South Africa only introduced a Residence Based Taxation system with effect from the 2002 year of assessment. Thus, correctly or incorrectly, many offshore structures were based on the premise that the income that they generated was in any event exempt from taxation in South Africa.
The provisions of the Income Tax Act which deal with the imputation to a resident of income from an offshore structure have yet to be tested by the tax courts. There is little in the way of legal precedent on which to rely if interpretation of these provisions goes wrong. This is, however, not the only problem.
Little regard is taken of the enormous extent of the amendment to the disclosure provisions of the Income Tax Act.
In the past, SARS has seldom applied the non-disclosure provisions to their full extent. This will soon change. Not only to the extent of penalties imposed, but also to the extent of imposing jail terms. Tax indiscretions carry a maximum five year term.
Financial Institutions and Advisors
It's not only the Suits in the tax havens screaming “fire in the hole.” It applies locally as well.
South Africa’s financial institutions and advisors have also come under attack in the form of, inter alia, the Financial Advisors and Intermediary Services Act, and the Financial Intelligence Centre Act. This is all new law that comes into effect this year.
There are some advisors who have openly stated that it's business as usual. But the financial institutions are not going to stick their necks out. Without the assistance of financial institutions, the advisor is not going to be much use.
When one speaks to South Africans quite bluntly about the future, the following questions get asked and need to be answered.
What about taxes in the future?
Once cleaned up, exposure to taxation on offshore investments is going to be pretty minimal for most investors. Simply put, the return on offshore investments mainly takes the form of capital gains that are currently subject to taxation at a maximum individual rate of 10%.
Can I be made to repatriate offshore funds in the future?
Technically, it would create a huge debate. Forcing South Africans to repatriate legitimate offshore money would not only be highly unpopular locally, it would also have severe implications abroad. Add to this an inevitable dispute in the Constitutional Court and it would seem highly unlikely that there would be a change in policy.
I intend to emigrate one day and join up with my offshore money. So why legitimise my money in RSA?
The problems with emigrating with grey money are becoming greater and greater. In short, it is far easier to legitimise money through the South African amnesty than to attempt to explain grey money away as part of emigration proceedings. South African grey money is fast becoming internationally grey.
At the end of the day, it all boils down to: “Do I accept the amnesty on offshore money?”
It is suggested that if you qualify for the amnesty, accept without doubt! The levies in terms of the amnesty legislation are a small price to pay. The odds and costs of keeping offshore money on the run are just not worth it anymore.
The problem is rather what to do if you don’t qualify. The answer is to get some professional help quickly. It is far easier to get matters sorted with SARS now while negotiation is still an alternative, than getting caught out later and having the book thrown at you.
Amnesty for what?
The amnesty has three dimensions. Firstly it grants relief for exchange control contraventions. Secondly, it provides tax relief for foreign income which has not been declared. Thirdly, it provides domestic tax relief for income which arose in South Africa but which was not declared and was accumulated as or converted to foreign assets. The distinction between tax relief for undeclared foreign income and domestic tax relief is relevant in relation to the levies, which are dealt with in detail below.
The amnesty will only provide you with relief in respect of those assets which you disclose in your application. Your application will not, however, be prejudiced by your failure to disclose all of your assets.
How long do I have?
An application for amnesty must be submitted to the amnesty unit during the period between 1 June 2003 and 30 November 2003.
Do I qualify?
Companies are excluded but your close corporations and trusts are included. Certain persons who assisted you (other than in a solely advisory role) may also apply for relief. A further limitation is that any person making application must have been resident in South Africa on 28 February 2003.
You will not qualify for the amnesty if your foreign assets have been derived from the proceeds of unlawful activities, for example fraud or theft.
What information must I provide?
Where you apply for exchange control relief, you will need to disclose the location, identifying characteristics and market value of your offending foreign assets as at 28 February 2003 in the relevant foreign currency and substantiate that market value by submitting a valuation of those assets or other acceptable proof.
Disclosure of all undeclared foreign income for the last year of assessment ending on or before 28 February 2003 must be made when applying for tax relief under the amnesty.
Where domestic tax relief is sought, you must also disclose those amounts which arose in South Africa, which were not declared for estate duty or income tax purposes.
A statement of all your foreign assets and liabilities must accompany your application, reflecting their historic cost and estimated market value (in the foreign currency). Should you fail to provide such a statement, the Commissioner may estimate these amounts.
What about my facilitator?
Your facilitator is not able to apply for amnesty independently and will have to join in your application.
Will my application be approved?
If you provide all of the required information within the amnesty period and are not already subject to an audit or investigation in respect of your foreign assets, the amnesty unit is obliged to grant approval. The approval is subject to timeous payment by you of the amnesty levies referred to below.
The approval will be void if you fail to submit your February 2003 tax return by 29 February 2004. The approval will also be void if your foreign assets have been derived from unlawful activities. If this is the case, you will forfeit any amnesty levies that you may have already paid.
What do I have to pay for the amnesty?
If your application for exchange control relief is approved, you will be required to pay an exchange control amnesty levy, which is calculated on the total market value of all foreign assets which you disclose, excluding those foreign assets which are held offshore legally and after deducting your R750 000 allowance.
The exchange control levy is 5% where you bring the assets back into South Africa and 10% where you chose to leave the assets offshore. There is a three-month period for payment of the levy. The levy must be paid out of foreign funds and is converted into rand using the exchange rate on the date of repatriation or date of payment, as the case may be. A change in the exchange rate may therefore significantly impact on the amount of foreign funds required to make payment of the levy.
There is no levy payable in respect of the relief for undeclared foreign income. If you are applying for the domestic tax relief, you will be required to pay a levy of 2% of the amounts that you previously failed to declare and which you disclose as part of your application. This levy is also payable within three months after the date of approval of your application.
Will my application be kept confidential?
Each member of the amnesty unit is required to keep information on your application confidential. The unit may not ask for details of any of your advisors or any other persons who may have assisted you in accumulating offshore assets.
If your application is approved, your application will be submitted to the Reserve Bank and to SARS, to amend and update their records. If your application is not approved, none of your information may be disclosed to any person. Your rejected application will be kept by National Treasury for a period of time and the confidentiality of such information will remain in place.
So what do I do now?
Seek advice from your professional advisors as to whether you qualify for the amnesty and how to go about your application.
Authors: Matthew Lester and Brigitte Franck
Matthew Lester is Professor of Taxation Studies at Rhodes University, Grahamstown.
Brigitte Franck is a director of attorneys Cliffe Dekker Inc.
Cliffe Dekker has specialist legal experts in Sandton and Cape Town advising on Tax Law and the Tax and Foreign Exchange Amnesty. For advice, please contact any of the following attorneys:
Chris Ewing, chairman Tel: +27 11 290 7120
Brigitte Franck, director Tel: +27 11 290 7127
David Pinnock, director Tel: +27 11 290 7141
Matshipi Mabane, associate Tel: +27 11 290 7074
In Cape Town
Johan Neser, deputy chairman Tel: +27 21 481 6329
Francis Newham, director Tel : +27 21 481 6326
Koos Rossouw, director Tel +27 21 481 6380