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The tax dispute resolution process, contained in the Tax Administration Act, No. 28 of 2011 as well as the rules promulgated under section 103 of that act was designed to ensure efficient and simple resolution of tax disputes. Of late, however, our experience has been quite the opposite.

It is evident that the current economic climate has taken its toll on the tax dispute resolution process within SARS as well. SARS are, no doubt, inundated with objections, requests for reasons and appeals from taxpayers trying to save where they can and unfortunately, based on the responses being received from SARS over the last few months in relation to tax disputes,  the wheels appear to be coming off!

Objections are being declared invalid for invalid reasons, disallowed on incorrect reasons, and sometimes just figuring out what SARS is trying say in response to an objection can be challenging with the response being, plainly, an incoherent blabber, that is if a response is received at all.   Similarly, concerns raised from the tax industry with the introduction of the alternative dispute resolution process on appeal also now seems to be coming to a head with either no facilitation taking place at alternative dispute resolution hearings or failure by SARS to try and amicably resolve the dispute to close the matter.

While SARS should indeed be commended for the massive strides forward on the tax dispute resolution process to date, the current status, in our experience, does not compliment their hard work in the past.

In the current, unfortunate status of the process, taxpayers and tax practitioners may feel powerless and frustrated resulting in disputes being abandoned or otherwise not being resolved.  Having a competent team of professional tax dispute resolution experts is now more important than ever to ensure disputes are resolved fairly, efficiently and within reasonable amount of time.

SARS recently changed their dispute process on e-filing to include additional functions such as allowing taxpayers to request suspension of payments online or submitting a request for remission of interest and admin penalties.

The system furthermore compiles the DISP01 on your behalf and only requires the taxpayer to select the amounts under dispute and to provide descriptions in the ‘Grounds for Dispute’ and ‘Reasons for Late Submission’ blocks where applicable.

We herewith list some issues experienced with the new system on a practical level:

Grounds for Dispute to be completed in full

Generally together with the DISP01 form the taxpayer or tax practitioner acting on behalf of the taxpayer, will submit a comprehensive Grounds for Objection letter together with the supporting documents.

As the grounds on which the objection is based are described in detail in the accompanying grounds for objection letter, taxpayers often only refer to the latter referenced letter in the ‘Grounds for Dispute’ field on the form. SARS has however indicated that the taxpayer should in short include the reason for the objection as well the grounds on which it is based and cannot only make reference to the supporting document. Where taxpayers do not comply with the request, SARS have warned that such objections may be declared invalid.

Assessment Results

When making the selection of which amounts the taxpayer is objecting to on the prescribed DISP01 form, the system collects these amounts as well as their SARS source codes from the latest assessment. This amount is referred to as the ‘Dispute Amount’ on the DISP01 form. On a practical level, the system often either does not display any values under the relevant SARS source codes, despite income disclosed under the source codes on the assessment or displays the incorrect amount.

As taxpayers are unable to change the incorrect ‘Dispute Amount’ blocks on the DISP01, the objection is to be submitted as is. Despite bringing the system error to SARS’ attention on the DISP01 form, SARS declares the dispute as invalid due to the incorrect amount displayed in the ‘Dispute Amount’ blocks and steps need to be taken for SARS to treat the objection valid.

Limitation on Number of Objecting Source Codes

The taxpayer is only allowed to object to five items per objection as the new system limits the number of SARS source codes when completing the DISP01 form. Where there are more than five items in dispute, the taxpayer should wait for the finalisation of the first objection and only thereafter submit another objection against the remaining incorrect source codes. This often results in the later objection being declared invalid as a result of being late and steps need to be taken to for SARS to treat the objection as valid.

South Africa is one of the expatriate jurisdictions where proactive planning makes a significant difference to the tax and exchange control implications of an international mobile employee. The primary reasons are:

• Unlike most other countries, with good planning, you only become ‘tax resident’ in the beginning of your sixth year in South Africa; and

• There are various tax provisions which provide specific tax relief for expatriate employees, as well as various South African Revenue Service (SARS) practice notes and binding rulings that gives additional relief.

Typical mistakes you should avoid:

The following are examples of things that may sound like a good idea, but, from a South African tax perspective, is not:

• Open ended contracts and applying for permanent residency too soon. These are examples of items which SARS and the South African Reserve Bank often use to determine whether you have an intention to reside permanently in South Africa thus making you ordinarily resident and therefore, tax resident in South Africa. Not only will you then be liable to tax in South Africa on world-wide income, but you will also be subject to South African exchange control regulations. We have in recent months defended expatriates who SARS held to be tax resident in South Africa on the basis of an open ended employment contracts. Good planning would be entering into a fixed term contract with the option to renew.

• Housing or accommodation related allowances are never good ideas because they are fully taxable with no tax relief. Company provided accommodation either directly or through outsourced provider qualifies for various exemptions.

• Expatiates based in South Africa but who travels internationally qualifies for various exemptions. Whilst the principles are complex and there is no ‘one-size –fits-all’, it dates back to 1946 and states that days worked outside South Africa by a non-resident is exempt from South African tax.

A word of caution:

Whilst South African tax law has favourable provisions for expatriates, SARS has a dedicated audit focus on expatriates, for example, in the SARS standard payroll questionnaire, there is an entire section dealing with expatriates to ensure correct treatment and to identify abuse of favourable provisions.

The rule of thumb is that the employment contract or secondment agreement should be optimally structured from a tax perspective. This must be done before the work permit application.

Background, aims and enactment of FATCA

The Foreign Account Tax Compliance Act (colloquially known as “FATCA”) was enacted by the United States government during 2010, under sections 501-541 of the Hiring Incentives to Restore Employment (“HIRE”) Act.[1]  FATCA was implemented with the aim of counteracting tax avoidance, and aims to improve tax compliance by imposing certain identification- and financial reporting obligations on certain individuals and institutions.[2]

Implementation of FATCA in South Africa

Reflecting the trend towards global financial information-sharing, South Africa and the US entered into an intergovernmental agreement (“the IGA”) on 9 June 2014 (the IGA between the US and South Africa is based on the Model 1 IGA).  The agreement was ratified by Parliament and came into force on 28 October 2014.[3]  The IGA is a bilateral agreement in terms of which South Africa and the US have agreed to exchange certain financial information among one another.  In terms of the IGA FATCA is incorporated into South African domestic law.  Failure on the part of an individual or entity, with the provisions of FATCA as contained in the IGA therefore constitutes a breach of South African law.

Obligations on individuals

As a result of the IGA, all US individuals who have South African financial accounts or other assets above a certain value, in South Africa, must file annual reports about these accounts and assets.[4]

Obligations of financial institutions and entities

Foreign financial institutions (“foreign institutions”) are required to register with the US Internal Revenue Service (“the IRS”), either via the IRS online registration portal, or by filing Form 8957.  Foreign institutions must then report certain information regarding non-US accounts and assets, to the IRS.[5]

Reporting duties of South African financial institutions (as defined in the SARS Guide) (“South African institutions”)[6] are regulated in terms of the IGA and public notices 508 and 509 published in Government Gazette 37778 of 27 June 2014 under the Tax Administration Act 28 of 2011 (“the TAA”).[7]

In accordance with the above provisions, South African institutions must maintain records and collect information specified in the IGA, and submit the relevant information and records to the South African Revenue Service (“SARS”).  The collection and maintenance of records must be done in accordance with the due diligence requirements stipulated in the TAA, as set out in Business Requirement Specification:  Foreign Account Tax Compliance Act Automatic Exchange of Information (BRS:  FATCA AEOI).[8]

SARS will in turn share the information with US Treasury via automatic exchange of information under Article 26 of the existing Convention for the Avoidance of Double Taxation and Prevention of Fiscal Evasion between South Africa and the US.

Reportable information and format of disclosure

Article 2 of the IGA specifies items that should be reported.  These items include financial accounts held by specific US persons, the name, address, US Taxpayer Identification Number (“TIN”) of the accountholder, name and Global Intermediary Identification Number (“GIIN”) of the reporting institution and the account balance or value at the end of the financial year.[9]  Further in accordance with Article 4, payments to non-participating financial institutions must be reported to the IRS.

The South African institution will use forms in the W-series (W-9, W-8BEN and/or W-8BEN-E) for collecting information on its US clients.  The particular form and supporting documents will depend on the classification of the particular US entity.  The IRS has published guidelines regarding the completion of its series of forms which are available on the IRS webpage.

Non-compliance

Failure to comply with the provisions of FATCA may expose an individual or South African institution to penalties for non-compliance.  The penalties have been published in Public Notice 597 Government Gazette 38983 of 10 July 2015, under the TAA.[10]  A South African institution which fails to register with the IRS may also do so to its detriment in that non-registration may subject it to a 30% withholding penalty imposed on any US-sourced income in countries that have not entered into an IGA in terms of FATCA.

Footnotes

• [1] Available at https://www.gpo.gov/fdsys/pkg/PLAW-111publ147/html/PLAW-111publ147.htm.
• [2] https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx;  https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA and SARS’ Guide 1 on the Implementation of an Intergovernmental Agreement to Improve International Tax Compliance (“SARS Guide”).
• [3] http://www.sars.gov.za/Media/MediaReleases/Pages/26-March-2015—Update-on-implementation-of-FATCA-in-South-Africa.aspx.
• [4] https://www.irs.gov/Businesses/Corporations/FATCA-Information-for-Individuals.
• [5] SARS Guide.
• [6] http://www.savca.co.za/wp-content/uploads/2015/01/SARS-releases-guideline-notice-on-FATCA.pdf
• [7] http://www.sars.gov.za/AllDocs/LegalDoclib/SecLegis/LAPD-LSec-TAdm-PN-2014-04%20-%20Notice%20509%20GG%2037778%2027%20June%202014.pdf
• [8] http://www.sars.gov.za/ClientSegments/Businesses/Mod3rdParty/Pages/Automatic-Exchange-of-Information.aspx.
• [9] http://www.sars.gov.za/AllDocs/LegalDoclib/Agreements/LAPD-IntA-EIA-2014-04%20-%20FATCA%20IGA.pdf and http://www.savca.co.za/wp-content/uploads/2015/01/SARS-releases-guideline-notice-on-FATCA.pdf.
• [10] http://www.sars.gov.za/ClientSegments/Businesses/Mod3rdParty/Pages/Automatic-Exchange-of-Information.aspx.  And  http://www.sars.gov.za/ClientSegments/Businesses/Mod3rdParty/Pages/AEOI—Fixed-amount-penalty-table.aspx.

Downloads

Form 8957 Foreign Account Tax Compliance Act (FATCA) Registration

Download

Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

Download

Form W-8BEN-E Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)

Download

Updated Information On Use of Form W-8eci

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Updated Information On Use of Form W-8exp

Download

Updated Information On Use of Form W-8imy

Download

W-9 Request for Taxpayer Identification Number and Certification

Download

It is that time of the year again when Medical Aid Schemes are releasing their premium rates for the 2016 calendar year. In a comparison, conducted by Remuneration Consultants South Africa, the 2015 and 2016 contribution rates of seven of the most prominent Medical Aid Companies in South Africa revealed an on average contribution rate increase between 7.26% and 10.92%. The graph below ranks the seven Medical Aid Schemes from the highest to the lowest increase.

The Medical Aid contribution rate increases for the prominent South African Medical Aid Schemes is at rates that are significantly higher than the official consumer price index (CPI) inflation average which according to Statistics South Africa has been reported at 4.5% for the period, January 2015 to October 2015 (average CPI is illustrated by the red line in the graph above). Members may therefore be subject to annual rate increases during 2016 that are well above the rate inflation. This potentially will place a burden on members’ cash flow and raise questions on the value they receive for their money.