While many South Africans have previously disclosed their offshore assets under the tax and exchange control amnesty programmes introduced by government, some still chose to take their chances. To a large degree, their decision may have been informed by the perception that SARS did not look beyond our borders or at least did not have the capability to do so effectively.
The OECD’s Common Reporting Standard for the Automatic Exchange of Information was introduced on a global scale and the first reporting occurred in 2017. But until recently, it appeared that this initiative was not utilised by SARS. In the same vein, SARS reported that 1,700 South Africans were identified in the data leaked under the Panama Papers, but we have not seen any progress in this regard since SARS’ undertaking to investigate these individuals.
An Unexpected Audit
In 2020, for the first time we saw SARS issue notices to taxpayers informing them that SARS is reviewing their offshore holdings.
These notices confirmed that the request for information sent to the relevant taxpayer was prompted by information received by SARS from 87 different jurisdictions through the Automatic Exchange of Information regime and which was currently under review by SARS. This was the first indication that SARS is making use of information shared by other countries since this reporting commenced.
The notice requests that the taxpayer confirm, first of all, that they do have offshore holdings and then requires details on the nature of the assets, amounts invested, intermediaries that facilitated the investment, source of the funds, and tax obligations discharged with regard to the holdings. Finally, the notice requests an explanation for why the information was not previously disclosed. SARS affords the taxpayer 21 business days to provide the material requested.
As with any information request, the notice is issued under section 46(1) of the Tax Administration Act No. 28 of 2011 (“TAA”); the failure to respond fully will constitute a criminal offence under section 234 of the TAA. This is a difficult request to navigate, even where you have dutifully observed all of your obligations. Where you have not, it truly presents a quandary and voluntary disclosure application (“VDP”) is likely your best bet for a good outcome.
In this regard, from the wording of the notice, it appears SARS will allow the taxpayer to submit a VDP, even after they have received the request. This is an interesting concession, as by its nature, a VDP application must be “voluntary”, otherwise it does not meet the requirements of a valid VDP application under section 227 of the Tax Administration Act. Nevertheless, even where the taxpayer opts to regularise any related default by filing a VDP application, they must still respond to the notice.
No Escape from the Exit Tax
SARS has also sharpened its axe in vetting the affairs of taxpayers who leave the country. Prior to 1 March 2021, emigrating taxpayers who sought to close the book on their fiscal obligations in South Africa, completed the emigration process as recognised by SARB. This process, which has now been phased out, had a tax component, where the individual would apply for an emigration tax clearance certificate.
In practice, taxpayers still apply for an emigration tax clearance certificate when they leave South Africa and the process to review the taxpayer’s affairs is now far more sophisticated. Taxpayers who apply for emigration tax clearance certificates now often receive notifications from SARS where they are called to comply with further arduous information requests.
To finalise the process, taxpayers are asked to submit a comprehensive statement of assets and liabilities for the previous three years of assessment, particulars of any trusts in which they have an interest, a complete statement of assets and liabilities, particulars of all shareholdings and an explanation of their exit tax calculation.
SARS’ ability to interrogate these declarations has been enhanced by the use of data received from third-party sources such as the deeds office, local financial institutions and the tax authorities of other countries under the Automatic Exchange of Information regime.
SARS’ refined audit strategy follows a promise from the government that the tax component of the emigration process will be more rigorous, and it aligns with the institution’s commitment to bring undisclosed offshore assets within the South African tax net. An important part of utilising this untapped pool of revenue is to ensure that those who leave the tax base have paid their dues.
An interesting point to note here is that it appears that SARS will no longer shut its eyes to offshore trusts. The Davis Tax Committee in its Final Report on Estate Duty noted that it appeared that much of the South African wealth held in foreign trust arrangements were not identified by tax and exchange control amnesty programmes.
Seemingly, these taxpayers were advised that their offshore planning structures would remain undetected. But perhaps with the means now at SARS’ disposal, they will be able to untangle these arrangements.
SARS’ Expanded Scope of Capabilities
A key part of SARS’ vision to rebuild a robust and respected institution, based on integrity and trust, is to modernise its systems and to rely more on data analytics and artificial intelligence to execute its mandate. This, together with the expansion of its global network, will only further enhance its capability to look into the offshore assets of taxpayers.
But all the technology in the world would not mean much if you do not have the resources to wield it. It is widely known that there was a mass exodus of senior SARS officials under the previous administration. Beyond the fact that this caused SARS to be understaffed, it created a problem with skills transfer at the institution. In 2020, the Commissioner told the Standing Committee on Finance that there are 800 critical vacancies at the organisation for which needs funding.
The government heard his plight and with the 2021 Budget, it was confirmed that SARS will be given an additional R3 billion in funding.
It soon became clear that a large chunk of the additional funding will go to recruitment. On 28 March 2021 SARS announced that is undertaking a massive recruitment drive. The skills that SARS is hoping to attract include 370 highly skilled specialists, as well as 200 finance graduates. Seemingly, this would mean that SARS will not be shying away from complex issues and international financial arrangements.
Nevertheless, it is clear that SARS has embarked on a larger project of remedying its internal, operational, cultural and technological deficiencies and one can only hope that the skilled individuals it now attracts will stay the course. Skills take time to develop but SARS is laying the foundation to rebuild the organisation. In the course of time, leaving offshore assets undisclosed may simply no longer be worth the risk.
Do You Need To Submit A Tax Return?