Questions relating to the Special Voluntary Disclosure Programme
The South African Revenue Service (SARS) initially introduced a tax amnesty and exchange control amnesty that ran from June 2003 until February 2004. The amnesty included a waiver on all interest and exchange control penalties prior to 28 February 2003, as well as a waiver on all taxes due prior to 1 March 2002.SARS then introduced a second tax amnesty under the guise of a voluntary disclosure programme (VDP) that ran from November 2010 to October 2011. The VDP aimed to encourage tax defaulters to disclose their tax defaults, resulting in them receiving relief from interest and penalties on unpaid taxes, but no tax relief.
The VDP then took the form of a permanent voluntary disclosure programme (Permanent VDP) from 1 October 2012, which is provided for in the Tax Administration Act 28 of 2011. The Permanent VDP provides relief from criminal prosecution, limited relief from penalties, but no relief from unpaid taxes and interest thereon.
The concern for taxpayers with regard to the Permanent VDP is that it has no specified statutory review cut-off date. It is SARS' practice to restrict the calculation of outstanding taxes and interest to the immediate past five tax years, however, in theory SARS could go back as long as it deems appropriate.
In the 2016 Budget Speech the Minister of Finance, Pravin Gordan, announced that a new temporary tax amnesty, the Special VDP, will be introduced. The Special VDP, which addresses some of the abovementioned issues, is only valid between the period 1 October 2016 and 31 March 2017.
The timing of the Special VDP is no coincidence with the automatic exchange of information between tax authorities coming into force on 1 September 2017. To date 97 countries have signalled their intention to adopt the multilateral competent agreement (MCA), which stipulates what information will be collected and how it will be exchanged, with 58 of these countries formally committing to be early adopters of the MCA. South Africans with irregular or undeclared funds offshore will not have any safe havens going forward and will be compelled to take advantage of the Special VDP.
Some of the key features of the Special VDP:
- The Permanent VDP applies to all taxes except customs and excise duty, whereas the Special VDP is only in respect of offshore assets and income.
- It is applicable to individuals and companies only. Trusts are disqualified from participating in the Special VDP, however settlors, donors, deceased states or beneficiaries of foreign discretionary trust may participate insofar as the trust's assets and income is deemed to be held by them.
- The Special VDP is not applicable to any person under investigation or is aware of pending audit in respect of foreign income and taxes. Persons will not be eligible where SARS has obtained information in terms of the automatic exchange of information.
Benefits of the Special VDP:
- 50% of the initial undeclared capital used to fund the offshore assets (seed money) will be exempt from income tax.
- Investment returns prior to 1 March 2010 will be exempt.
- Interest on tax debts arising from the seed money will only commence from 1 March 2010.
- No understatement penalties will be levied if the application is successful.
Specific concerns regarding the Special VDP:
- There are serious concerns arising from the timing of the Special VDP. For instance, should a person make an application before 1 October 2016, would it be considered in terms of the Permanent VDP or would it qualify for the benefits under the Special VDP? Another scenario to contemplate would be a taxpayer who has elected to apply in terms of the Special VDP and therefore has to wait until 1 October 2016 to make the application. What would be implications should SARS conduct an investigation into that taxpayer's affairs in the period leading up to 1 October 2016?
- Are taxpayers who have applied under the Permanent VDP entitled to re-apply under the Special VDP, given the more favourable terms of the Special VDP? Has SARS infringed on such a person's constitutional right to be treated equally, and can it be construed as discrimination that applicants of the Permanent VDP were not offered the right to pursue the benefits of the Special VDP?
- In terms of the Special VDP, only 50% of total amount used to fund foreign asset is exempt from tax. It is extremely difficult to prove that the total amount of foreign assets was built up using after tax income. If the applicant utilised after tax funds to acquire his offshore assets but cannot prove this, then he will be obliged to pay tax on 50%. This will be double tax.
- In light of the fact that settlors, donors and beneficiaries of foreign discretionary trusts would be deemed to be asset owners under the Special VDP, issues regarding which countries laws take precedent arise. Will the Special VDP (SA law) or the trust law of the country in which the foreign trust is domiciled take precedent?
SARS should be commended on being pro-active with regards to the Special VDP. If the few issues raised above can be ironed out prior to the implementation of the Special VDP, then the success of the programme will be immense.