Voluntary Disclosure Programme an opportunity to 'come clean' on assets hidden offshore

Paula Bagraim, Director Tax Consulting at Stonehage Financial Services

Using government’s recently announced Voluntary Disclosure Programme, South African taxpayers will soon be given an opportunity to put their affairs in order if they owe tax on local assets or income, and by disclosing income and assets hidden offshore.

Taxpayers who take advantage of the programme will be able to “come clean” without having to pay additional tax, penalties and interest on their defaults.

According to Paula Bagraim, Director Tax Consulting at Stonehage Financial Services: “The international tax environment is moving towards greater transparency and a more open exchange of information between tax authorities. In the wake of the global financial crisis, governments across the world have been scrambling to raise their tax revenues to help fund budget deficits.

“The relaxation of banking secrecy laws, sophisticated audit initiatives and improving co-operation with overseas tax jurisdictions and banks, including reciprocity in provision of information, will improve SARS’s ability to trace fund flows around the world and identify South African resident taxpayers with income and assets hidden offshore.”

In order to encourage taxpayer’s to disclose past non-compliances to SARS and to regularise their tax affairs, a voluntary disclosure programme (VDP) will be instituted in terms of draft legislation from 1 November 2010 to 31 October 2011.

“The VDP is consistent with successful initiatives implemented in other jurisdictions such as the UK, Australia, the US and more recently Italy and Denmark,” said Bagraim.

The detail of the VDP is set out in the Taxation Laws Second Amendment Draft Bill of 2010. The requirements for a valid voluntary disclosure are that:

Ø There must be a voluntary, full and complete disclosure in all material respects.

Ø There must be a default. Either inaccurate or incomplete information was submitted to SARS or the taxpayer failed to submit information which resulted in their being incorrectly assessed or an incorrect tax refund being paid.

Ø A penalty or additional tax would have been imposed had SARS discovered the default.

Ø The disclosure cannot result in a refund due to SARS.

Ø The disclosure must be made be in respect of a default which occurred at least 12 months before the commencement of VDP.

A taxpayer may apply for the VDP unless they are aware of a pending audit or investigation into their tax affairs by SARS, or an audit or investigation which had commenced but has not yet been concluded.

“Provisions are made for exceptions to this rule. Where the relevant default would not otherwise have been detected during the audit or investigation, and the application would be in the interest of good management of the tax system and the best use of SARS' resources, an application will be entertained,” explained Bagraim.

The full amount of tax will remain due for taxpayers participating in the VDP. Subject to certain exceptions, additional tax, penalties (other than administrative penalties) and interest relating to the default will be waived for qualifying taxpayers. SARS will also not pursue criminal prosecution in respect of the default.

The exception to this rule is where a SARS audit and investigation is already underway, in which case only 50% of the interest will be waived. No relief will be available for any administrative penalties found in the regulations issued under section 75B of the Income Tax Act. Therefore penalties arising from non-compliance, such as the failure to submit a tax return, would remain and would depend on the seriousness of the non-compliance.

Said Bagraim: “For certain qualifying taxpayers, the 100% relief from penalties, additional tax, and interest is to be welcomed and will surely encourage many taxpayers to come forward.

“It is expected that the VDP will result in substantial revenues for SARS as taxpayers take advantage of the opportunity to regularise their affairs. VDP will be supported by a simultaneous exchange control programme that will be brought into effect separately by the South African Reserve Bank.”