When it comes to the wealthy using offshore investments as a way to dodge local tax, South Africa has ranked higher than several developed countries. A recent assessment of money “hidden” in HSBC Swiss bank accounts shows that: “The money connected to SA was higher than money connected to France, eight times higher than that of the USA, and 3.5 times more than Spain.”
At the time of the report the equivalent of 0.57% ($2 billion or approximately R28 billion at the current exchange rate) of SA’s GDP was being held by South African citizens in HSBC Swiss bank accounts. While 0.57% seems insignificant at first glance, it represents only one report from one bank in one tax haven.
Domestic Tax Changes for RSA that could lead to a Silent Wealth Exodus
The formation of the Davis committee in July 2013 to assess our tax policy framework issued a report of findings in early 2015.
1. It aims at increasing estate duty from 1 billion rand to 15 billion.
2. It suggested inter spouse abatement be withdrawn entirely or subject to certain limits.
3. It proposed that contributions to a retirement fund be included in deceased estates for estate duty purposes.
4. It suggested an attribution/conduit principle for domestic trusts, resulting in trust income being taxed at 40% and Gains at 26.6%, which makes the use of these solutions a lot less attractive.
It is acknowledged that these remedies may lead to a silent exit of South Africans looking to move their money offshore.
SARS and Offshore Trusts
The Davis Committee recommended the following in a bid to discourage offshore investments:
1. All distributions from an offshore trust be taxed as income irrespective of the nature of distribution.
2. South Africans with offshore investments over R10 million must disclose their wealth to SARS or they could face criminal charges.
The Common Reporting Standard (CRS)
In 2001, when the USA started tracking down Osama bin Laden by following his money, it became apparent that a rather large portion of his wealth was hidden in offshore companies and trusts. This triggered the US to start clamping down on all undisclosed offshore investments held by US citizens, by threatening to levy hefty fines against these investment companies, or even freeze them out from the US market, if funds were not disclosed. A staggering 70,000 investment companies signed up across the globe.
As a result, the rest of the world started implementing this strategy, resulting in investors being forced to take positive action in order to protect their assets.
Then, on 29 October 2014, a ground-breaking multilateral agreement was signed by 51 jurisdictions to automatically exchange information on financial accounts based on the multilateral convention. Due to the Common Reporting Standard (CRS), formally known as the Standard for Automatic Exchange of Financial Account Information, banking worldwide has become completely transparent.
By the end of 2018, 91 jurisdictions will exchange information on financial accounts. Once the CRS is implemented there will be two serious consequences for South African tax residents.
1. SARS will uncover all undeclared offshore accounts, resulting in criminal prosecution. However, if applications are put forward to SARS under the Voluntary Disclosure Program before offshore funds are discovered, criminal prosecution will not take place and the understatement penalty will be reduced – based on personal circumstances.
2. SARS will gain complete access to information in regards to tax residents’ offshore dealings.
What this means for South Africans who have investments off shore
Basically what it means is that sometime between now and September 2017 it is anticipated that your financial interests around the world will be automatically reported directly to SARS, without any notification to you.
Make no mistake, not only will the outstanding tax revenues be claimed, but fines of up to 200% of the amounts owing have been quoted, as well as interest on the outstanding monies.
It should be noted that a lot has to happen before these recommendations become law. However, South Africa needs to generate additional revenue, and these changes will come.
It is clear that the approach of the past has had its time, and that South Africans need to adopt a holistic, bespoke approach to tax planning, that is dynamic enough to change and adapt to the ever changing investment and tax environment.