What the Pandora Papers mean for South African taxpayers
Almost 12 million financial documents known as Pandora Papers have recently been disclosed and put into the public domain, revealing the offshore financial assets of many internationally recognized figures.
One of the questions raised following the leak is whether the investments made by these people are legal from a tax point of view.
âFrom a South African tax perspective, this provides an opportunity for South African residents who have investments abroad, or who intend to invest abroad in the future, to s ‘ensure that these investments are made in accordance with all relevant South African tax laws,’ said Louis. Botha, Senior Partner at Cliffe Dekker Hofmeyr Law Firm.
One of the most significant changes in international tax law in recent years is the introduction of the Common Reporting Standard (CRS), he said.
âWith respect to CRS, tax authorities in countries that have opted for and implement CRS must exchange certain information held by reporting financial institutions operating in their jurisdiction, with tax authorities in other countries that implement CRS .
âTherefore, the South African Revenue Service (SARS) will first collect information from the South African institutions that must report information to it under the CRS, and once collected, will exchange the information with the relevant foreign tax authorities. . “
Accordingly, if a South African resident holds an account with a foreign financial institution that is required to report information under the CRS to their local tax authority, the information on that account is likely to be reported. attention of SARS in the context of information exchange. between SARS and the foreign tax authority, Botha said.
âThe bottom line is this: South Africans cannot use offshore structures to hide the existence of assets. South African residents should also keep in mind that although South Africa does not have double taxation agreements with some so-called low tax jurisdictions, it still has agreements providing for the exchange of information. tax with many of these jurisdictions.
“This means that SARS can rely on these agreements, if necessary, to obtain information about a South African resident from a specific foreign tax authority.”
Botha said the following notable fiscal developments occurred in South Africa in 2021:
- In Budget 2021, the Minister of Finance announced that SARS would receive additional financial resources to increase its ability to enforce tax laws and investigate the cases of the so-called wealthy (HNWI).
- Following this announcement, the SARS HNWI unit was established and began sending letters to taxpayers who will be classified as HNWI.
- More recently, SARS and the U.S. Internal Revenue Service (IRS) announced that the IRS Criminal Investigation Division and SARS Enforcement Division will join forces to tackle tax crimes and economic effects affecting both countries.
“Although the Tax Administration Act 28 of 2011 (TAA) generally prohibits SARS from disclosing certain confidential information about a taxpayer to third parties, it provides for exceptions and specific cases where the information may be shared,” said Botha.
On the other hand, SARS would be able to obtain information regarding a specific taxpayer from any of the aforementioned agencies, as long as these agencies are allowed to share information regarding a specific taxpayer, did he say. he declares.
“What South African residents should therefore keep in mind is that it may be easier for SARS to obtain information regarding their financial affairs than they realize.”
From sharing information to paying an additional tax
Although it appears that SARS can legally obtain information regarding the financial affairs or financial condition of a South African taxpayer through different avenues, it is still required to comply with the TAA provisions regarding audits before it can. impose additional tax on a taxpayer.
In other words, simply sharing information does not automatically equate to a taxpayer with foreign assets subject to more taxes. In this regard, particular TAA Articles 40 and 42 should be noted, Botha said.
âUnder section 40 of the TAA, SARS has the right to audit a taxpayer. It was also confirmed in Carte Blanche Marketing CC and others c. South African Tax Administration Commissioner that the audit decision is not subject to review.
In other words, a taxpayer faced with an audit cannot prevent SARS from undertaking that audit. However, if SARS does not perform the verification in accordance with Section 42 TAA, it could constitute a violation of a taxpayer’s constitutional right to fair administrative action, âhe said.
“If so, it could result in the revocation of the additional assessment issued as a result of such a flawed audit process.”
How to avoid tax pain
Botha outlined some of the important aspects to consider when investing offshore or in an offshore structure:
- Set up or invest in the offshore structure: All relevant tax considerations should be taken into account when a South African resident intends to set up an offshore structure. When investing in an offshore trust structure, one would initially need to make a loan to the trust or make a donation. When a donation is used to fund the trust, donation tax will be payable. When a loan is advanced to the trust, care must be taken to ensure that the terms of the loan comply with sections 31 and 7C of the Income Tax Act 58 of 1962 (ITA). SARS Interpretation Note 114 (IN114), which provides examples of how these sections may interact, should also be considered. Although IN114 is not binding, it provides an overview of how SARS might apply Articles 7C and 31 under a certain set of circumstances.
- If we are dealing with direct investment in an offshore company, it should be examined whether Article 31 of the ITA has been observed when purchasing shares or subscribing to shares in this company. When a loan is granted to this foreign company, that loan must also comply with the transfer pricing provisions of Article 31. In addition to tax considerations, one must also comply with the exchange control rules applicable to the investment in the offshore structure.
- Annual tax payment: Depending on how the investment in the offshore structure has been funded, some tax will likely be payable to SARS each year. When a loan is made, interest income will be subject to tax. In addition, a taxpayer must assess whether the attribution rules apply to income, capital gains or dividends from the offshore structure. The attribution rules could apply even if the offshore trust has not vested any amount to a South African beneficiary. When owning shares directly in a foreign company, one must consider whether the rules on controlled foreign companies apply to the taxation of amounts received by the foreign company.
- Keeping records is essential: The TAA requires a South African resident to keep records for at least five years after submitting a tax return. If SARS institutes an audit or verification process for a specified period, the provision of documentary evidence is essential to avoid having to pay an additional tax. If the documents are relevant to an audit or investigation under Chapter 5 TAA of which the taxpayer is aware or a person files an objection or appeal under Article 104 (2) of the TAA, the person must retain relevant documents until the audit or investigation is completed, or the assessment or decision becomes final, despite the aforementioned 5-year requirement.
Read: Here Are The Biggest Revelations From The Pandora Papers Leak