22/02/17

Africa: Wealthy individuals wary of special voluntary disclosure

JOHANNESBURG – High net worth individuals are reluctant to disclose their offshore assets under the special voluntary disclosure programme (SVDP), some tax experts say, reports Money Web.

Andrew Wellsted, head of tax at Norton Rose Fulbright, says he has consulted with a number of people and the uptake is “around 50-50”.

After hoarding assets and keeping them off the radar for years, people are suspicious about coming clean and concerned about the expensive nature of the programme, he says.

In an effort to allow taxpayers with undisclosed offshore income and assets to regularise their affairs in anticipation of the automatic exchange of information between international tax authorities that commenced this year, finance minister Pravin Gordhan announced the SVDP during his 2016 Budget speech. The automatic exchange of information will make it much more difficult for taxpayers to hide their offshore assets.

Although estimates suggest that the SVDP could raise between R10 billion and R15 billion, a lot of the numbers are conjecture. At this point no one really knows which funds are legal and which are illegal, Wellsted says.

The legislation governing the SVDP came into effect in January. Applications can be made until August 31.

Johan van der Walt, associate director for dispute resolution and tax controversy at KPMG, says on the tax side not much has changed. 

Assuming a rand/dollar exchange rate of R10/$, someone with $100 offshore (R1 000) will see R400 taxed at his or her effective tax rate (instead of R500 in terms of the previous proposal).

“It is not much relief. I am aware of high net worth people who are seriously considering leaving South Africa,” he says.

If these individuals paid a 10% exchange control levy and tax on 40% of offshore assets at their marginal rate, the hit on capital is significant, he says.

Where applicants elect to step into the shoes of a discretionary trust and declared offshore income, the assets would also be included in the estate duty net in future. While this is not an immediate problem, indications that estate duty rates are going to be increased, make this an unpopular move.

Many people have indicated that they believe the SVDP to be too expensive and are therefore reluctant to make use of it. This is especially the case with the tax SVDP, adds Louis Botha, associate designate for tax and exchange control at Cliffe Dekker Hofmeyr. 

“This is due to the fact that they will be taxed on the market value of their foreign assets at an effective rate of 16% in many instances.”

In terms of the normal VDP they would only be taxed on the income generated from the asset, such as interest and dividends, or capital gains on the disposal of the asset.

“In terms of the SVDP, a taxpayer who inherited a foreign asset will be taxed on the market value of the asset even if the taxpayer has derived no income from the asset,” Botha says.

Van der Walt says for people who kept travellers cheques offshore, the SVDP is probably not a problem, but for individuals with technically complex structures and significant resources offshore, this is an expensive process.

“Unfortunately those are the people who have got the ways and means of divesting themselves from South Africa,” he says.

While he agrees with Wellsted around the uptake, some people just don’t have an option and will have to regularise, he says.

But why would high net worth individuals take the gamble of non-disclosure?

There seems to be a lot of scepticism around the process and whether tax authorities would be able to decipher and deal with the data at their disposal. Some argue that they are relatively small players or that they didn’t do anything wrong by wisely investing their travel allowance overseas. Others believe they shouldn’t pay tax on foreign assets. There are also fears that disclosure could lead to a witch-hunt or harassment.

But although National Treasury and Sars should not be expected to show leniency where South Africans had several opportunities to regularise their affairs but chose not to do so, there are also other factors to consider.

“They [National Treasury and Sars] don’t have to show leniency as long as we understand that an application of the law and a dispensation that is so punitive that people make decisions rather to get out of the South African tax net is also counterproductive, not only for those individuals but also for the South African fiscus. So it is a double-edged sword,” Van der Walt says.

If the deal was a straightforward, transparent equitable one that made financial sense, most people would readily come clean in order to sleep at night, he says.

“People are not happy to commit financial suicide, because people who can afford to live anywhere in the world and who’ve got assets all over the world, they don’t need to be in a particular jurisdiction,” he says.

But not all tax practitioners report similar experiences.

Hanneke Farrand, director in ENSafrica’s tax department, says the appetite for disclosure is significant. She agrees however that the SVDP’s tax dispensation in particular is not fantastic. Individuals would often use the SVDP for exchange control purposes and the normal VDP process for tax.

It is unlikely that individuals will get away with non-disclosure going forward. The international landscape is becoming increasingly transparent and the automatic exchange of information worldwide is a much bigger issue than amnesty, she says.

There is also a risk that international financial institutions may ultimately turn their back on individuals with undisclosed assets.

Wellsted says interactions with international colleagues and financial institutions suggest that these institutions increasingly don’t want to hold money in their accounts if they cannot verify that the money is legitimate.

“At some point I believe you are going to get to a position where you’re actually not going to be able to do anything with your money. No institution is going to accept it because it creates a liability for them.

 

“I think the world is shrinking. I think the ability to hide funds is going to become almost non-existent, but people are suspicious.”