In line with its pledge earlier this year to increase its focus on wealthy individuals and offshore holdings, the South African Revenue Service (SARS) has started contacting South African taxpayers with financial accounts abroad to request information. The aim is to see how much has been disclosed in prior tax returns and to assess any underpayments.
SARS’ newfound reach is thanks to the Common Reporting Standard (CRS), which sees 87 countries around the world sharing the account information of the world’s taxpayers. The CRS was born out of the American initiative, the Foreign Account Tax Compliance Act (FATCA), essentially widening the scope internationally. CRS aims to collect information on the member states citizens’ offshore assets, and has been adopted by many countries as a method to supplement their fiscus.
Richard Neal, the managing director of Sovereign Trust (SA) Limited, said the fact that high net worth individuals had long been the target of progressive tax increases may have led to some taxpayers pursuing more aggressive means to shelter their funds from tax, primarily via overseas bank and investment accounts.
Many taxpayers have already received notices from SARS requesting more information on their overseas accounts. Such requests for information ask the SA taxpayer to confirm that they have offshore holdings and requests detailed information as to the location, the amount and the nature of the investments; why the offshore holdings were not previously disclosed on tax returns; and if they intend to file an application under the SARS Voluntary Disclosure Programme (VDP).
“If you’re contacted by SARS, it’s because you’ve been identified as a person who holds a foreign account, investment account, life policy or similar. Playing dumb will not be well received. While there’s nothing preventing a South African from having an offshore account, you need to be able to account for how the funds in the account were earned, and whether you’ve disclosed that income in past tax returns,” said Neal.
Taxpayers with offshore entities like overseas trusts, companies and foundations will have to consider how these entities are managed and administered, and the level of control they have over the underlying assets.
How should a taxpayer respond to a request for information? Neal says the best advice is to seek advice. This means contacting the local advisor who facilitated the opening or maintenance of the offshore account, as these agents will be well versed in the degree of information that the CRS disclosures provide for.
“When you know what information has been disclosed under CRS – including the account opening date and the amount of funds deposited, you can start collating your response to the direct questions SARS has posed. Provide clear answers, but be as succinct as possible. Rather provide direct answers to the questions, than over-explain the history or motivations. This draft should then be sent to the taxpayer’s accountant, auditor or tax advisor to confirm that the questions are sufficiently answered while providing no more than the minimum information required.
If anything is unclear, SARS will reply with more specific follow-up questions,” said Neal.
“Anyone who thinks that confidentiality still exists in the financial world needs to reconsider. The world has become a much smaller place, and CRS has made the automatic sharing of information the norm. Any arrangement or account which depends on secrecy is destined to create future problems and potential tax nightmares,” said Neal.
“There are still numerous personal and corporate planning opportunities abroad for South Africans to benefit from. The key, however, is making sure the overseas entity is being managed and administered by professional firms, and at an arm’s length basis.”