Coming clean with the taxman – which is the best option to take?

If the taxman offers an amnesty and your tax affairs aren’t in order, it’s best to take advantage of his largesse. While Finance Minister Pravin Gordhan hasn’t offered a tax amnesty, he has offered certain taxpayers an opportunity to get their tax affairs in order without incurring huge penalties. It’s called a Special Voluntary Disclosure Programme (SVDP), which was introduced in his budget speech on 24 February 2016, was promulgated in January 2017 and runs until August 2017. It’s specific in its aims – to afford taxpayers a final opportunity to regularise their offshore tax position, and to do it before SARS finds out that their affairs aren’t in order. If taxpayers come forward, disclose their irregular situation and sort out their affairs to SARS’s’ satisfaction in terms of the SVDP, they will escape the harsh consequences that SARS can impose. Taxpayers can also make use of the Voluntary Disclosure Programme (VDP) which has been in place since 2010 and continues to operate indefinitely. So what advantages does the SVDP offer as opposed to the VDP? Making use of the SVDP instead of the VDP can lead to drastically different outcomes for the taxpayer. What is clear is that expert advice is often the best way forward when faced with this choice, and legal advice is recommended because of the client-attorney privilege that comes with such consultations. David O’Sullivan spoke about the SVDP process to Nel Schoeman, Associate with Maitland, a global advisory firm that provides multi-jurisdictional legal, tax, investment and fund administration services.

Nel Schoeman, Maitland

This podcast is brought to you by Maitland. The South African Minister of Finance last year announced this Special Voluntary Disclosure Programme, the cumbersomely named SVDP, in his Budget Speech. Nel, what is it?

Globally there’s been this whole move towards transparency and global automatic exchange of information, which has an immense impact on a lot of South Africans. From government’s side it seems that there is an acceptance that a lot of these taxpayers are with their backs against the wall. In an attempt to meet them halfway, seeing as a lot of the outstanding liability might be too much to bear for many of these taxpayers, government in essence introduced this final amnesty but technically it is a Special Voluntary Disclosure Programme. That is why it came into effect and the motivation was, I suppose, to give taxpayers a last chance to bring it onto the record voluntarily – so as to avoid SARS having to dig up every single case. That’s really, in a nutshell, why it was introduced.

What is the incentive for people to come forward and volunteer information? Do they get some kind of leniency?

Absolutely – look, this is an interesting question because at the moment what you’ve got are two avenues. You’ve got – and I’m speaking only to tax at the moment – but you’ve got your normal voluntary disclosure to SARS and then you’ve got the special voluntary disclosure. One of these two doors, whichever one you walk through, will have different implications for you. On the voluntary disclosure side, the normal one, essentially what SARS will allow you to do is to update your tax returns retrospectively. In other words, there are no penalties really. They just levy the interest on the late payment, so that’s the one side.

On the other side, you’ve got the Special Voluntary Disclosure Programme, which is a once-off net penalty of 16% in most instances. I won’t go into detail of why I say 16% but really, in 99% of the cases you’ll end up with a 16% penalty and that really is a once-off penalty that extinguishes any past liability in relation to these offshore, undeclared assets. So, what we’ve seen is it really depends from one client to the next whether the Special Voluntary Disclosure Programme will in fact be better or not because you often find where people took out travel allowances through the years and just left them in an offshore bank their outstanding tax bill might not come to more than 10% of the total value of what they have offshore. In which case the Special Voluntary Disclosure Programme would be a nightmare because they’d be paying 16%. So, that’s why it’s a very delicate thing one has to analyse and then, at the end, you can advise the client whether the special voluntary disclosure is really the best way for them to go or not.

So, it really is a case of just doing the maths, what’s my interest and how much is 16% of the highest value?

That’s absolutely right. I think another important point to add is slowly but surely people are coming to terms with the fact that this Common Reporting Standard (CRS) – and if I say ‘Common Reporting Standard’ I’m referring to the global automatic exchange of information – it’s not going to go away. Many taxpayers are slowly coming to terms with the fact that it’s not if SARS finds out but when because the net of the Common Reporting Standard is so wide that it’s highly unlikely that any of your offshore interests will not come to SARS’s knowledge by way of the reporting.

So, the reason why I mention this is we say to clients often that you’re looking at a situation where it’s either you go forward voluntarily and speak to SARS, in which case there will be some relief. Or it will be SARS coming and knocking on your door in the next two years, in which case they’ll be extremely hostile and it will be a very uncomfortable situation to be in because they’ll levy penalties. They’ve even threatened criminal prosecution, etcetera.

Well, you’ve just answered my question of what’s the worst-case scenario, criminal prosecution but penalties – how are those penalties determined?

landlords

So, the worst SARS can do is up to 200% of the tax outstanding and the interest obviously, so if you add up the maths it can get to quite an ugly number. Then what often is forgotten – and we haven’t even spoken about that yet – is the exchange control side. What we discussed with the 16% on the tax side is purely tax and then you’ve got the exchange control side as well. So the worst-case scenario could be 200% penalty on the tax side and the Reserve Bank, on the exchange control side, they’ve got rights to claim everything, if the origin of it was tainted and they look at the source.

So, let’s say a person took out a couple of dollars in the 1980s which have grown substantially over the years. If that source was tainted, from a Reserve Bank point of view, the SARB has the power to claim the entire pot, so there are real repercussions for not taking the opportunity to make voluntary disclosure at this point.

You’ve explained the difference between the VDP (Voluntary Disclosure Programme) and the Special Voluntary Disclosure Programme in terms of the penalties. Are there any other significant differences between the two programmes?

Absolutely, so what they’ve done with the Special Voluntary Disclosure Programme is one can see that just from an administrative point of view it seems as though SARS were aiming to create a more streamlined process because one can accept that it’s a lot of work to even process and assess these applications. With the Special Voluntary Disclosure Programme you have a lot less onerous process of disclosing to SARS. Just to give you an example – if you go the normal VDP route and the assets were expatriated prior to 2000, you would have to make a disclosure to SARS going back to 2002. Typically that would mean you have to get bank statements from the bank, going back 10 years, which sometimes the banks are not willing to or not able to comply with, just because of the difference in the tax regime. They don’t always understand what it is that SARS are looking for.

So, under the normal process you have to gather in a lot of substantiating documentation, whereas under the Special Voluntary Disclosure Programme you simply have to supply SARS with five balance sheet values. It’s essentially five snapshots of the account over the last five years, at the end of February, so it’s a lot less onerous and the interrogation, in terms of the history, is also not as intense as under the normal VDP. The reason for that is simply because it doesn’t affect your penalty at the end of the day. You are capped at a maximum of 16% and therefore the revenue authorities don’t go into such detail, so there is a real, procedural benefit, if I can put it that way, by going through this Special Voluntary Disclosure door.

And what has been your experience dealing with clients who’ve gone through that door, the Special Voluntary Disclosure Programme door?

What is clear at the moment is that this is new, both on our side and on SARS, and what I mean by that is both industry and government because what one would have hoped for is  that each assessor will have the same approach and that there would be an unanimous view in terms of how these applications should be treated, from the SARS side. Unfortunately however, we have seen there to be some variants from one assessor to the next and this is far from what one would have hoped for because at the moment what everybody is looking for is certainty.

Our experience has been that there have been some variances, from one assessor to the next but I have to add that the units have been open to, I can’t say negotiation because the Act is the Act, but we have been corresponding with them and pointing them to specific provisions and explaining why we believe, for instance, the view they’re taking is not in line with the Act, etcetera. They have been responsive, so it’s not ideal because there doesn’t seem to be an unanimous approach but, at the same time, they do seem to be open to correspond around their approach.

Is your advice that somebody should consult a lawyer in dealing with these matters rather than, for example, a tax consultant?

Yes, look I think it’s important to understand that at the end of the day, when you speak to any lawyer in this field you do have the added benefit of a client-attorney privilege, which means that until you actually engage SARS by submitting the application, everything under discussion remains in the domain of the privilege. In other words if, for whatever reason, the client or taxpayer decides to not go ahead they are protected in a sense that the lawyer would not need to report them. In fact, the client could sue him if he were to disclose anything, due to his breach of the privilege. Whereas, when you deal with an accountant, without the involvement of a lawyer, accountants are bound under a whole range of legislation to report, should a client or taxpayer not decide to go ahead. I think there is a real benefit of dealing with lawyers.

Then I think the other important point to note here is, as I’ve explained, it seems as though SARS are also finding their feet around this legislation, so I do believe there to be a great deal of benefit for people to engage, whether it be lawyers or accountants, but people who are well experienced in this arena and do have the capacity to point out to SARS if and when they can pick up that the guys in the unit are taking a chance. I think, for those reasons, there’s definitely a benefit of engaging a lawyer.

Nel, a lot of questions are being asked about the efficiencies of SARS but from what you’re telling me, in terms of the international automatic exchange of information – the Common Reporting Standard – it’s clear that should you decide to test SARS and their efficiencies, you might fall foul because you are going to be found out. This information does come to the fore at some stage.

Absolutely David, and I think as you point out, the efficiency of SARS is something one can talk about a lot and I guess the important point to make in this regard is to say what department because I can assure you – I think even as was mentioned in the Budget – just comparatively speaking the portion of the population that are paying tax at the higher rates. In other words, those who have considerable wealth, are a very small pocket of people, if you just consider the statistics involved. One would accept that from SARS’s point of view they need to know where to go, in order to get their money. It’s maybe a very blunt or crude way to say this but the point I’m trying to make is SARS would, in my view – it’s just logical for them to employ the necessary resource to gather in the money where they know they can get some real value.

The point I’m making is I wouldn’t rest or try SARS in this regard because from our experience they have been sharpening their teeth, as it were, for this information and I would definitely say that they won’t leave any stone unturned, and if you ask me, especially when it comes to any offshore interests. That, I think, is my clear view on that – they will definitely pursue it.

Is there a time period for this Special Voluntary Disclosure Programme? Does the door shut at any stage?

Yes it initially was going to be the end of March. It was then moved out to the middle of the year and then eventually it ended up at the end of August of this year, so taxpayers have been given that sufficient window period to bring an application. I think just on a practical point though, what we’ve seen often is even though you’ve got until the end of August a lot of our clients are being pressured from the offshore institutions involved. In other words, we’re talking about the Swiss banker, for instance, who is putting immense pressure on the client to regularise their position and confirm tax compliance, failure of which would lead to the bank terminating the relationship, so in many instances, even though there is technically until the end of August 2017, we find that a lot of clients are experiencing pressure from the outside.

To make it clear, this is for people who need to regularise their offshore tax position?

Absolutely, so what you’ve got is for instance, especially in the case of Switzerland, they’ve undergone immense penalties. They’ve been levied great penalties from the US, for instance. They are determined to make sure that all of their accounts are being held by people who can certify compliance in the local jurisdiction. That is why these banks are putting a great deal of pressure on their account holders, to regularise and confirm that all of their taxes, retrospectively, are up to date because none of these institutions want to be seen as hiding taxpayers’ money essentially.

For anybody listening and realising that they need to do something about their tax position, what’s your general advice? How do they start and what should they do?

So I think the first point to make here is that ignorance can really bite you in this regard. I still fear for those who are ignorant – I’ve come across it many a time, when I speak to clients. I get the feeling that sometimes their family adviser or local accountant does not appreciate the weight of all of these international developments. I fear for them because sometimes it may be in a worst-case scenario that the first time they’ll hear of all of this is when SARS come knocking on their door and then it will be too late. So, my advice would be to take proactive measures and speak to people who understand the international developments, as well as the VDP developments on the South African front because from what we’ve just seen you need to get to a calculated decision at this point in time.

Also, I suppose I fear for those who say ‘yes, I’ll do it but I’m just going to do it on the side and I’ll do it on my own or I’ll just use my local account’ which may result in a failure to appreciate the finer nuances between the normal and the special VDP. Then also the exchange control issues involved can really result in the taxpayer paying a lot more, and I’m talking here about 10% of the offshore value in difference, potentially. So, I would say there’s a real benefit in gaining proper advice on the offshore position and people who can really shepherd the client through the whole process, from start to finish and deal with all the issues, tax, excon, etcetera.

And you at Maitland, you specialise in that field?

Absolutely, I think we’ve got the benefit of an international range of offices. Our office in Luxembourg, for instance, have a very close relationship with the Swiss banks, so we are in a very fortunate position to have a good understanding of the international scope of the reporting and on the SA side – we have in fact, because of our relationship with these offshore bankers, been dealing with a great deal of applications and because of the experience we’ve been able to gain there. I do feel that we are in a very fortunate position and have some good insights into this process, so yes, absolutely.

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