NOVEMBER 2016 ISSUE 206 Special Voluntary Disclosure Programme: Tax and Exchange Control Relief

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1 NOVEMBER 2016 ISSUE 206 Special Voluntary Disclosure Programme: Tax and Exchange Control Relief Detailed overview Information and documentation required to support an application Is this opportunity right for you? Foundations, declaration trusts, and prohibited loop structures Interpretation notes, media releases and other documents Detailed overview Introduction During the course of the February 2016 National Budget presented to Parliament, the Minister of Finance announced a last opportunity for those South African resident taxpayers holding funds abroad which are not known to the South African Revenue Service or the South African Reserve Bank, to regularise those assets. Draft legislation was released during February and a subsequent draft was released during the course of April for public comment. On 20 July the National Treasury released a further revised draft of the legislation dealing with the income tax aspects of the Special Voluntary Disclosure Programme (SVDP). 1

2 Furthermore, on 13 July the South African Reserve Bank issued a Circular dealing with the exchange control aspects of the SVDP. On 7 September the National Treasury announced further changes to the SVDP which are dealt with below. It is important for prospective applicants to be aware of the implications and requirements relating to the SVDP and indeed whether it is suited to their needs as opposed to the existing current Permanent Voluntary Disclosure Programme (Permanent VDP) contained in the Tax Administration Act, of 2011 (TAA). Before turning to the specific details contained in the draft SVDP legislation and Exchange Control Circular it is worthwhile setting out the requirements for the Permanent VDP contained in the TAA. Applicants need to weigh up whether applying under the SVDP is preferable to applying under the current rules set out in the Permanent VDP. Generally the SVDP may be the preferred option but, where the tax default relates to the non-disclosure, for a limited period, of foreign income derived by the taxpayer, the Permanent VDP may be less costly. It depends on the applicant s particular facts and circumstances. Permanent VDP contained in the Tax Administration Act The Permanent VDP came into force on 1 October 2012, which is the date on which the TAA took effect. It must be noted that the Permanent VDP does not have a termination date and is thus open-ended and will exist for so long as the provisions are contained in the TAA. To qualify for relief under the Permanent VDP a person may apply, whether in a personal, representative, withholding or other capacity for VDP relief unless that person is aware of a pending audit or investigation into the affairs of the person seeking relief or an investigation or audit which has commenced but has not yet been concluded. 2

3 The law allows for SARS to direct that, even though a person may be under an audit or investigation, they may still apply for VDP relief where the default in respect of which the person wishes to apply for VDP relief would not otherwise have been identified during the audit or investigation and the application for Voluntary Disclosure relief is in the interest of good management of the tax system and the best use of SARS resources. It must be remembered that a person is deemed to be aware of a pending audit or investigation if a representative of the prospective applicant, or in the case of a company, an officer or shareholder or member thereof has become aware of the audit or an investigation, or that the audit or investigation has commenced. To apply for VDP relief under the TAA, it is essential that the prospective applicant has committed a default which comprises the submission of inaccurate or incomplete information to SARS, or, alternatively, the applicant has failed to submit information or has adopted a tax position where such submission, non-submission or adoption of a tax position resulted in the taxpayer not being assessed for the correct amount of tax, or the correct amount of tax was not paid by the taxpayer, or the taxpayer received a refund which they should not have received. Section 227 of the TAA specifies the requirements for Permanent VDP relief and those are that the disclosure made by the prospective applicant must: be voluntary; involve a default which has not previously been disclosed by the prospective applicant; be full and complete in all material respects; involve the potential imposition of an understatement penalty in respect of the default; not result in a refund due by SARS, and be made in the prescribed form and manner. It must be noted that SARS requires the prospective applicant to make a full and proper disclosure of defaults committed by the prospective applicant. South Africa migrated to a 3

4 worldwide or residence tax system with effect from 1 March 2001, which is with effect from the 2002 tax year. Thus, where a person holds foreign assets and they have failed to declare the foreign income derived on those assets, SARS will insist that the income and capital gains relating to those foreign assets are disclosed with effect from 1 March The income tax on the previously undisclosed foreign income will always remain payable together with interest thereon. This can become significant, particularly where the default goes back to the 2002 tax year. The Permanent VDP does not contain any cut-off period relieving prospective applicants from making disclosure regarding prior tax years. Thus, prospective applicants cannot only make disclosure for the last five years but are required to make full and proper disclosure going back to when the default first occurred, which could be as long ago as 1 March The advantages of applying for VDP relief under the Permanent VDP and pursuant to the conclusion of a voluntary disclosure agreement, are the following: No criminal prosecution for any tax offence relating to the default committed by the prospective applicant; In most cases, the waiver of any understatement penalty that would otherwise have been imposed under the TAA. 100% relief in respect of an administrative non-compliance penalty that was or may have been imposed under Chapter 15 of the TAA or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter, or in terms of a tax Act for the late submission of a return. Thus, a penalty which would otherwise have been imposed for the late payment of any tax may be waived under the Permanent VDP. The Permanent VDP contains a mechanism whereby a prospective applicant may seek a non-binding private opinion as to whether they qualify for relief under the TAA. Thus, prospective applicants may apply anonymously via the offices of a tax practitioner whether the person in question qualifies for VDP relief. 4

5 The prospective applicant will be required to be registered for e-filing, as the application form for VDP purposes must be submitted utilising e-filing. It will be necessary to quantify the amounts of income which previously should have been reflected and a covering letter is normally submitted together with the application motivating why the prospective applicant qualifies for the relief in question. Once the prospective applicant has filed the VDP application form they will receive confirmation of receipt from SARS which will then review the information submitted. Thereafter SARS will require the taxpayer to complete the so-called VDP tax returns which amend the income tax returns previously submitted by the taxpayer. Once those returns have been submitted they will be assessed by SARS and those assessments will reflect the income tax and interest payable by the taxpayer pursuant to the VDP arrangement. To conclude the VDP process the taxpayer and SARS must conclude a Voluntary Disclosure agreement as envisaged in the TAA. The agreements utilised by SARS must comply with the provisions of the TAA, setting out the material facts of the default on which the Voluntary Disclosure relief is based as well as the amount of tax payable by the person. The agreement must separately reflect the understatement penalty that would otherwise have been payable as well as arrangements and dates of payment and any other relevant undertakings made by the taxpayer and SARS. SARS is entitled to withdraw the Voluntary Disclosure relief if it subsequently discovers after conclusion of the Voluntary Disclosure agreement, that the applicant failed to disclose a matter that was material for making a Voluntary Disclosure under the TAA. In such a case the relief that was granted under the VDP rules will be withdrawn and any amount paid will constitute part payment of any additional tax debt which may arise in respect of the defaults disclosed. Furthermore, the taxpayer may be pursued criminally. SARS is compelled to issue assessments to give effect to the Voluntary Disclosure agreement concluded by the taxpayer and SARS. 5

6 Special VDP tax aspects On 20 July National Treasury issued a media statement dealing with the revised draft tax bills which will regulate the SVDP. The SVDP is contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016 as well as the Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill, The public had until 8 August to make further representations regarding the legislation. In principle, it does not appear that further significant changes will be made at this late stage, taking account of the fact that the SVDP commenced on 1 October 2016 and is to terminate on 30 June The income tax aspects of the SVDP are primarily contained in the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016 at part 2 thereof, namely clauses It is specifically provided that the SVDP will include a trust as defined in section 1 of the Income Tax Act, 1962 (the Act) and will include any similar arrangement formed or established under the laws of any foreign country. Clause 15 of the revised draft bill provides that the amount of receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act for tax purposes, excluding for employees tax purposes, in respect of assets held outside South Africa during the period 1 March 2010 to 28 February 2015 will be exempt from tax. Thus no donations tax, estate duty or income tax will be payable on the undeclared foreign assets up to 28 February From 1 March 2015, taxpayers must account for income tax on the foreign assets and donations tax on assets donated thereafter. In addition, they will be subject to estate duty where the person holding the foreign assets passes away after 1 March Any person who held an asset wholly or partly derived from receipts and accruals not previously declared to SARS as required by the Act or the Estate Duty Act which was disposed of before 1 March 2010, other than by way of a donation or disposal on loan account to a trust, may elect that the asset is deemed to have been held for the period 1 6

7 March 2010 to 28 February 2015 on the basis that the value for the period in question will be equal to its highest value whilst actually held by the applicant. Where the applicant is unable to establish the amount with certainty, SARS may agree to accept a reasonable estimate of that value from the taxpayer. Clause 16 of the revised draft bill provided that an applicant must include in their taxable income in the first year of assessment ending on or after 1 March 2014, that is in the 2015 tax year, an amount equal to 50% of the highest amount determined in respect of the aggregate value of all foreign assets referred to above, as at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March National Treasury has proposed that the 50% inclusion rate be reduced to 40% and it would appear that this decision is final. It will therefore be necessary for taxpayers to ascertain the market value of all foreign assets held, not previously declared to SARS, and to convert the foreign market value into Rands at the spot rate at the end of each year of assessment. SARS has published the rates of exchange which should be used for these purposes. Assume a taxpayer held foreign assets on which foreign income such as interest and dividends and capital gains had not previously been reported to SARS, as set out below: Year of assessment Market Value of foreign assets in Rands 28 February 2011 R February 2012 R February 2013 R February 2014 R February 2015 R

8 By virtue of the fact that the market value of the foreign assets at 28 February 2014 was the highest in the amount of R , 40% thereof, that is, R will be added to the taxpayer s income in the 2015 tax year and taxed at the person s marginal rate for that year which in most cases will be 41%. The tax charge will therefore amount to R Interest will no doubt be payable from 1 October 2015 until the date on which the tax is paid. The draft legislation deals with foreign trusts whereby either a donor or the deceased estate of the donor or a beneficiary may elect that any asset located outside South Africa which was held by the discretionary trust from 1 March 2010 to 28 February 2015 be regarded as having been held by that applicant for purposes of all tax Acts. This means that the assets owned by the foreign trust will be regarded as forming part of the estate of the applicant for purposes of estate duty upon their death. The election available for foreign trusts applies in respect of foreign assets where such assets were acquired by the foreign trust by way of a donation and have been wholly or partly derived from any amount not declared to SARS as required by the Estate Duty Act or the Act and has not vested in any beneficiary of the foreign trust at the time that the election is made. The legislation provides that, where a person makes the election in respect of a foreign trust, that person is deemed to have held the asset in question from the date on which the foreign trust acquired the asset and to have received the same income and incurred the same expenditure in respect of the foreign asset which was received by the trust and deemed to have dealt with the asset in the same manner as dealt with by the trust. The deeming provisions set out in the draft bill operate until the asset is disposed of by the trust or, alternatively, the person would be treated as having disposed of the asset under the Act or in the case of a deceased estate, company or other juristic person, the day before the person ceases to exist by operation of law. Where the deeming provisions cease to apply, the applicant is regarded as having disposed of the foreign asset for consideration equal to the market value of that asset on the date of 8

9 disposal. The draft legislation makes it clear that the deeming provisions set out in section 7(5), section 7(8) and 25B of the Act and the equivalent rules for capital gains, namely, paragraphs 70, 72 and 80 of the Eighth Schedule to the Act, will not apply in respect of any income or expenditure or capital gain during the time that the asset is deemed to be held by the applicant. Prospective applicants must obtain details of market values of the foreign assets held by them as at the end of February of each year for 2011 to 2015 so that they may undertake the calculation required under the draft legislation. Where, for example, a person received an inheritance from a deceased relative abroad and failed to declare the income derived therefrom over many years it would appear that, should that person apply for SVDP relief, they will be required to disclose the full amount of the market value of the assets such that the highest market value thereof in the five year period will be subject to tax on the basis that 40% thereof will be included in the applicant s income in the 2015 tax year. There is therefore unfortunately an element of double taxation that may arise in certain cases or the taxation of amounts which should in principle not be taxed, where applicants choose to apply for relief under the SVDP. This is on the basis that the draft bill does not permit an applicant to apportion the foreign asset into its constituent parts of those amounts which may be inherently non-taxable and those which are income and thus taxable. An applicant must determine whether SVDP or the Permanent VDP is more appropriate in their particular circumstances. It must be noted that any non-compliance in regard to value-added tax, employees tax, unemployment insurance fund contributions and skills development levies do not fall into the SVDP and relief for penalties relating to these taxes would need to be applied for under the Permanent VDP referred to above. The SVDP commenced on 1 October 2016 and applications are required to be lodged no later than 30 June The application process for the existing Permanent VDP will be extended to the SVDP. 9

10 Applicants may also apply to SARS for a non-binding opinion on the same basis as the Permanent VDP. As in the case of the Permanent VDP, a person will not be able to apply for the SVDP if they are aware of a pending audit or investigation in respect of their foreign assets. Where the audit relates to domestic assets they would still qualify for relief under the SVDP. No understatement penalties will be imposed and SARS will not pursue a criminal prosecution for a tax offence where an application under the SVDP is successful. The Rates and Monetary Amounts and Amendment of Revenue Laws (Administration) Bill, 2016 makes it clear that, in all cases, the understatement penalty will be reduced to nil where a person applies for SVDP relief. Under the Permanent VDP there was a risk, depending on the circumstances, that the taxpayer might face a penalty of 5% or 10 % where SARS believes that the taxpayer was guilty of gross negligence or intentional tax evasion. However, in all cases, applicants for SVDP will not on any basis face an understatement penalty. Exchange Control aspects of the SVDP The Financial Surveillance Department of the South African Reserve Bank (FinSurv) has confirmed that persons who wish to regularise any foreign assets held in contravention of the Exchange Control Regulations may apply for relief from 1 October 2016 until 30 June It is intended that the applications for exchange control relief will be filed electronically utilising the SARS e-filing system. The requirements for relief under the SVDP for exchange control are as follows: the unauthorised foreign assets for which administrative relief is required were held by the applicant on or before 29 February 2016; applications are made within the prescribed period; the declaration made by the applicant is made voluntarily; the applicant makes full disclosure of all unauthorised foreign assets. In the disclosure, applicant must stipulate the source of all unauthorised foreign assets and includes details of the manner in which such assets were transferred and retained abroad; 10

11 the applicant furnishes all documentation of information stipulated in the SVDP application form which information and documentation includes, but is not limited to: the market value as at 29 February 2016 of the unauthorised foreign asset in the foreign currency of the country of which the asset is located; a description of the identifying characteristics and location of such foreign asset; a valuation certificate by a valuator of the country where the unauthorised foreign asset is located or a valuation by a sphere of government where the asset is located or an original certified statement of account reflecting the balance or market value or any other form of proof of value of that foreign asset as the Treasury may on good cause shown allow to be submitted, and a sworn affidavit or solemn declaration of the contravention. the applicant furnishes any additional information relating to the unauthorised foreign assets as may be required in terms of the SVDP. The FinSurv has indicated that a levy of 5% will be payable on the value of the unauthorised foreign assets where the assets are repatriated to South Africa. The 5% levy is required to be paid from foreign sourced funds. Where the applicant retains the foreign assets abroad, a levy of 10% is required to be paid and that must be sourced from foreign sourced funds. Where the applicant does not pay the 10% levy from foreign sourced funds because the foreign assets are illiquid, the levy will be increased to an amount of 12% on the value of the unauthorised foreign assets. The applicant will not be allowed to deduct the foreign investment allowance or any unutilised portion thereof from the leviable amount. The levy due is required to be paid 11

12 within three months from the date of receipt of notification from FinSurv and, in those cases where the 5% or 10 % levy is payable, that levy must be repatriated to South Africa to an account held at a local Authorised Dealer, that is, a commercial bank. The levy must be converted in South Africa at the ruling exchange rate. Once the applicant s bank has received the payment of the levy, they will be required to pay that over to an account held at the Corporation for Public Deposits. The SVDP exchange control circular deals with foreign assets held in contravention of the exchange control Regulations and especially those arising from the sale, cession or assignment by residents of intellectual property owned or developed by South African residents without first having obtained the approval of the FinSurv. In these cases disclosure of the sale or assignment of intellectual property will be required including the identity of the parties involved and details of royalties paid by residents pursuant to any disposal of intellectual property. In addition, where an applicant has incurred foreign liabilities to acquire foreign assets with recourse to South Africa without having obtained the requisite approval, disclosure of the underlying transactions relating to the liability will be required, including details of the liability itself for the parties involved. Finally, the acquisition of a direct or indirect interest in a foreign asset, including foreign cash balances, as a result of foreign funds abroad which should have been repatriated to South Africa or having remitted funds from the country without prior approval, fall into the SVDP for exchange control purposes. This will include the acquisition of foreign securities, the retention abroad of export proceeds, unauthorised spending on credit cards resulting in foreign assets and inheritances from South African deceased estates with unauthorised foreign assets. In these cases disclosure of the transaction including any underlying transactions are required to be provided. Where a South African has reinvested foreign assets into South Africa via a so-called loop structure or structure, those may also be unwound utilising the SVDP for exchange control purposes. 12

13 Thus, where, for example, a South African resident has disposed of shares that they held in a domestic company to a foreign trust of which they are a beneficiary, that will be regarded as a loop and that structure is required to be unwound with a levy being payable to the FinSurv. The FinSurv also sets out the rules relating to donors of funds to foreign discretionary trusts which are very similar to the rules relating to the tax aspects of the SVDP. In such a case, the applicant is deemed to hold the foreign assets owned by the foreign trust for purposes of the administrative relief available under the exchange control aspects of the SVDP and will be required to submit a copy of the trust deed to the authorities. The levy payable amounts to 5% or 10 % of the value of the foreign assets as at 29 February The Circular issued by the South African Reserve Bank sets out the procedures to follow in the case of those applicants who are dissatisfied with any decision made under the process. The Exchange Control Circular also deals with administrative relief available outside of the SVDP. The authorities make it clear that, in many cases, foreign assets falling into the categories dealt with below will not generally attract any levy but merely requires disclosure being made to an Authorised Dealer. The disclosure must include confirmation of the source of the unauthorised foreign assets, details of the manner in which such assets were transferred and retained abroad as well as proof of the market value of the unauthorised assets at 29 February The categories of foreign assets dealt with relate to those persons who have immigrated to South Africa and who failed to declare their foreign assets upon immigration to an Authorised Dealer. The SVDP allows such immigrants to now place on record their foreign assets before 31 March 2017 thereby regularising the qualifying residents possession and retention abroad of the foreign assets concerned. Where a resident became entitled before 17 March 1998 to a foreign inheritance from a bona fide non-resident estate, which excludes South African estates with foreign assets,,they were required to declare those foreign assets to an Authorised Dealer for consent to 13

14 hold the assets abroad. Those persons who have not yet done so may now regularise those assets by way of declaration to an Authorised Dealer. The Circular also deals with those cases of South African residents who became entitled to a foreign inheritance from the estate of another South African resident where those assets were held in compliance with the Exchange Control Regulations. Such persons may declare those foreign assets and apply for exemption from the provisions of the Regulations in question. The FinSurv will allow the assets to be retained abroad subject to the condition that those assets are not placed at the disposal of any other resident or used to create loop structures and no levy will be payable by the resident beneficiary. In the event that the foreign assets inherited by the resident were held by the deceased in a manner contrary to the Exchange Control Regulations they must be reported to an Authorised Dealer who would require the assets to be repatriated and, in such a case, no levy would be payable. If the decision is made to retain the assets abroad, the levy of 10 % will be payable. Furthermore, the Circular also deals with foreign income which was required to be reported to the authorities for permission to retain the funds abroad where such income was generated prior to 1 July All that is required in such a case would be a declaration which would regularise the qualifying resident s possession and retention abroad of the foreign assets. The exchange control Circular dealing with the SVDP also deals with contraventions which may have taken place by corporate entities regarding approved foreign investments where such entities may have failed to comply with procedural requirements. Where corporate entities failed to supply the authorities with financial statements and progress reports regarding the proof of investment and other technical violations have incurred, they will be required to submit the outstanding information and in most cases, no levy will become payable. 14

15 Those South African residents who do not apply for administrative relief under the SVDP and thereafter make a full and frank and verifiable disclosure to FinSurv, they will be required to pay a settlement amount ranging from 10% to 40% of the then current market value of unauthorised foreign assets. Those persons who choose not to apply for SVDP relief nor voluntarily approach FinSurv for assistance to regularise their affairs, will face the full force of the law in which case FinSurv may recover the full amount of the contravention assets as a penalty from the person in question. Conclusion Those taxpayers holding assets in contravention of either the income tax or exchange control rules are encouraged to apply for VDP relief and need to evaluate whether to apply for relief under the Permanent VDP or SVDP. This decision will depend on the person s particular circumstances. The relief available from the South African Reserve Bank is reasonable and requires payment of a levy of either 5% in the case of assets returned to South Africa or 10 % where the applicant chooses to retain the assets abroad. It is important that applicants start obtaining the required information as the timeframe to submit application is short, namely 9 months from 1 October 2016 to 30 June ENSafrica ITA: sections 7(5), 7(8) and 25B and paragraphs 70, 72 and 80 of the Eighth Schedule TAA: Section 227 Rates and Monetary Amounts and Amendment Bill, 2016 SARB: Exchange Control Circular 6/ Is this opportunity right for you? The Special Voluntary Disclosure Programme (Special VDP) came into effect on 1 October 2016, and will run until 30 June

16 At the same time, the permanent voluntary disclosure programme contained in the Tax Administration Act, continues in application. The question then arises, if you have any historical non-compliance with tax and/or exchange control rules, which of these options is right for you? This article considers this question, first from an exchange control perspective, and then from a tax perspective. Exchange control non-compliance The permanent VDP relates only to taxes, and not to exchange control non-compliance. This is one of the reasons why the Special VDP is so enthusiastically welcomed the chance to remedy past exchange control non-compliance at a known, fairly low, exchange control levy (5% from offshore funds if the funds will be repatriated to South Africa; 10% from offshore funds or 12% from local funds if the funds will not be repatriated to South Africa). If your matter involves exchange control non-compliance, then you would need the Special VDP, at least as regards the exchange control components. Do you have to do Special VDP for both tax and exchange control? There is no direct legal link between the exchange control and tax components of the Special VDP. In this respect, the exchange control circular (6/16) that provides for exchange control relief, does not state that the tax components of the Special VDP must be complied with in order to qualify for exchange control relief; nor do the relevant statutes giving rise to tax relief state that the exchange control components of the Special VDP must be complied with in order to qualify for tax relief. It therefore appears that one could apply for exchange control relief in terms of the Special VDP without applying for tax relief. The SARS draft guide to the Special Voluntary Disclosure Programme (v1.2) supports this, stating as follows (at page 6): Typically, an applicant will complete both forms, but if only tax relief is required, or if only exchange control relief is required, then only one form needs to be completed. 16

17 The question then arises, could one do a Special VDP application in relation to exchange control, and a permanent VDP application in relation to the taxes? From a strict legal perspective, it would appear that this should be possible. Exchange control relief without a Special VDP application There are, however, certain exchange control contraventions that do not require a Special VDP application. In terms of exchange control circular 6/2016 (issued on 13 July 2016), there is certain administrative relief (generally not subject to any levy) available outside of the Special VDP, provided that disclosure is made to the Financial Surveillance department of the South African Reserve Bank (FinSurv) via an Authorised Dealer. The circular indicated that this disclosure should be by 31 March 2017, at the time when the Special VDP was envisaged to be operative until this date. Now that the Special VDP has been extended until 30 June 2017, presumably the other disclosures could also be made within this same extended period, although that is not certain. The relevant exchange control contraventions are as follows: Declaration and undertaking of immigrants in relation to foreign assets; Declaration of foreign inheritances and legacies from non-resident estates prior to 17 March 1998; Declaration of foreign inheritances and legacies from resident estates with foreign assets, where such assets were previously held in compliance with exchange control regulations; Declaration of foreign income earned prior to 1 July 1997; Disclosure of exchange control contraventions in relation to approved foreign investments, for example failure to submit financial statements and progress reports to FinSurv on an annual basis, failure to lodge the relevant share certificates with Authorised Dealers, failure to disclose to FinSurv any expansion of the approved foreign investment, and failure to declare and repatriate to South Africa any dividends prior to 26 October 2004 where such dividends were used for purposes of the business operations. 17

18 If the historical exchange control non-compliance falls into one of these categories, then one would be able to take advantage of relief from exchange control sanctions, through disclosure via an Authorised Dealer, without having to do a Special VDP application and pay the relevant levies. Failure to utilise this regularisation window The Special VDP and associated administrative relief outside of the Special VDP, gives a window of opportunity to regularise past non-compliance with exchange control regulations. If you miss this window, and make full and frank disclosure at a later stage, FinSurv would typically impose a levy of between 10% and 40%. If FinSurv identifies the non-compliance, there could be much more severe consequences, including forfeiture of the relevant assets and/or potential criminal prosecution. Tax non-compliance The Special VDP and permanent VDP do not cover all of the same tax types, and the tax related relief granted also differs. Tax types The Special VDP is limited to taxes imposed by the Estate Duty Act and the Income Tax Act excluding employees tax. Donations tax is imposed by the Income Tax Act, and is therefore covered by the Special VDP. If your matter relates to other taxes, such as VAT or employees tax, then only the permanent VDP would be available from a tax perspective. Tax related relief From a tax relief perspective, the Special VDP: exempts the taxpayer from the relevant tax types referred to above, for all years of assessment ending on or before 28 February 2015, in relation to assets outside South Africa that were wholly or partly derived from receipts or accruals not declared to SARS; but 18

19 deems the taxpayer to have taxable income in the first tax year ending on or after 1 March 2014 equal to 40% of the highest market value at the end of each tax year (ending between 1 March 2010 and 28 February 2015) of the relevant assets. In contrast, the permanent VDP does not give any relief from taxes, but also does not have any deemed taxable income amounts. If the deemed income of 40% of the market value of the assets is higher than the actual taxable income, the permanent VDP may be more attractive than the Special VDP. From a penalty relief perspective, the two VDPs are essentially the same except that the understatement penalty for gross negligence and intentional tax evasion would be 5% and 10% respectively, for the permanent VDP where disclosure takes place before notification of audit, whereas this would be reduced to 0% for the Special VDP. From an interest relief perspective, the permanent VDP does not offer any interest relief, whereas the Special VDP effectively provides for relief from interest before the first tax year ending on or after 1 March 2014 (because the deemed taxable income is included in this year). Overall, the Special VDP is accordingly more attractive from a penalty and interest perspective, but any such financial advantages should be compared to the relative advantage or disadvantage based on the tax amounts, to determine which VDP is best for you. Tax aspects of VDP: conclusion Whichever VDP option works best in your circumstances, it is clear that either option is better than having SARS identify your past non-compliance itself, which would give rise to substantial understatement penalties as well as potential criminal prosecution. Bowmans Exchange Control Circular 6/

20 Rates and Monetary Amounts and Amendment Bill, 2016 SARS draft guide to the Special Voluntary Disclosure Programme (v1.2) Foundations, declaration trusts, and prohibited loop structures Practitioners will encounter many unusual structures, entities and transactions when undertaking risk reviews for potential SVDP applicants. In particular, the interaction between the SVDP provisions and foundations, declaration trusts and prohibited loop structures is considered in this article. Foundations Foundations come in various forms and have been very popular offshore vehicles for a number of reasons. They are typically encountered in civil law countries, but most South African clients seem to favour Liechtenstein, Panama and the Seychelles. Each country has its own peculiar laws dealing with foundations, so it is important to analyse each on its merits. As South African law does not deal with foundations, it is necessary to consider whether the foundation in question constitutes a company or a trust for South African income tax purposes. The definition of a "company" in section 1 of the Act includes (since 2000) any association, corporation or company incorporated under the law of any country other than South Africa or any body corporate formed or established or deemed to be established by or under such law. A "trust", in contrast, is defined (since 1992) in section 1 as meaning any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person. The key distinguishing feature of a company is that it is incorporated, meaning that it is given legal status as a person. A trust is merely an arrangement, a non-person. The legal fiction that a trust is a person for tax purposes is a red herring in this context. In most jurisdictions, a foundation will have legal standing as a person in terms of the 20

21 local civil code. This would generally mean that the foundation should be classified as a foreign company for South African income tax purposes. Although the former Amnesty Unit treated foundations as trusts, no indication has been given that the VDP Unit will adopt the same policy under the Tax SVDP. Submissions were made to National Treasury to include foundations in the definition of "trust" for Tax SVDP purposes, but instead, the following definition appeared: " means a trust as defined in section 1(1) of The Tax Act and includes any similar arrangement formed or established under the laws of any country other than the Republic." [our emphasis] The question therefore arises whether a foundation is a similar arrangement to a trust. Our view is that a foundation which is a juridical person is not an arrangement at all - it is a body corporate. The above definition includes only arrangements that are formed or established, not body corporates that are formed or established (as per the definition of a company). Consequently, a foundation does not necessarily constitute a trust for Tax SVDP purposes. So what are the implications if a foundation is regarded as a foreign company as opposed to a trust? Primarily, the controlled foreign company (CFC) rules in section 9D of the Act come into play. The question here is whether the South African tax resident beneficiaries of the foundation hold more than 50% of the "participation rights" in the foundation. Importantly, the definition of "participation rights" contemplates not only traditional shareholder rights, but also: "the right to participate in all or part of the benefits of the rights attaching to a share, or any interest of a similar nature, in that company" [our emphasis] Beneficiaries of a discretionary trust typically have no "participation rights", as contemplated in section 9D, with respect to the trust's property, but merely a spes or a hope. It is unwise to assume that beneficiaries of a foundation are similarly unvested. While the constitution of the foundation may give all rights and power over property to 21

22 the foundation council or similar body, this rule is generally subject to the foundation's by-laws or regulations. Careful scrutiny of such rules often reveals that one or more beneficiaries are 'entitled' to the income and capital of the foundation, or other words to that effect (in German, French or Spanish, depending on the jurisdiction, so you may need a translator). A share is a bundle of rights that entitles the holder to, inter alia, the income distributions of the company, and the capital of the company on winding up. Where beneficiaries have a vested right to income and capital of the foundation, it is arguable that such beneficiaries hold rights of a similar nature to those attaching to a share, and therefore, they hold "participation rights" in the foundation. If this is the case, the foundation will be regarded as a CFC. If it is ascertained that the foundation is actually a CFC, the analysis becomes far more complex. Section 9D is notorious for its complexity and has changed significantly over the past 20 years. For older foundations, practitioners will need to dust off the pre-2002 "controlled foreign entity" rules and delve into long-forgotten definitions and exemptions. It must also be noted that up to 2000 the definition of a controlled foreign entity was wide enough to include vested trusts. A further complexity to note for foundations is that, although they may be foreign companies and CFCs, they do not have shares or share capital (i.e. a "unit into which the proprietary interest in that company is divided" in terms of the definition in section 1 of the Act). Distributions from such entities will not, therefore, qualify as foreign dividends, and no full or partial exemption from income tax will be available. In terms of section 17 of the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2016 (which introduces the Tax SVDP), donors and beneficiaries of foreign trusts (including deceased estates) may participate in the SVDP if they elect to have the trust s offshore assets deemed to be held by them. This election is, however, only available for discretionary foreign trusts, and only with respect to assets acquired by the 22

23 trust by way of donation. Therefore, even should the VDP Unit permit a foundation to be treated as a trust, if the foundation does not qualify for the election, as will often be the case due to beneficiaries having vested rights, the only asset which can be regularised (and have 40% included in income) is the vested right held by the beneficiary. In some instances, this may work in the applicant's favour, since the trust s assets would not then fall into a South African's estate. On the other hand, the right itself would fall into the estate, and could not be swapped out in the same way as trust assets. The same would apply to a debt held by a founder who established a trust with a loan. Post-SVDP planning in each of these scenarios would be very different, and should be considered very carefully. Declaration trusts and prohibited loop structures The Trust Property Control Act (57 of 1988) and our common law only contemplates socalled "settlement trusts" as valid trusts in South Africa. These are trusts created by settlement, i.e. the transfer of property by the founder (settlor) to the trustees. Most other jurisdictions, following English common law, accept declarations of trust as valid. These are trusts created merely by the trustees declaring that they hold certain property in trust. No settlement by a founder (settlor) is required for its initial existence. The opening clause of the deed will generally tell you whether you are dealing with a settlement or a declaration trust. South African courts could, in theory, decline to recognise such trusts as valid, although to our knowledge, this has never actually happened. South Africa is not a signatory to the Hague Convention on the Law Applicable to Trusts and on their Recognition (1985) so is not obliged to recognise the validity of a foreign trust which would not be valid had it been formed in South Africa. Nevertheless, such trusts would almost certainly qualify as trusts in terms of the definition of a "trust" in section 1 of the Act and the Tax SVDP definition, so they present no challenge in that regard. We would, however, caution practitioners to be aware of the wording of clause (b)(vii)(c) of Exchange Control Circular 6/2016. This provision permits a "South African resident who is a donor (or the deceased estate of a donor) in relation to a discretionary trust which 23

24 is not a resident" to make an election to treat the trust's assets as his or her own, for the purposes of applying for exchange control relief in terms of the SVDP. Note that this election, unlike section 17 of the Tax SVDP, does not bring the trust assets into the estate of the donor (should the applicant undertake a 'normal' Tax VDP along with an exchange control SVDP). Also, unlike the section 17 election, it can only be made by a donor, and not by a beneficiary. In the context of the (b) (vii) (c) election, who is the donor of a declaration trust? There is no named settlor or founder of such trust, although presumably a South African resident donated assets to the trust at some point. "Donor" in this context is not defined, and in terms of its ordinary meaning, any person who donated property to the trust would qualify as a "donor". Therefore, our view is that any person who funded the trust may make this election, even if there is no named settlor or founder, as is the case for a declaration trust. This may give rise to questions as to who is the best person to bring the application, and what will be the impact on non-applicants involved in the structure. Consideration of the trust's legal status will be important when bringing an application for SVDP involving an impermissible loop structure, where the South African asset is held directly or indirectly via a declaration trust. The structure would typically be unwound by sale of the asset to a resident at historical cost; however the SVDP exchange control levy would be calculated on the market value (of the asset, accumulated income and reinvestment growth thereon) as at 29 February Alternatively, the applicant could seek to unwind the loop by bringing the structure onshore, which may be a less expensive route to regularisation, particularly with respect to immovable property loops. In this instance, care must be taken that the trust is valid when re-domiciled to South Africa. Webber Wentzel ITA: Section 9D Rates and Monetary Amounts and Amendment Bill, 2016 Trust Property Control Act,

25 2564. Information and documentation required to support an application This article is based on draft legislation and information available to date. It is possible that changes to the final versions might result in changes to the information and documentation required to be collated. Exchange Control (Excon/SARB) If application is to be made by a representative on behalf of the applicant, proof of authority will be required. Standard general or special power of attorney forms may be suitable for this purpose. The value of unauthorised assets in foreign currency at 29 February 2016 must be obtained as well as proof of ownership, exact identifying characteristics and description of each asset as well as the location of each asset. Proof of valuation in foreign currency is required from a valuator in the country where each asset is situated or a valuation by a sphere of that government or any other proof of value as Treasury may find acceptable. Full disclosure is required of the source of all unauthorised foreign assets and details of the manner in which such assets were transferred or retained abroad. Where the full facts are no longer available because of the death of the originator of the foreign assets or because information or supporting documentation is no longer available, the best attempts must be made to recreate the chain of events. This information about the contravention must be submitted in the form of a sworn affidavit or solemn declaration. It is critical to attempt to separately deal with authorised and unauthorised assets from an Excon point of view. In the case of unauthorised assets held by Foreign Trusts, it will also be necessary to ascertain the original cost of those assets to the Trust as well as the dates of acquisition by the Trust. The Founding Document (and any amendments) must also be obtained as well 25

26 as any related documents. Tax (SARS) As with the SARB application, if an application is to be made on behalf of the applicant, proof of authority will be required. The market value in foreign currency of all assets outside South Africa which were derived from undeclared income must be ascertained together with the description and full details and proof of valuation of each asset as at each of the following dates 28 February February February February February 2015 Income and expenditure related to such foreign assets after 28 February 2015 must also be collated. If such foreign assets were disposed of prior to 1 March 2010, a reasonable determination (or if not possible, an estimate) of the highest value of such assets must be ascertained. If such assets are held by foreign discretionary trusts, the asset values at the above dates must be obtained as well as - The original cost to the trust of each such asset The date of acquisition by the trust of each such asset The Founding Document (and any amendments) must be obtained. The application can be made in respect of the foreign assets held by such foreign discretionary trusts if The asset had been acquired by the trust by way of donation, The asset was wholly or partly derived from any amount not declared to SARS as required by the Income Tax Act or Estate Duty Act, and 26