3 SEPTEMBER 2010 TAX ALERT THE ANNOUNCEMENT OF THE VOLUNTARY DISCLOSURE PROGRAMME The Voluntary Disclosure Programme (VDP) has been formulised pursuant to the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill B29-2010 (the Bill) that was introduced into Parliament recently. It is important to appreciate that the VDP is not only limited to income tax. It covers any tax, duty, levy, penalty and additional tax that may be imposed in terms of any legislation administered by SARS. In other words, it covers amongst others: income tax; value-added tax; stamp duty / securities transfer tax; customs duty; transfer duty; skills development levies; unemployment insurance contributions. IN THIS ISSUE A review of recent tax developments The announcement of the Voluntary Disclosure Programme Make sure you disclose all material matters Procedural aspects in making an application in terms of the Voluntary Disclosure Programme ANY QUESTIONS? COME DISCUSS THEM WITH SARS AT OUR OFFICES The n Revenue Service involved in the Voluntary Disclosure Programme (VDP) have agreed to attend a seminar at our offices in Sandton to discuss any questions you may have regarding the programme and give some helpful insight into the programme. Please indicate your interest in attending this seminar by sending your contact details to Louise Schnetler at louise.schnetler@dlacdh.com. Once we have established the level of interest in attending the seminar on the VDP we will contact you with further details. We anticipate that the seminar will be held towards the end of September. We look forward to seeing you there! EVERYTHING MATTERS Cliffe Dekker Hofmeyr is a member of DLA Piper Group, an alliance of legal practices
Should one compare the VDP to the previous amnesty that applied, it should be appreciated that it is not only limited to individuals. Any taxpayer, whether a trust or a company can apply for the VDP. The VDP is also not limited to cross-border transactions or income that has not been disclosure from foreign sources. It also includes activities within or taxes that have not been paid pursuant to tax events that took place in. In other words, the VDP is unlimited with reference to its ambit. It is expected that the first of the applications on the VDP can be submitted with effect from 1 November 2010. However, it can be indicated that we have had pleasant experiences to date with reference to informal applications that have been lodged that are to be treated similar to the VDP. In other words, it seems that the internal infrastructure of SARS has been established and that they are ready to deal with same. It should be noted that, contrary to the previous amnesty, the applications are not to be submitted to a separate committee, but to SARS. In other words, SARS will internally deal with the applications so submitted. The VDP applies to defaults that occurred prior to 17 February 2010. A default is defined as the submission of inaccurate or incomplete information to SARS, or the failure to submit information or the adoption of a tax position, where such submission, nonsubmission, or adoption resulted in: the taxpayer not being assessed for the correct amount of tax; the correct amount of tax not being paid by the taxpayer; or an incorrect refund being made by the Commissioner. The requirement that a default should have occurred prior to 17 February 2010, may have unintended consequences. For instance, if somebody defaulted in submitting a return for prior years, he may benefit given the fact that the returns have not been submitted compared to taxpayers that have regularly submitted their returns. Also, issues arose as to how the provisional tax should be paid by taxpayers (especially 31 August 2010) and whether these provisional tax payments should be dealt with as if a VDP application has been accepted. This may especially have an impact upon the way in which the basic amount or the first/second provisional taxes are to be calculated for provisional taxpayers. Once an application has been accepted, an agreement must be entered into between SARS and the taxpayer setting out the liability for the outstanding tax. Should the application be accepted, the liability will be limited to: the capital amount of the tax; no additional tax or penalties (except in relation to penalties for the late submission of returns or for the late payment of tax); remission of all interest (except that only 50% of interest will be payable to the extent that an application is considered in circumstances where there is a pending audit or investigation into a taxpayer's affairs). Taxpayers should seriously consider the benefits associated with the VDP as it is unlikely that similar amnesties will be announced in the foreseeable future. Lengthy submissions had to be made to the legislator in order to persuade same to announce the VDP in the circumstances concerned. It was only after a number of years that it was decided to introduce the VDP in its current format. Emil Brincker, MAKE SURE YOU DISCLOSE ALL MATERIAL MATTERS The new Voluntary Disclosure Programme (VDP) to be introduced by SARS should be very attractive to taxpayers seeking to come forward and correct their tax affairs. In order to reap the benefits of the VDP, taxpayers must ensure that they comply with the specific requirements of the VDP. If a taxpayer has made a valid voluntary disclosure and concluded a voluntary disclosure agreement, the taxpayer will be entitled to the following relief: Criminal Prosecution - SARS will not pursue any criminal prosecution for any statutory offence in terms of the Income Tax Act (the Act) or a related common law offence; Penalties - 100% of any penalties and additional tax will be waived, excluding any penalties imposed for the late submission of a return or for the late payment of tax; 2 l Tax Alert 3 September 2010
Interest - where the taxpayer is unaware of a pending audit or investigation, 100% of the interest payable will be waived; and where the Commissioner has directed that the taxpayer may apply for the VDP, 50% of the interest payable will be waived. Importantly, in order to obtain the relief in terms of the VDP, the applicant who is liable for the outstanding tax must conclude a written agreement with SARS evidencing the agreement. The agreement must be in the format prescribed by the Commissioner. In particular, the agreement must specify: the material facts of the default on which the voluntary relief is based; the amount payable by the taxpayer, which amount must separately reflect the tax payable and the interest amount payable; the arranged payment dates; the treatment of the issue in future years or periods; and the undertakings of the parties. It is vital that the agreement clearly discloses the matters that are material for purposes of making a valid voluntary disclosure to the Commissioner; otherwise the Commissioner may withdraw any relief granted to the taxpayer. In such case, the Commissioner may regard any amount paid in terms of the VDP to constitute part payment of further outstanding tax and pursue criminal prosecution under the Act. In the context of the section 79 of the Act, it has been held that the word 'non-disclosure', as used in that section, has a neutral connotation and could include an innocent non-disclosure (Natal Estates Ltd v SIR 1975 (4) SA at 208 F-G). It should therefore be appreciated that an innocent non-disclosure of a material matter will not necessarily avail a taxpayer of this requirement. Further, in Kommissaris Van Binnelandse Inkomste v Transvaale Suikerkorporasie BPK 49 SATC 11, addressing the question whether there has been material non-disclosure by the taxpayer, it was held that: "it was incumbent on the Corporation to disclose sufficient facts to enable the Commissioner to decide on the correctness or otherwise of the treatment of the amount without calling for further information from the Corporation... As regards the alleged duty of the Commissioner to make enquiries the Commissioner had no duty to enquire as regards the receipt of R3,5m and the duty of the Corporation to render full and true return and to disclose all material facts is not affected by any duty to make enquiries." If taxpayers wish to apply for the VDP it must be appreciated that the onus is on the taxpayer to provide sufficient facts to enable the Commissioner to decide on the correctness or otherwise of the treatment of the amount which would have been payable by the taxpayer without calling for further information from the taxpayer. For instance, the taxpayer should not simply refer the Commissioner to cryptic notes in the financial statements but rather, as explicitly as possible, disclose all material matters to the Commissioner. It is likely that there will be disputes whether the taxpayer has disclosed all matters that are material for the purposes of making a valid voluntary disclosure. If the Commissioner submits that a material matter has not been disclosed, or for whatever reason withdraws the relief granted to the taxpayer, such a decision by the Commissioner is subject to objection and appeal or internal review. It is noted that the Commissioner may issue an assessment or make a determination for purposes of giving effect to the agreement. However, such an assessment is not subject to objection and appeal or internal review, presumably on the basis that the assessment is issued or the determination is made in accordance with the voluntary disclosure agreement. The VDP has a wide application and taxpayers should seriously consider the benefits associated with the VDP. However, if you are going to apply for the VDP it is vital you disclose all material matters to the Commissioner which should be correctly recorded in the voluntary disclosure agreement. Failure to do so may leave a taxpayer in a situation where most of the skeletons in the closet have been disclosed to SARS without obtaining the benefit of the relief in terms of the VDP. Andrew Lewis, Associate 3 l Tax Alert 3 September 2010
PROCEDURAL ASPECTS IN MAKING AN APPLICATION IN TERMS OF THE VOLUNTARY DISCLOSURE PROGRAMME The Voluntary Disclosure Programme and Taxation Law Second Amendment Bill contains a number of procedural requirements which must be met in order for a person to participate in the voluntary disclosure relief which is offered as part of the Voluntary Disclosure Programme (VDP). The application for relief in terms of the VDP may be made by any person, thus encompassing both natural and juristic persons. The VDP is not limited to any particular category of taxpayer (such as small businesses or only natural persons) thus allowing for the VDP to be more widely applicable than previous amnesties. In addition, the application may be made not only by the person concerned but also by persons acting in a number of capacities, being personal, representative, withholding or any other capacity. The scope of the VDP is thus widely applicable and in line with the objective as indicated in the memorandum to encourage taxpayers to come forward and avoid further imposition of additional tax, penalties and interest. It is, however, a pre-requisite that any application may not be made if the person is aware of a pending audit or investigation into the person's affairs or an audit or investigation has commenced but not yet been concluded. The awareness of the audit need not be only by the particular person in question, but may extend to: a representative of the person; an officer, shareholder or member of the person if the person is a company; a partner in a partnership with a person; a trustee or beneficiary of the person if the person is a trust; or a person acting for or on behalf of or as an agent fiduciary of the person. The net is cast widely with regard to the deeming provisions regarding knowledge of any pending audit or investigation or commencement thereof. Thus, irrespective of whether the particular persons mentioned above have informed the person applying for relief under the VDP of any pending audit or investigation or that such an audit or investigation has commenced, the applicant will be deemed to be aware of such pending audit or investigation. This may prove problematic if one of the persons mentioned assumes that the applicant is aware of the audit or investigation and does not inform the applicant accordingly. The question which does arise is what will occur in those instances where an application is submitted and it subsequently transpires that the application is invalid on the basis that the requirement that there be no audit or investigation pending or commenced is not satisfied? There is limited provision for the Commissioner to direct that a taxpayer may apply for voluntary disclosure relief despite the applicant being aware of a pending audit or investigation or one which has commenced if the Commissioner is of the view, having regard to the circumstances and ambit of the audit or investigation that: the default would not have been detected; and the application would be in the interest of good management of the tax system. One apparent difficulty with this provision of the VDP is that the term "good management of the tax system" is not defined. Further, from a timing perspective, it is not clear if application must firstly be made in terms of the VDP before the Commissioner takes a view regarding the validity of the application despite the existence of any audit or investigation. Notably, there is no provision for any objection and appeal or review of the decision taken by the Commissioner in disallowing an application on the basis that an audit or investigation is pending or commenced. Once the initial threshold requirements have been satisfied, the application must be made in accordance with the particular requirements for a valid voluntary disclosure as contained in section 4. Specifically, the disclosure must: be voluntary; involve default; be full and complete in all material respects; involve potential application of a penalty or additional tax; 4 l Tax Alert 3 September 2010
not result in a refund; be in the form prescribed; be within the time period prescribed; be in respect of a default prior to 17 February 2010. It is important that all of the above requirements be met in order for there to be a valid voluntary disclosure within the specified time periods. Whilst the term "default" is defined, there is no corresponding indication of what will constitute "full and complete" disclosure in "all material respects". The burden will be placed on the applicant to demonstrate that all information has been provided and that there is no material information which has not been included. It is noted that the Financial Surveillance Department (previously referred to as the Exchange Control Department) will be offering an opportunity to n residents to regularise their exchange control affairs. In our Tax Alert dated 16 July 2010 we discussed the salient features of the draft regulations on the Exchange Control VDP. To read this article or any of our other articles, please feel free to visit: http://www.cliffedekkerhofmeyr.com/news/ newsletters.htm A further interesting inclusion in the VDP is the right of the applicant to make an application without disclosing their identity for a nonbinding private opinion by the Commissioner as to the applicant's eligibility for relief under the VDP. It is not detailed as to what will constitute sufficient information for purposes of a nonbinding private opinion, for instance, whether the same requirements as contemplated in section 4 must be met. In addition, the time period within which such nonbinding private opinion may be sought is not included and it is questioned whether this will be clarified in any regulations which may be issued in relation to the VDP. It is noteworthy that in terms of section 76I of the Income Tax Act a non-binding private opinion does not have any binding effect upon the Commissioner and may not be cited in any proceedings before the Commissioner or in the courts. It is therefore possible that despite obtaining a positive nonbinding private opinion, it may not be subsequently binding upon the Commissioner to the extent that the applicant elects to make use of the VDP. Therefore, there remains a degree of uncertainty for the applicant if the applicant elects to make use of obtaining a nonbinding private opinion. Natalie Napier, To unsubscribe from this mailing list, please send an email to marketing@dlacdh.com with Unsubscribe - Tax in the subject line. Or contact us if you wish to be added to our mailing list. This information is published for general information purposes and is not intended to constitute legal advice. Specialist legal advice should always be sought in relation to any particular situation. Cliffe Dekker Hofmeyr will accept no responsibility for any actions taken or not taken on the basis of this publication. 5 l Tax Alert 3 September 2010
CONTACT US For advice, please contact any member of our Tax team listed below. Emil Brincker National Practice Head T +27 (0)11 290 7135 E emil.brincker@dlacdh.com Natalie Napier T +27 (0)11 290 7137 E natalie.napier@dlacdh.com Ruaan van Eeden Senior Associate T +27 (0)11 290 7139 E ruaan.vaneeden@dlacdh.com Ben Strauss Regional Practice Head T +27 (0)21 405 6063 E ben.strauss@dlacdh.com Freek van Rooyen T +27 (0)11 286 1175 E freek.vanrooyen@dlacdh.com Afton Appollis Associate T +27 (0)21 481 6383 E afton.appollis@dlacdh.com Mariette Cruywagen Senior Associate T +27 (0)21 481 6328 E mariette.cruywagen@dlacdh.com Andrew Lewis Associate T +27 (0)11 290 7207 E andrew.lewis@dlacdh.com BBBEE STATUS:LEVEL TWO CONTRIBUTOR JOHANNESBURG 6 Sandown Valley Crescent Sandown Sandton 2196 Private Bag X40 Benmore 2010 Dx 154 Randburg T +27 (0)11 286 1100 F +27 (0)11 286 1264 E jhb@dlacdh.com CAPE TOWN 11 Buitengracht Street Cape Town 8001 PO Box 695 Cape Town 8000 Dx 5 Cape Town T +27 (0)21 481 6300 F +27 (0)21 481 6388 E ctn@dlacdh.com Our publications are published for general information and are not intended as legal advice. 2010. For permission to reproduce a publication, please contact our marketing team on marketing@dlacdh.com 1 Protea Place Sandown Sandton 2196 Private Bag X7 Benmore 2010 Dx 42 Johannesburg T +27 (0)11 290 7000 F +27 (0)11 290 7300 E jhb@dlacdh.com 5th floor Protea Place Protea Road Claremont 7708 PO Box 23110 Claremont 7735 Dx 5 Cape Town T +27 (0)21 683 2621 F +27 (0)21 671 9740 E ctn@dlacdh.com www.cliffedekkerhofmeyr.com EVERYTHING MATTERS Cliffe Dekker Hofmeyr is a member of DLA Piper Group, an alliance of legal practices