WHAT YOU SHOULD KNOW ABOUT THE SPECIAL VOLUNTARY DISCLOSURE PROGRAMME

WHAT YOU SHOULD KNOW ABOUT THE SPECIAL VOLUNTARY DISCLOSURE PROGRAMME

The special voluntary disclosure programme (VDP) may seem similar to the “grey money” amnesty, but there are a number of differences. 

With the 2004 amnesty, you needed to declare tax for the previous and current tax years and pay a levy of 5 or 10% on your offshore assets, depending on whether you wanted to repatriate them or leave them offshore. 

The draft legislation for the special VDP states that you will have to: 

  • Include in your taxable income 50% of the total amount you originally transferred offshore – referred to as your seed capital – before March 1, 2015. For example, if you took R2 million out of South African in 2005, you must include R1 million in your taxable income and pay tax on this amount at your marginal tax rate.
  • Declare for tax purposes dividends, interest or capital growth for the past five years.
  • Pay interest on the tax owed for the past five years.
  • Pay an exchange control levy of 5 or 10% of the amount you hold offshore. The 5% levy will apply if you repatriate the investment, while the 10% levy will apply if you leave it offshore. 

The levy must be paid from foreign funds, but if your foreign investments are not liquid and you use local assets to pay the levy, you will have to pay an additional 2%. 

You will not be liable for any penalties for understating your tax, and you will not be prosecuted criminally. 

The special VDP is far more complex than the 2004 grey money amnesty, and the submission of the required documents will take hours of tax advisers’ time. 

If you intend to make use of the special VDP, you should start gathering all your information you will need to apply, because the application period is very short. You should not expect the application period to be extended. 

The special VDP will operate for six months and applications must be submitted between 1 October 2016 and 31 March 2017. 

‘PERMANENT’ VDP 

If you do not apply for the special VDP but use the “permanent” VDP provided for in the Tax Administration Act, a levy of between 10 and 40 percent will be imposed on the current market value of the assets, depending on whether or not the funds are repatriated. As with the special VDP, the levy must be paid from foreign-sourced funds. If they it is not, an additional levy of 2% will be imposed. 

The “permanent” VDP does not provide for relief for interest on unpaid tax and does not specify how many years back a taxpayer must disclose offshore income and assets. As a result, the interest on the outstanding tax could exceed the funds held offshore, which is a major deterrent to many potential applicants. 

WHO SHOULD APPLY? 

You should apply for the special VDP if: 

  • You failed to declare tax on offshore assets, regardless of how they were acquired (left offshore after you immigrated, acquired offshore, or taken offshore illegally). It is unclear whether foreign inheritances and earnings will be excluded from the special VDP, as they were from the 2004 “grey money” amnesty.
  • You exported money from South Africa in contravention of the exchange controls.
  • You failed to repatriate an unspent travel allowance. 

If you took money out of South African in contravention of the exchange-control regulations in place at that time and the regulations have subsequently been relaxed, the South African Reserve Bank will take into account the date on which the funds were illegally remitted offshore and determine whether a levy should be imposed according to the regulations that were then in force. 

The special VDP applies to individuals and corporates, and you may initially apply anonymously through your representatives. 

Trusts cannot apply for the special VDP; only individuals who are regarded as donors (or the deceased estates of donors) or beneficiaries can. 

Donors and beneficiaries can choose to be deemed to be the holders of the income and assets, which will result in these assets being included in their estates for estate duty purposes, and in the calculations when a disposal for capital gains tax purposes occurs – for example, on death or emigration. 

SPECIAL VDP HAS A PRICE 

Proposal in the special VDP legislation to include 50% of the capital used to seed an undisclosed offshore investment could result in a high tax liability. This could result in the special VDP having a less favourable outcome than expected. 

It is unclear what constitutes seed money and, specifically, whether it includes a loan used to acquire offshore assets, and if so, whether interest can be charged on this loan. The draft legislation seems to assume that such seed money is derived from pre-tax funds. 

The special VDP seems to cover contraventions of the tax legislation in respect of offshore assets and exchange-control contraventions. It is not clear whether the special VDP will be available if you contravened the tax laws but not the exchange-control regulations. 

The revised Revenue Laws Bills require that you first apply for the “permanent” VDP provided for in the Tax Administration Act. Once agreement has been reached with the South African Revenue Service, you will be able to apply for the special VDP. 

Reference:

Laura du Preez – Weekend Argus