VDP as recourse on the omission of historic foreign receipts
From March 2001, the Republic of South Africa (RSA) transitioned from a source-based tax system to a residence-based system. The implication of such for South African tax residents being the imposition of taxes, in RSA, on worldwide derived.
RSA being party to double tax treaties with several foreign jurisdictions to avoid the double imposition of taxes on amounts accruing to a taxpayer by both the country in which the income is sourced and RSA.
However, a common misconception amongst taxpayers gainfully employed and investing abroad is that the income accruing in such jurisdictions is shielded from being taxed in South Africa. Either due to the imposition of taxes by the foreign state, the income being earned offshore or because the amounts were paid into an offshore bank account. In this article, we show you how SARS got into your carry-on.
The actual tax consequences
Whilst the tax treaties may, in certain instances, limit South Africa’s taxing right in respect of certain offshore income if the tax residency of a person remains in South Africa, an obligation on the taxpayer to disclose global receipts and some taxing rights remain therein.
So, to establish the implications of such a declaration, several factors are to be taken into consideration. Some factors, such as
- The nature of the income
- Whether the applicable article of the DTA fully or partially exempts South Africa from imposing taxes and
- Any exclusions and credits which may apply to the income in accordance with the provisions of the Income Tax Act No. 58 of 1962 (the Act).
This is best illustrated by way of an example
Mr S is a South African tax resident. He has been offered an employment opportunity in Switzerland and cleverly grabs it upon hearing of their comparably low individual tax rates. He receives employment income of CHF 120 000 (R2 545 200). The Swiss Authority imposes taxes of CHF 4 4441,15 (R94 196,80). Assume Mr S qualifies for an exemption of R1 250 000 on the remuneration, in terms of section 10(1)(o)(ii) of the Act.
When Mr. S submits his income tax return to the South African Revenue Services (SARS) the Swiss remuneration is to be declared. Firstly, because he is a South African tax resident, who is legally obligated to do so. Secondly, to his surprise, because Article 15 of the RSA/Switzerland treaty states that the income is taxable in RSA and that Switzerland may, as the Source country, impose tax thereon.
Income Tax Return Example
Article 22 of the treaty will then allow for a credit to be set off against the South African tax liability. This is done in accordance with the provisions of the Act, for foreign taxes already paid on such income. So, without even considering the limitations of section 6quat of the Act on the foreign taxes paid (R94 196,80), it becomes evident that such foreign taxes are not enough to reduce the taxpayer’s liability in South Africa to nil.
The framework applied to the receipt of Swiss employment income by Mr S, largely applies to foreign income received by South African residents, irrespective of the nature of such receipt;
- foreign dividends;
- disposal of foreign assets;
- profits derived from foreign companies, and
- Foreign rental income, etc.
You name it? SARS, likely, has a claim on it.
Catch me if you can!
So whilst, some taxpayers are oblivious to the tax implications of foreign receipts. Others are sincerely hoping that if they stand still and quietly in the shadows, SARS will not find out about such. In a ploy to continue to, amongst other things, offer exceptional service delivery, the South African government seeks to collect taxes when and where due … in comes SARS!
SARS has several specialised units which strategize, implement controls, and collaborate with foreign jurisdictions to gather data on high-net-worth individuals deriving income globally and, somehow, failing to declare such receipts.
Their strategies, in large, focus on highlighting the legal obligation of high-net-worth individuals to declare their global assets and liabilities in their income tax returns to account for the source of unexplainable wealth (and, naturally, the tax implications on the income generated by such assets). Further, they use their powers to politely question the business interests of South African taxpayers in foreign countries.
Tag, you’re liable!
In the event that standing still and quietly in the shadows is no match for the powers vested in SARS, the consequences of non-disclosure of foreign receipts under the provisions of the Tax Administration Act No. 28 of 2011 (the TAA) may be dire. Taxpayers can be held liable for the taxes, which were originally due, alongside understatement penalties of up to 200% on such taxes and even face criminal prosecution.
Is it a bird, is it a plane? No, it’s the VDP (and Unicus tax specialists SA)
Fear not, for atonement exists for taxpayers who, at their own volition, are ready to disclose receipts previously omitted. Under section 227 of the TAA, a taxpayer may, by way of the Voluntary Disclosure Programme (VDP), apply to disclose foreign receipts previously omitted voluntarily. The successful disclosure of historic defaults under such a programme provides taxpayers relief from certain penalties and criminal prosecution. However, of late, getting these applications through has become somewhat cumbersome, not to mention that making full disclosure is often a very difficult requirement to satisfy. The expertise of a tax specialist is advised for assistance.