Review of Exchange Control Amnesty and Amendment of Taxation Laws Bill
The submissions below are as made to a meeting on Friday 4th April 2003 with representatives of National Treasury, South African Reserve Bank ("SARB"), South African Revenue Services ("SARS"), PricewaterhouseCoopers ("PwC"), South African Chamber of Business, KPMG and Moores Rowland.
Where there is inset text underneath each point (in bold and italics) these represent PwC’s interpretation of the outcome of the discussions on the points raised. In addition at the end of the document is a section on further issues identified after that discussion.
I High level/ conceptual
Timing Despite the assurances given by SARS/ National Treasury to the Portfolio Committee on Finance ("PCoF") during its hearings on the Revenue Laws Amendment Bill 2002 that the public would be given 10 working days to review new legislation, in this instance the public was given only half of one working day (the draft legislation was issued at close of the business day on Wednesday 2nd, thereby permitting interested parties only the morning of Thursday 3rd to review it prior to the PCoF’s briefing session). It has to be questioned whether this can be justified as, from an administrative law perspective, the public must be given a "reasonable" amount of time. We would suggest that, in this instance, this concept has been breached.
That said, it is appreciated that the Bill is generally (and ignoring the indirect negative impact on honest taxpayers who do not need to apply under its provisions) a relieving bill and therefore in the interests of taxpayers, and we appreciate that there are other factors contributing to the tight deadlines in this instance.
National Treasury were sympathetic with our concerns and apologised for short timescale.
We are however concerned that there is very little time going forward to resolve the issues identified below, and in particular the issues regarding the Financial Intelligence Centre Act’s reporting requirements. The exemption needed in respect of that Act will also have to go through the Parliamentary process and until such time as it does professional advisers may not speak to potential applicants for fear of being required to report them. Given the commencement date for applications is less than a month away this clearly could have a negative impact on the take up of the amnesty if applicants cannot seek advice.
See FICA issues detailed below.
There are a number of other timing concerns, for example, applicants will have to, by 31st October, obtain market valuations of their overseas assets to submit with their application, both as at 28 February 2003 (section 5(1)(d)) and presumably also at 28 February 2002 (section 6(1)).
Dealing with Financial Intelligence Centre Act ("FICA") reporting requirements "Applicants" will want to seek advice as to how to complete their application, what the reporting requirements are etc. However professional advisers will be unwilling to assist due to current requirements of the FICA. Under s29 of the FICA, there is a requirement to report suspicion of illegal activities (including breaches of exchange control regulations) to the Centre and if a potential applicant informs an adviser that he has assets overseas in respect of which he wishes to claim the amnesty the adviser must suspect that those assets were obtained by breaching the exchange control regulations (why else would amnesty be sought) and so have a reporting obligation.
Clearly an exemption is required from the reporting requirement in respect of activities which come to someone’s attention as a result of the amnesty. This must be regarded as a key requirement for the success of the amnesty and accordingly must be resolved forthwith. The timing problem referred to above though is that such exemption, presumably by way of amendment to the FICA, will also require to go through the Parliamentary process and it is unclear whether any steps have been taken in this regard to date. The possibility of an exemption from the reporting requirements of the FICA are being examined. If approved this can apparently be done quickly through regulation and does not require an Act of Parliament.
We have requested this exemption be agreed upon and implemented as soon as possible and with retrospective effect to 26 February 2003 and that this fact be communicated to the public at large in order to fully leverage the power of advisers in marketing and advising on the amnesty.
Imposition of the levy Our understanding is that the levy will effectively be based on the total value of the applicant’s foreign assets as at 28 February 2003 less that applicant’s foreign investment allowance of R750,000 (R1.5million for family units). However this does not appear to recognise that if funds were taken offshore some time ago they could have grown and been legitimately retained offshore.
To the extent that funds were taken off legitimately then both those funds and any growth thereon need not be disclosed in terms of the exchange control part of the application and so will never be subject to the levy. To the extent an amount equal to the FIA was taken off without approval in the past any growth on those funds will not be protected, any amount over the FIA will be subject to the levy. The bill will be updated to make this clearer.
In practice an applicant will need to determine the original source and use of mixed funds offshore. We are aware that National Treasury are looking at a "rough justice" type apportionment formula but we have not yet seen any details. More clarity is needed urgently on this aspect.
It is appreciated that to some extent the individual concerned may have also utilised FIA and therefore, to this extent would have grown the authorised assets. It is important that the individual does not obtain the benefit more than once. Please see our request for clarification on the calculation below. As noted above the bill will be updated to clarify the interaction of the FIA on the calculation, where it is used in respect of authorised assets it cannot then also be used as a deduction from the unauthorised asset, but any unused portion of the authorised amount may be.
Blanket amnesty re foreign investment allowance ("FIA")/ travel allowance Is there scope for a simplified procedure for "rats and mice". In particular where people have, for example, retained foreign travel allowance overseas for future travel, rather than repatriating it as required, could this not be approved by the clearing banks rather than through application to the amnesty unit. This would appear to make sense especially where such amounts would otherwise be covered by that persons FIA.
SARB expressed reluctance in respect of this proposal and no such simplified process will apply. All applications will have to go through the amnesty unit. We accept this.
Key requirements of the amnesty For the amnesty to be effective it must satisfy a number of criteria; it should be comprehensive, its enabling legislation should be clear and unambiguous, it should provide applicants with certainty that there will be no "black marks" against their names, it should be on a "no questions asked" basis and finally there must be sufficient incentive for residents/ taxpayers to apply, i.e. they must believe that if they do not apply they will be caught anyway and punished accordingly. Each of these are considered in turn below.
- Is the amnesty comprehensive?
The amnesty does not extend to cover SA source income notwithstanding that undeclared SA source income may have been applied in obtaining foreign assets in contravention of exchange control regulations. If the purpose of the amnesty is as stated to facilitate the repatriation of funds held offshore illegally the absence of SA source income from the tax amnesty could be a significant inhibiting factor for applicants.
National Treasury will consider whether such extension may be appropriate where the domestic tax avoided or taxable income undeclared was integral to the scheme whereby the resultant funds were shipped offshore in breach of exchange control regulations. A wider ranging amnesty however is not on the table.
In addition, the amnesty applies to natural persons. Is there any reason why this has not been extended to companies and trusts? The fact that it does not may constitute discrimination and a further significant inhibiting factor to the success of this amnesty.
One of the broad rationales behind this is that historically corporate vehicles had more legal avenues open to them for the export of funds than individuals. The main thrust of the amnesty is that of an exchange control amnesty to cope with this and it was not considered appropriate (SARB) to extend it to companies who could have taken the funds offshore through legal means.
With the change in the definition in resident contained in the draft bill at section 30 (effective 26 February 2003) it is unclear whether the amnesty will apply to certain individuals. This is discussed further under the subsequent bullet point.
The individuals concerned (currently non-resident) will not be catered for as National Treasury consider this would require complex legislation which is unmerited for the small number of individuals they think it would apply to.
In addition it is unclear whether the exemption from taxes and penalties extends to donations tax and interest.
Currently the amnesty does not extend to donations tax and this is under consideration.
- Is the draft legislation clear and unambiguous?
There remain a number of areas of uncertainty and these are dealt with in the section below on specific matters.
See below
- Will there be any black marks against taxpayers?
It appears that attempts have been made to ensure this will not be the case with the establishment of an "independent" body. However this will be staffed by SARS and SARB personnel so it may not be viewed as truly independent. On a more positive note this body does not appear to have much discretion, rather it can simply approve or deny amnesty based on actual facts provided. The passing of information from the unit to SARS and SARB (highlighted as essential in the PCoF briefing session on 3rd April) is however likely to raise concerns that there will be a black mark against those claiming the amnesty. The legislation needs to spell this out i.e. "no prejudice against applicants by SARS and SARB in dealing with their post 28 February 2002 and 28 February 2003 tax and exchange control affairs respectively.
- Is the amnesty on the basis of "no questions asked"
With the removal of advisors and facilitators from the scope of the amnesty and the consequent necessary amendments as regards details of schemes which pertained only to them, the details to be supplied with the application do not appear too onerous and so we have no particular concerns in this respect. Please confirm which sections of the bill will now be deleted.
- Will the amnesty be taken benefit of and to what extent?
It is hard for us to comment on this at present as, due to the FICA problem identified above we haven’t really spoken to potential applicants about it yet. SARS and SARB need to convince taxpayers/ residents that if they don’t take advantage of the amnesty
they will be caught by other means.
Concern was expressed that, in particular with regard to the 28 February 2002 and 28 February 2003 balance sheet information to be provided, SARS could launch independent enquiries into a taxpayer’s affairs, especially as regards SA source income to which the amnesty does not apply. Options discussed to address this were the introduction of a statute of limitations (3/ 6 years) or extension of the amnesty to interest and penalties (but not the underlying tax) in respect of earlier years. This is to be considered further by SARS and National Treasury and we await the outcome of their deliberations.
In addition, concern was expressed that SARS could then require a taxpayer to identify those previously referred to as advisers or facilitators and proceed against them. In this respect the possibility of restricting SARS right to question taxpayers in this respect is to be examined.
- Calculation of levy
National Treasury’s slides used in the PCoF briefing session were particularly clear regarding the deduction of the foreign investment allowance (R750,000 or R1.5million as appropriate) from the value of foreign assets prior to applying the levy. However it is not clear how this actually works in the legislation.
National Treasury are aware the current draft is unclear and are working towards a solution.
II Specific matters pertaining to wording of sections
Section 1
"date of approval": refers to section 8(6) which doesn’t exist
Section 3
(1)(a) and (b) : As raised above, should the amnesty be restricted to natural persons? Is it unconstitutional to apply it only to individuals.
What about those who are no longer residents but may return in the future, should they not also be catered for, e.g. a person who was a resident and breached exchange control regulation, moved overseas and is no longer a resident as defined (due to amendment to definition in section 30 of this amending Act which takes effect 26 Feb 2003 – does in fact the change in definition apply only to companies or to companies and individuals?) and then returns after the amnesty period expires. Surely such people should be permitted to apply from overseas.
Such individuals will not be catered for as they are considered to be insignificant in number and unlikely to take benefit of the amnesty in any event (National Treasury). (2) : Why should a beneficiary (who was not the donor) of a discretionary trust be invited to elect to treat the assets of that trust as their own and be subject to the levy thereon?
To be reconsidered and possibly removed, the aim is to catch the donor.
Section 4
Various timing issues as identified in the section on high level/ conceptual points above result from the proposed timescale.
Section 5
(1)(b) : Where a person has both legitimate and illegitimate offshore assets, it may be hard to trace the respective portions, particularly if asset held at 28/02/03 is the result of a chain of assets held and disposed of over the years.
For example is exchange control was breached in 1999 with R2 million being taken out of the country, R500,000 of that could have been legally done through the foreign investment allowance, that R500,000 could now have grown to R1.2million with the R1.5 million taken out illegally now being worth R2million. As the funds offshore may have been blended over the years provision should be made to permit an estimate as to the split between legitimate and illegitimate assets. See also our comments in the high level/ conceptual section as to the imposition of the levy.
See comments in high level section.
Section 6(1)
What if details as to historical cost are no longer available? Such eventuality is envisaged elsewhere in tax legislation, e.g. paragraph 26 of the 8th Schedule. Surely this shouldn’t invalidate or preclude the amnesty relief.
It was confirmed that this will not preclude application of the amnesty.
Section 7
On the basis of the notification in the PCoF hearing on Thursday 3rd April 2003 it is understood that this section will be deleted so our initial concerns will no longer apply.
Section 8
There appears to be no details or requirements on the amnesty unit as to time limits within which they must approve or deny any application. Surely this is required. The definition of "date of approval" suggests that there should be something here.
This was considered by the government bodies but due to uncertainty over the number of applications which will be received it was left out.
Section 9
In terms of practical application, is the amnesty unit to confirm with the Commissioner in each instance the status of returns prior to considering an application?
Section 11(1)(a)
The last word must surely be "and" not "or". Otherwise one could simply repatriate say R100, pay the R5 (5%) levy and leave everything else offshore for no further levy.
This will be resolved.
Section 14
Reference is to exemption from income tax (not defined), need confirmation this also includes donations tax.
Currently the amnesty does not cover donations tax – under consideration.
What is the purpose from excluding from the relief income attributable to assets which are no longer held as a result of a donation?
Section 15
Need clarity on whether this would also apply to interest.
Section 17(3)
Under such circumstances, is the amnesty revoked in full, or just to the extent the proceeds result from the proceeds of unlawful activities?
Section 20
Section 19(2) states the unit will act as an independent body, however given its constitution this appears unlikely. Should not representatives from the authorised dealers also sit on it?
Section 24
The bill should contain confirmation that, in terms of identifying the applications, details of which are to be given to the Minister, that this will be done by, for example, reference numbers and not names.
Section 27
In terms of the Regulations the Minister is permitted to make, this should not include control of the information. That should be governed by law for certainty.
List of key points/ requirements
- Address exemption required from the FICA reporting requirements
As noted above, currently under consideration.
- Include tax amnesty for SA source income
Extension of the amnesty will be considered to funds which were an integral part of the breach of exchange controls, but not more widely to all undeclared SA source income.
- Provide a simplified procedure via the clearing banks for "rats and mice"
Reluctance on behalf of SA Reserve Bank. Inclination from them and other governmental bodies is to have all applications sourced through the amnesty unit.
- Resolve issues identified as to imposition and calculation of the levy (deduction for FIA and combined levy).
National Treasury now aware of issues and will resolve, i.e. ensuring wording achieves set-off of FIA and applies the two levels of levy appropriately.
- Availability of amnesty to current non-residents
National Treasury indicated they do not see that this is where the bulk of the value to be gained by SA lies, and so do not wish to introduce complex legislation dealing with only limited numbers of individuals.
We beg to disagree and suggest that statistics be obtained from the Department of Home Affairs of the number of emigrants over the last, say 5 years. We maintain that this aspect should be considered further as the exclusion of such individuals would appear to be at odds to national policy and leaves an additional hurdle to be cleared for many expatriates wishing to return home.
Additional issues identified.
- In respect of the levy payable, what exchange rate is to be used when calculating the levy.
For example if there is an offshore asset of USD 1million as at 28 February 2003, should the levy of USD 100,000 be paid at the rate on that date, the date of the amnesty application, any date in the three (six) months after amnesty is granted when a decision can be taken as to what assets to retain offshore and funds remitted to pay the levy?
It is our opinion that the most appropriate rate is that on the 28th February 2003, but for clarity would suggest that this be provided for in the legislation.
- Clarity is required as to what the treatment will be of undisclosed foreign inheritances and income flowing therefrom.
- Additional clarity is required as to the level of detail which must be provided in respect of disclosed assets. For example is it sufficient to state "cash at bank" or must an applicant list details of the bank, account number etc.
- In addition clarity is required as to what the position is where assets are declared by one party as their own where such assets are held in another name through for example the use of a nominee.