EXPLANATION OF THE EXCHANGE CONTROL AMNESTY: CHAPTER I
1. INTRODUCTION
Chapter I of the Bill gives effect to the Exchange Control amnesty proposed in the 2003 Budget Review. Chapter I allows South African residents to disclose their foreign assets accumulated or transferred in contravention of Exchange Control without being exposed to any civil or criminal liability. In order to ensure that this Exchange Control amnesty has maximum effect, Chapter I also contains accompanying tax measures that exonerate South African residents for failing to disclose certain amounts (from both foreign and domestic sources) that should have been taxed if that failure ultimately relates to foreign assets.

2. RATIONALE OF THE EXCHANGE CONTROL AMNESTY
Many South African individuals have a long history of shifting assets offshore in contravention of Exchange Control. These illegal shifts commenced well before the 1980’s, having occurred in a variety of ways. The revenue from these illegal foreign assets typically goes unreported for income tax purposes. These foreign assets may even stem from unreported domestically derived amounts.

Government has rightly taken the position that Exchange Control and related tax violations should not be tolerated. However, in recent years, Government has become increasingly aware that many individuals with illegal foreign assets wish to repatriate or regularise their assets but have hesitated to do so out of fear of prosecution. This desire stems from a variety of economic as well as legislative factors.

From an economic point of view, many individuals with illegal offshore assets have found that the world of foreign investments is not rendering the relatively high returns as previously experienced. Current weak economic conditions on the world scene have generally resulted in offshore losses. This weak economic picture is to be compared with local economic growth and investment opportunities. The South African economy continues to grow at a respectable rate despite the current international economic downturn. Moreover, local interest yields are more attractive than those found in developed countries at a time when the local currency is appreciating vis-à-vis those currencies.

Due to the introduction of new legislation, the risk of holding undisclosed foreign assets has grown dramatically in recent years. The holding of undisclosed foreign assets is now an income tax violation in addition to an Exchange Control violation. In 1997, individuals became subject to tax on investment income from their foreign assets. In 2001, South Africa’s worldwide tax system became fully operational, meaning that individuals became fully subject to tax on a wider range of their foreign income (except for limited cases such as salaries from long-term services rendered outside South Africa). This system of worldwide taxation was enhanced in 2002 when Government introduced a deemed income provision for the failure to report revenue from foreign assets. Moreover, tax is not the only legislative change. The risk of criminal prosecution for the holding of illegal foreign assets has increased with the introduction of the Financial Intelligence Centre Act, 2001.

The international legislative environment is also a riskier place for illegal foreign assets. Government has greatly expanded its tax treaty network since 1994, thereby facilitating greater international co-operation for South African enforcement. The world community has simultaneously grown increasingly impatient with tax haven countries with bank secrecy and other laws designed to serve as a tax refuge for illegal foreign assets. This impatience with bank secrecy has recently accelerated with the increased understanding that bank secrecy can encourage terrorism and other illegal activities (such as money laundering).

Mindful of the above, Government announced an Exchange Control amnesty. This amnesty is accompanied by supporting tax measures in order to ensure that fears of prosecution from related tax violations do not indirectly undermine the objectives of the Exchange Control amnesty. The objectives of the Exchange Control Amnesty Bill are—

(a) to enable violators of Exchange Control and certain tax acts to regularise their affairs in respect of foreign assets derived from these violations;

(b) to ensure maximum disclosure of foreign assets and to facilitate repatriation thereof to the Republic; and

(c) to extend the tax base by disclosing previously unreported foreign assets.

3. JOINT AMNESTY UNIT
Parties interested in applying for amnesty must do so with the newly established amnesty unit (Clause 22(1)). The amnesty process will be administered by a Chairperson appointed by the Minister (Clauses 2 and 23(1)(a)) with support from employees drawn from the South African Reserve Bank ("SARB") and from the South African Revenue Service ("SARS") (Clause 23(1)(b) and (c)).

The amnesty unit can only grant or refuse approval of amnesty applications within the authority provided under this Chapter. Any action taken by the amnesty unit outside this authority is void (Clause 24(5)).

4. ELIGIBLE PERSONS (CLAUSE 3)
a) Natural Persons and Entities
The amnesty applies to natural persons, close corporations, trusts and deceased estates that hold foreign assets as at 28 February 2003 (Clause 3(1)(a) and (b)). The amnesty does not apply to companies (either private or public) with foreign assets because companies operate under a wholly separate discretionary regime for purposes of Exchange Control. Unlike these other persons, companies can invest in sizeable business projects offshore upon receipt of Exchange Control approval. These companies must also annually repatriate foreign earnings unless these companies can obtain further Exchange Control approval to retain excess foreign earnings offshore. In order to obtain this further Exchange Control approval, a company with foreign assets must generally demonstrate that this offshore retention is necessary to maintain or expand current foreign operations within the same line of business.

b) South African versus Foreign Residents
The amnesty applies only to persons that qualify as South African residents on 28 February 2003. For purposes of this Bill, two definitions of "resident" are required – one for Exchange Control and one for tax – because this Bill contains both Exchange Control and tax aspects (definition of "resident" in Clause 1). For purposes of Exchange Control matters, a resident is a person who has taken up residence or is domiciled in South Africa under the authority of the Exchange Control Regulations, regardless of whether that person has a South African or foreign nationality. For purposes of tax matters, a resident is defined under section 1 of the Income Tax Act (i.e., is "ordinarily resident" or satisfies the "physical presence" test).

Foreign persons have been excluded from the amnesty since most foreign persons are simply not subject to Exchange Control or South African tax on their foreign assets. The only class of foreign persons that may seriously be interested in an Exchange Control amnesty are those foreign persons who have left the country while still qualifying as residents (i.e., persons who left the country without applying for emigration facilities under the Exchange Control Regulations). These persons, however, would still qualify as a resident for purposes of this amnesty.

Example. Facts. Individual, age 33, lived in South Africa until age 30. Individual left South Africa for the United Kingdom in 2000 in order to pursue a U.K. job opportunity which Individual still holds. Individual plans to return to South Africa within a year or two. Individual never applied for emigration facilities under the Exchange Control Regulations.

Result. Individual qualities as a resident for purposes of the Exchange Control and tax amnesties. Individual never departed the country for Exchange Control purposes and Individual remains a resident under the Income Tax Act (i.e., is ordinarily resident).

c) Applicants
The amnesty is designed for two sets of parties (defined in the Bill as "applicants") – those seeking relief for Exchange Control violations and those seeking relief for tax violations relating to foreign assets. An applicant can:

(a) apply for Exchange Control relief if that person holds direct beneficial ownership of one or more foreign assets on 28 February 2003, the value of which has been wholly or partly derived from assets held in contravention of Exchange Control (Clause 3(1)(a));

(b) apply for tax relief if that person holds direct beneficial ownership of one or more foreign assets on 28 February 2003, the value of which has been wholly or partly derived from amounts required to be declared in terms of the Income Tax Act and in terms of the Estate Duty Act (Clause 3(1)(b)).

For purposes of the Bill, the term "foreign assets" (as defined in Clause 1) means any funds held in foreign currency (i.e., all undisclosed foreign currency notes whether held abroad or domestically) as well as any assets transferred from or accumulated outside South Africa. Eligible persons may apply for Exchange Control relief, tax relief or both (see Clause 9). Neither form of relief is tied to the other.

Example (1). Facts. On 28 February 2003, Individual owns all the shares of Foreign Company. Foreign Company owns £1 million of foreign assets obtained in contravention of Exchange Control and £2 million of foreign assets obtained without any contravention.

Result. Individual can apply for amnesty with respect to the Foreign Company shares because the value of those shares is partly derived from Exchange Control violations.

Example (2). Facts. On 28 February 2003, Individual owns all the shares of Foreign Company 1, which in turn owns all the shares of Foreign Company 2. Foreign Company 2 generates £100 000. £15 000 should have been reported as taxable income for Individual in 2001 (as an inclusion under section 9D of the Income Tax Act).

Result. Individual is eligible for amnesty because the value of the Foreign Company 1 shares are partly derived from a violation of the Income Tax Act.

Yet, "foreign assets" do not generally include any foreign bearer instruments (as defined in Clause 1) if the identity of the instrument’s beneficial owner cannot be determined by reference to the instrument itself or by the party issuing that instrument. This exclusion from "foreign assets" is designed to eliminate anonymous holdings that could otherwise represent funds obtained from criminal activity (such as drug smuggling and related money laundering). This exclusion eliminates instruments, such as numbered bank accounts and foreign bearer bonds. However, an applicant may obtain amnesty for foreign bearer instruments if the applicant can prove that the financial instrument is derived from the applicant’s own funds held for at least 18 months prior to acquiring the foreign bearer instrument.

Example (3). Facts. Individual opened a bank account in Italy on 1 January 1998 with deposits in contravention of Exchange Control. On 1 January 2002, the total funds accumulated in this account were Є10 000. On 2 January 2002, individual closed the account and purchased foreign bearer bonds equal to the value of Є10 000. These foreign bearer bonds remained in the possession of Individual as at 28 February 2003.

Result. Individual may apply for exchange control relief. Individual can prove that the foreign bearer bonds stem from a bank account held in Individual’s name for a period of 4 years (which exceeds the required 18 month period).

d) Facilitators
Advisors and facilitators who assisted illegal accumulations or transfers offshore have no foreign assets to bring to the table as consideration for amnesty relief. Moreover, these parties remain uncompromised by the amnesty. Applicants seeking amnesty relief cannot be forced to reveal names of the advisors or facilitators who assisted, and names voluntarily revealed to the amnesty unit cannot be passed on to SARB or SARS. More importantly, SARB and SARS will not have any power to force the disclosure of names from the applicant (either during the amnesty process or upon subsequent review) (Clause 26). Hence, advisors and facilitators generally do not need amnesty relief since these parties cannot be exposed to the prosecuting authorities as a result of the amnesty. Government is also reluctant to grant a wholesale amnesty to institutional parties engaged in criminal activities since the very nature of their professional status requires a higher standard of conduct.

That said, the amnesty is available to a small class of facilitators whose anonymity could potentially be compromised by the amnesty despite the above protections (clause 3(1)(c)). As will be discussed, facilitators seeking amnesty must apply with an applicant seeking amnesty (i.e., a party holding foreign assets as at 28 February 2003) (Clause 8(a)). In order to fall within this small class of facilitators, the party involved must additionally qualify as a resident and either be:

(a) a natural person, or
(b) a related party (entity) to the applicant.

This party must have assisted an applicant (other than solely in an advisory capacity) on or before 28 February 2003 by accumulating or transferring assets outside South Africa in violation of Exchange Control or tax (as long as those foreign assets are no longer beneficially held by that assisting party). The assistance envisioned by this rule is of a complacentory a nature which is more likely to be traceable than pure outside advice. This assistance often involves physical assistance to transfer funds offshore (putting money into travel suitcases) or deliberately providing false records (through under- or over-invoicing). Parties engaged in both assistance of this type and advisory support will be eligible for amnesty since both forms of support become indistinguishable.

As far as entities are concerned, the amnesty for facilitators is restricted to related parties. A "related party" (as defined in Clause 1) qualifies as a facilitator if that party is:

(a) A company that is wholly owned by an applicant (and/or that applicant’s relatives if the applicant is a natural person); or
(b) A trust or deceased estate of which the applicant is a beneficiary.

Natural persons need not be related because a close traceable relationship with the applicant can come in many forms. For instance, a natural person could be an employee of a close corporation seeking amnesty, a trustee of a trust seeking amnesty, or an executor of a deceased estate seeking amnesty.

Example. Facts. On 28 February 2003, Individual owns all the shares of Domestic Company. Individual also owns £700 000 in a foreign bank account. These funds stemmed from amounts illegally shifted offshore by Domestic Company in contravention of Exchange Controls (as well as tax) through under-invoicing. Individual never reported the taxable foreign growth of these funds.

Result. Individual can apply for amnesty relief as an applicant because Individual owns foreign assets as at 28 February 2003 that stem from Exchange Control (and tax) violations. Domestic Company cannot apply as an applicant because Domestic Company does not hold any illegal foreign assets as at 28 February 2003, but Domestic Company may apply jointly as a facilitator due to its assistance in illegally shifting funds offshore.

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As stated above, this small class of facilitators was included within the amnesty because subsequent review of an applicant’s affairs could easily lead to the identification of these facilitators without SARB or SARS forcing the applicant to disclose names. For instance, SARB or SARS could easily begin checking the affairs of a wholly owned export company of a natural person receiving amnesty on the suspicion that the applicant artificially shifted funds offshore through the company. SARB or SARS could also begin questioning the employees of a close corporation receiving amnesty relief or a trustee of a comparable trust. Entity facilitators were kept extremely narrow because an entity (as opposed to a natural person such as an employee) must be truly linked to the applicant in economic ownership terms to create an obvious nexus for an investigation. More importantly, amnesty relief should only be extended to an entity if the entity is a mere legal extension of the applicant’s economic ownership affairs. Use of an entity in this manner only worked to the detriment of Government in terms of fiduciary duties. Similar uses of lesser-owned entities may work to the detriment of other parties (e.g. other shareholders not related to the applicant).

5. SPECIAL RULES FOR FOREIGN DISCRETIONARY TRUSTS (CLAUSE 4)
Special rules are required for foreign discretionary trusts because of the unique ownership of foreign assets involved. In a foreign discretionary trust scenario, a South African person illegally transfers assets without consideration to a foreign discretionary trust with all beneficiaries having an interest in the foreign discretionary trust assets only at the discretion of the trustees. These discretionary beneficiaries can potentially include South African residents who may wish to repatriate assets once the assets are vested in them, but are unwilling to do so because the foreign discretionary trust acquired or accumulated those foreign assets in violation of Exchange Control.

Without special rules, foreign assets in foreign discretionary trusts of this kind would not fall within the amnesty because no South African technically holds any foreign asset as at 28 February 2003. Failure to cover this situation would seriously hamper the potential impact of the amnesty because many parties acting in violation of Exchange Control shifted assets offshore through foreign trusts of this kind.

In order for a foreign asset held in a foreign discretionary trust to be eligible for amnesty, the foreign asset must satisfy a series of requirements, and the donor (or the deceased estate of the donor) must make an election with respect to that foreign asset (Clause 4(1)). Lastly, the founding document for the trust must be submitted with the amnesty application (Clause 4(4)).

In terms of the foreign asset requirements, the foreign discretionary trust must hold that asset as at 28 February 2003 (Clause 4(1)). Secondly, the foreign discretionary trust must have acquired the asset by way of donation (either during life or through a deceased estate) from the donor making the election (Clause 4(2)(a)). Thirdly, the foreign asset held in the foreign discretionary trust must be wholly or partly derived from assets accumulated or transferred in violation of Exchange Control or the Income Tax Act (Clause 4(2)(b)). Fourthly, the asset must not have vested in any beneficiary (Clause 4(2)(c)).

If the electing party makes the election, that party is deemed to have owned that asset for purposes of the amnesty and for purposes of the Income Tax Act (Clause 4(3)(a)). For purposes of the amnesty, the electing party is deemed to have held the foreign asset from the date the foreign discretionary trust acquired the asset, thereby providing full amnesty for that asset since the date of the foreign discretionary trust’s illegal acquisition (Clause 4(3)(a)(i)). For purposes of the Income Tax Act, the asset is deemed directly held by the electing party as from the first day of the 2002/2003 tax year ending on or before February 2003 (Clause 4(3)(a)(ii)). This deemed direct ownership lasts until the foreign discretionary trust disposes of the foreign asset. This deemed ownership means that the electing party will be taxable directly on the income generated from the foreign asset as if that the electing party held that asset directly as well as upon the subsequent disposal of that asset (at fair market value).

Example (1). Facts. On 28 February 2003, Foreign Discretionary Trust holds ₤1 million of foreign assets derived from funds donated in 1998 by Individual in violation of Exchange Control. The trustees are empowered to award the entire trust proceeds to Individual, Individual’s family (all of whom are also South African residents), or a charity.

Result. Because no resident beneficiary technically holds any rights to the foreign trusts assets, no amnesty relief can be obtained under the general rules. However, due to the special discretionary foreign trust election, Individual (the donor) can elect to be treated as if Individual directly held the illegal foreign assets. This election means that Individual can qualify for amnesty relief with respect to those foreign assets for violations dating back to 1998, and that Individual will be directly taxed on the income or gain from those assets from 1 March 2002 until Discretionary Foreign Trust disposes of those assets. For instance, if foreign trust assets vest in a family member beneficiary in June 2004, Individual will be taxable on the income generated from those assets until that date and will be subject to tax on the vesting of those assets at fair market value.

Example (2). Facts. Individual, who is the founder of Foreign Discretionary Trust, loaned funds in 1998 to Foreign Discretionary Trust in violation of Exchange Control. The loan initially amounted to £2 million. Foreign Discretionary Trust also invested the return received, thereby holding £2 million of foreign assets as at 28 February 2003 after market fluctuations. The trustees are empowered to award any of the trust’s capital or income to Individual, Individual’s family (some of whom are South African residents) and a charity of the trustee’s choosing.

Result. The election for discretionary foreign trusts does not apply because the assets were not received by way of donation. However, Individual can apply for amnesty with respect to the loan because the loan qualifies as a foreign asset held by Individual as at 28 February 2003.

6. MINIMUM ENTRY REQUIREMENTS (CLAUSES 5, 6(4) AND 10)
Amnesty relief from Exchange Control and tax violations is predicated on a few minimum requirements. Failure to satisfy these minimum requirements will prevent both forms of amnesty per se. These minimum requirements are as follows:

a) Applicants and facilitators seeking amnesty must submit an application by way of sworn affidavit or solemn declaration (Clause 5).

b) Applicants and facilitators seeking amnesty must submit their applications to the amnesty unit within the 6-month window period for the amnesty (i.e., from 1 June 2003 and ending on 30 November 2003) (Clause 5).

c) Applicants seeking amnesty relief must confirm that no foreign assets (inside outside the potential scope of the amnesty as well as any foreign bearer instruments) held by that applicant have been partly or wholly derived from an unlawful activity (Clauses 6(4) and 10(1)(c)). Facilitators seeking amnesty relief must similarly confirm that they had no reason to believe any foreign assets accumulated or transferred from South Africa on behalf of an applicant were derived from an unlawful activity (Clause 8(b)). For purposes of this test, the definition of "unlawful activity" means an "unlawful activity" as defined under the Prevention of Organised Crime Act (Act No. 121 of 1998) other than—

i) any violation of Exchange Control, Income Tax (including Donations Tax and the Secondary Tax on Companies), or Estate Duty; or
ii) any activity constituting a misrepresentation or non-disclosure necessary to facilitate that violation.

This requirement ensures that parties engaged in more serious forms of criminal activity, such as drugs and related money laundering, cannot participate in the amnesty. Illegal misrepresentations or non-disclosures were excluded from disqualifying crimes because these crimes typically act as a prerequisite for the violations targeted by the amnesty. Hence, a misstatement of corporate records through under-invoicing or over-invoicing will not prevent a party from submitting an amnesty application, even if that misrepresentation qualifies as an offence under company law relating to a breach of fiduciary obligations. However, amnesty relief cannot be construed to exonerate the company law violation itself.

d) Lastly, the amnesty does not apply if SARB or SARS delivers a notice of audit, investigation or other enforcement action before submission of an application (Clause 10(1)(b)). This disqualifying notice must involve a possible Exchange Control violation, possible undeclared foreign revenue, or possible undeclared domestic amounts accumulated or converted into foreign assets. The purpose of an amnesty is to provide relief to the extent parties unilaterally come forward and disclose their illegal activity, thereby disclosing previously unsuspected foreign assets and income and saving the enforcement authorities the administrative cost of investigation. Parties under audit, investigation or enforcement action do not provide this quid pro quo because the administrative cost for the disclosure has already been incurred. Exclusion of these parties is consistent with international best practice involving amnesties.

This exclusion applies if SARB or SARS delivers notice of a possible foreign asset violation to the applicant or to any facilitator who previously acted on the applicant’s behalf (or their representatives). In technical terms, delivery of this notice means: (a) handing notice to the relevant party, (b) sending notice to the relevant party by registered post at the last known address, (c) faxing notice to the relevant party (followed by a formal handing over of notice or sending by registered post), and (d) electronic notice to the relevant party (followed by a formal handing over of notice or sending by registered post) (Clause 1). Notice of this kind can only be ignored if the notice is withdrawn before the 30 November 2003 amnesty cut-off date.

7. EXCHANGE CONTROL AMNESTY
a) Basic Principle
The Exchange Control aspects of the amnesty apply "to the extent" foreign assets are disclosed on an asset-by-asset basis. Stated differently, the amnesty applies to disclosed foreign assets while non-disclosed foreign assets remain subject to potential civil and criminal Exchange Control prosecution. Post-28 February 2003 exchange control violations will also not cause withdrawal of the amnesty (but will remain subject to the full weight of Exchange Control prosecution on going forward).

This principle provides applicants with certainty of amnesty protection for their disclosed assets (i.e., applicants know that the amnesty will apply to disclosed foreign assets even if other illegal foreign assets are subsequently uncovered). This certainty is intended to maximise the number of applicants coming forward and greatly reduces the administrative process of verification. From an administration point of view, the amnesty unit need only focus on the foreign assets disclosed because the applicant still remains exposed with respect to undisclosed foreign assets.

b) Information Required (Clause 6(1))
An applicant’s disclosure of a foreign asset requires a statement of that asset’s market value as at 28 February 2003 (with the market value determined in the foreign currency of the country in which that asset is situated) as well as a description of that asset’s identifying characteristics and location. The market value disclosed of a foreign asset is central to all aspects of the Exchange Control Amnesty. The market value disclosed determines the level of the amnesty protection, the amnesty levy, and the initial tax cost of the asset. The market value of a disclosed foreign asset must generally be supported by—

(i) a valuation certificate by a valuator of the country where that foreign asset is located;
(ii) a valuation by a sphere of government of the country where that foreign asset is located; or
(iii) any other proof of value as the amnesty unit may on good cause shown allow.

In the case of financial instruments (e.g. bank accounts, brokerage accountsand savings accounts) a different set of supporting information is required. Disclosed foreign financial instruments must generally come with an original or certified copy of a statement of account. This statement must indicate the numerical balance or market value as at 28 February 2003. If a certified statement of account is not available, any other proof of value for that financial instrument can be provided as the amnesty unit may on good cause shown allow.

c) Amnesty Levy (Clauses 11 and 12)
i) Levy Base and Rates
Disclosure of foreign assets for Exchange Control relief is conditioned on an amnesty levy. This levy generally applies at a 5 per cent rate for assets repatriated to South Africa and at a 10 per cent rate for assets held offshore (Clause 12(1)).

The amnesty levy has the same base (known as the leviable amount) regardless of whether the levy rate applies at 5 or 10 per cent. The leviable amount is based on with the total market value of foreign assets disclosed as at 28 February 2003 (Clauses 6(1) and 11(1)). This 28 February 2003 fixed date simplifies administration and compliance. Both Government and the applicant bear the risk of any value changes of the foreign assets occurring after that date. The 5 per cent levy applies to the extent this 28 February 2003 amount is repatriated (except if used to pay the 10 per cent levy). The 10 per cent levy applies after deducting the amount subject to the 5 per cent levy (Clause 12(1)).

Example (1). Facts. Trust discloses £10 million of foreign assets held in violation of Exchange Control as at 28 February 2003. Trust repatriates £6 million to South Africa on 20 September 2003 and holds the remaining £4 million offshore.

Result. The 5 per cent levy applies to the £6 million repatriated. The 10 per cent levy applies to the £4 million remaining offshore.

Example (2). Facts. Trust discloses £3 million of foreign assets held in violation of Exchange Control as at 28 February 2003. This amount increases to £4 million by the time Trust receives amnesty relief. Trust leaves the full amount offshore (less the amount needed to pay the levy).

Result. The 10 per cent amnesty levy applies to the initial £3 million. It makes no difference that the value changed after 28 February 2003. No additional levy is payable in respect of the amount of the 10 per cent levy which is repatriated because the full leviable amount is subject to the 10 per cent levy.

Example (3). Facts. The facts are the same as Example (2), except that Individual repatriates all £4 million.

Result. The 5 per cent amnesty levy applies to the initial £3 million. It makes no difference that the value changed after 28 February 2003.

Example (4). Facts. Trust discloses £8 million of foreign assets held in violation of Exchange Control as at 28 February 2003. The amount increases to £9 million after receiving amnesty approval. Trust repatriates £5 million to South Africa on 20 September 2003 and holds the remaining £4 million offshore.

Result. The 5 per cent levy applies to the £5 million repatriated. The 10 per cent levy applies to £3 million of the £4 million remaining (£8 million amount as at 28 February 2003 less the £5 million repatriated). Trust needs to repatriate a further £300 000 to pay the 10 per cent levy.

An applicant may reduce the leviable amount in two ways. Firstly, an applicant may reduce the leviable amount to the extent the applicant proves the market value of the foreign asset disclosed does not stem from any Exchange Control violation. Secondly, in the case of an applicant who is a natural person, the leviable amount is reduced to the extent that person’s permissible foreign capital allowance has not otherwise been availed of (currently R750 000 per person). The permissible foreign capital allowance must be converted into the relevant foreign currency at the SARB published exchange rate on 28 February 2003.

Example (5). Facts. Individual discloses £2 million of foreign assets held in violation of Exchange Control as at 28 February 2003. Individual has never availed of the permissible foreign capital allowance. Individual leaves all £2 million offshore (less the amount repatriated to pay the 10 per cent levy).

Result. The 10 per cent levy applies to the £2 million of foreign assets less the R750 000 permissible foreign investment allowance, converted into pounds as at 28 February 2003.

Example (6). Facts. Individual discloses a £4 million foreign bank account held in violation of Exchange Control as at 28 February 2003. Of this amount, Individual can prove that £500 000 stems from U.K. services and another £20 000 stems from interest thereon. This £520 000 amount was not held in violation of Exchange Control because the U.K. services were rendered after 1997. Individual has availed of R350 000 of the R750 000 permissible foreign capital allowance. Individual leaves all £4 million offshore (less the amount needed to pay the 10 per cent levy).

Result. The 10 per cent levy applies to £3 480 000 (£4 million less the £520 000 legal amount) of the foreign assets less the R400 000 unused, permissible foreign capital allowance. The R400 000 is converted into pounds as at 28 February 2003.

The leviable amount is based on the gross market value of foreign assets without any reduction for liability or expenses. Similarly, the leviable amount is calculated before taking into account any transactional fees or commissions (Clause 12(3)).

Example (7). Facts. Trust owns foreign real estate with a £5 million value that is subject to £2 million foreign debt borrowed in violation of Exchange Control. The foreign real estate was financed solely from the illegal foreign borrowing. Trust does not repatriate any foreign assets.

Result. The leviable base for the amnesty levy is £5 million without offset for the illegal foreign debt.

Example (8). Facts. Trust owns foreign real estate with a £5 million value and subject to £2 million foreign debt. £1 million of the foreign real estate stems from foreign assets transferred in violation of Exchange Control, £2 million from assets shifted or accumulated offshore within the confines of Exchange Control and £2 million of foreign debt. Trust does not repatriate any foreign assets, except to pay for the amnesty levy.

Result. The leviable base for the amnesty levy is £1 million because only this portion stems from assets transferred or accumulated in violation of Exchange Control. The remaining £4 million portion of the asset does not form part of the leviable base because these amounts do not stem from illegal amounts (including the utilisation of the legal foreign borrowing).

ii) Method of Payment (Clause 13)
Applicants must pay the amnesty levy to an authorised dealer (as defined under the Exchange Control regulations) (Clause 1), and payment must come from foreign funds. Payment of the 5 per cent levy for repatriated foreign assets must come from the foreign funds repatriated (Clause 13(2)(a)). Payment of the 10 per cent levy for foreign funds remaining offshore must generally come from any foreign funds not otherwise repatriated (regardless of whether those funds are from the same currency or location) (Clause 13(2)(b)(i)). The only instance when the 10 per cent levy need not come from foreign funds offshore is when foreign funds are no longer remaining; in which case, payment is made from foreign funds repatriated (Clause 13(2)(b)(ii))).

Example. Facts. Trust discloses £10 million of foreign assets held in violation of Exchange Control as at 28 February 2003. These assets decline in value of £9 million after that date. Trust repatriates all £9 million to South Africa on 10 October 2003.

Result. The 5 per cent levy applies to the £9 million repatriated (with payment of the 5 per cent levy coming from the amount repatriated). The 10 per cent levy applies to £1 million (i.e., the initial £10 million as at 28 February less the £9 million repatriated). While payment of the 10 per cent levy normally comes from foreign assets remaining offshore, payment of the 10 per cent levy in this instance can come from the repatriated amount because no foreign assets remain.

For purposes of the payment rules just described, foreign funds do not include foreign currency within the Common Monetary Area (i.e., Namibia, Lesotho, and Swaziland) (Clause 13(5)). Funds in this area do not add anything in Exchange Control terms because the Exchange Control regulations already allow free use of funds within this area.

The foreign funds used to pay the levy must be converted into Rands. Applicants must convert the 5 per cent levy into Rands at the ruling spot exchange rate on the date of repatriation (Clause 13(1)(a)). Applicants must convert the 10 per cent levy into Rands at the ruling spot exchange rate on the date of payment (Clause 13(1)(b)). This conversion rate will simplify matters for authorised dealers processing payments.

After receipt of the 5 or 10 per cent levy, authorised dealers must transfer all amounts received into an account held at the Corporation for Public Deposits (Clause 13(3)). The Chairperson must prescribe the time and manner in which the authorised dealer must transfer these amounts into this account. The Corporation for Public Deposits will then transfer these amounts to the National Revenue Fund.

iii) Due Dates (Clause 12 and 13)
The due dates for the levy are generally 3 months after the amnesty unit grants approval. The repatriation required for the 5 and 10 per cent levy rates must occur within this 3-month period, and the actual date of payment must occur within this 3-month period (Clause 12(1) and 13(1)). The amnesty unit may extend this 3-month period for another 3 months for one of two reasons. Firstly, the applicant can seek an extension if the applicant cannot convert the foreign amounts required into Rands within the initial 3-month period (Clauses 12(2)(a) and 13(4)(a)). This lack of convertibility typically occurs when the applicant has foreign assets that cannot be readily sold or used as loan collateral. Secondly, the applicant can seek an extension if the applicant will repatriate or pay the levy by way of dividends from a foreign company in order to enjoy the proposed benefit of the foreign dividend exemption for holders of a meaningful interest in a foreign company, as announced in the 2003 Budget Review (Clauses 12(2)(b) and 13(4)(b)).

d) Tax Cost Value (Clause 28)
The Exchange Control Amnesty Bill contains a rule to prevent under-valuations of property that could otherwise undermine the amnesty levy. This rule is necessary because issues of valuation are often difficult to quantify even under the best of circumstances. Pursuant to this backstop, a disclosed foreign asset will be deemed to have a tax cost that does not exceed that asset’s disclosed market value. This rule applies for purposes of determining the tax cost of trading stock (Clause 28(1)), capital assets (Clause 28(2)), and depreciation calculations (Clause 28(3)). As a result of this rule, applicants undervaluing a disclosed foreign asset (to reduce the amnesty levy) will be forced to incur additional tax upon eventual sale of that asset. Stated differently, under-valuations will only result in deferral versus outright exemption.

Example (1). Facts. Individual owns foreign real estate for investment, which was initially acquired in contravention of Exchange Control for £18 million in July 1999. The foreign real estate has an actual value of £25 million on 28 February 2003, but Individual provides a sworn valuation from a valuator that the real estate is worth only £15 million. This £15 million value is accepted as true by the unit, requiring an amnesty levy of only £1,5 million (i.e., 10 per cent of £15 million) instead of a £2,5 million levy. Individual sells the real estate for £30 million on 15 June 2004. Individual fully utilised all of Individual’s permissible foreign capital allowance before the amnesty.

Result. Individual is deemed to automatically have a base cost in the foreign real estate that is limited to £15 million (because this disclosed amount is less than the actual base cost). Individual accordingly reports £15 million of capital gain on the sale (taxable at an effective 10 per cent rate). If the actual base cost had been fully disclosed all along, the time apportionment base cost method would have been £24 million.

Example (2). Facts. The facts are the same as example (1), except that Individual has never utilised any of Individual’s permissible foreign capital allowances (and the amnesty levy is reduced accordingly).

Result. The result is the same as Example (1). The use of the permissible foreign capital allowance to reduce the amnesty levy has no impact on tax cost.

Example (3). Facts. Close Corporation owns depreciable foreign assets, which were initially acquired in contravention of Exchange Control for £12 million in 1998. The foreign assets are depreciable over a 10-year period under the straight-line method. Close Corporation provides a sworn statement from a valuator that the foreign assets are worth only £4,5 million and pays a 10 per cent levy on that amount. The foreign assets have a remaining write-off period of 5-years in terms of section 11(e)(ix) of the Income Tax Act.

Result. Close Corporation is deemed to automatically have a tax cost in the foreign assets that is limited to £4,5 million (because this disclosed amount is less than the actual tax cost of £26 million). A maximum allowance of £4,5 million may be claimed over the remaining 5-year period (i.e., at £900 000 per year).

e) Exchange Control Relief (Clause 14)
Successful applicants are deemed not to have contravened the Exchange Control rules to the extent of the 28 February 2003 market value of foreign assets disclosed (Clause 14(1)(a)). As stated above, undisclosed foreign assets receive no protection nor do these undisclosed foreign assets undermine the protection afforded for disclosed assets. The same principle follows in terms of foreign assets with partially disclosed market values. The disclosed value portion is covered by the amnesty while the undisclosed value portion is not. This aspect of the amnesty further ensures that applicants do not understate value in order to artificially reduce the amnesty levy.

Example (1). Facts. Individual submits bank statements to the amnesty unit indicating £8 million of undisclosed foreign assets in Foreign Banks A and B. Individual fails to disclose an additional £2 million of illegal assets held in Foreign Bank C.

Result. The amnesty applies to the extent of the £8 million in Foreign Banks A and B (even if 10 per cent levy is reduced for any unused R750 000 foreign permissible capital allowance). Individual remains fully exposed to penalty under Exchange Control for the £2 million undisclosed amount in Bank C.

Example (2). Facts. Individual owns foreign real estate as an investment. The foreign real estate has an actual value of £25 million on 28 February 2003, but Individual provides a sworn valuation from a valuator that the real estate is worth only £15 million. This statement is accepted as true by the amnesty unit. Individual sells the real estate for £30 million on 15 June 2004. SARB subsequently re-examines the issue determining that the real value was indeed £25 million on 28 February 2003.

Result. Amnesty relief fully applies to the £15 million disclosed amount. Individual remains fully exposed to penalty under Exchange Control for the £10 million non-disclosed amount.

In addition, amnesty relief fully applies to all undisclosed foreign assets that are no longer held by an applicant as at 28 February 2003 (except if that foreign asset is no longer held because that applicant donated that asset to another) (Clause 14(1)(b)). This amnesty coverage is intended to protect applicants from being exposed to investigation from SARB with respect to prior year violations that are no longer relevant. This aspect of the amnesty also spares applicants from maintaining voluminous records of prior year violations.

Example (3). Facts. Individual submits bank statements to the amnesty unit indicating £8 million of undisclosed foreign assets in Foreign Banks A and B as at 28 February 2003. In 1998, Individual also had undisclosed foreign assets of £1 million in Foreign Bank C. The account in foreign Bank C was closed on 10 July 2002 and transferred to foreign Bank D.

Result. The amnesty fully applies to foreign assets that no longer exist. In order for Individual to remain liable for Exchange Control violations, the Bank C amount must exist in undisclosed form on 28 February 2003 (in the undisclosed foreign Bank D).

8. ACCOMPANYING TAX MEASURES
a) Accompanying Tax Measure #1: Amnesty for Failure to Disclose Foreign Income
i) Basic Principle
As with the exchange control amnesty, the accompanying tax measures for failure to disclose foreign income will also apply "to the extent" income from underlying foreign assets is disclosed on an asset-by-asset basis. These measures apply to disclosed foreign income on foreign assets while non-disclosed foreign income remains subject to potential income tax liability, interest, and penalties. Post-28 February 2002 income tax violations will also not cause withdrawal of the amnesty but will similarly remain subject to potential tax liability, interest, penalties and criminal prosecution.

As stated above, this principle promotes certainty of amnesty protection for disclosed income. Applicants know that the amnesty will apply to disclosed foreign income on foreign assets even if other foreign income has not been disclosed. Further, this principle reduces the administrative process of verification because the amnesty unit need only focus on disclosed amounts.

ii) Information Requirement #1: Asset-by-Asset Disclosure (Clause 6(2))
For purposes of obtaining tax relief, disclosure of foreign revenue entails two basic requirements. Firstly and most importantly, the applicant must disclose foreign receipts and accruals that:

(a) arise during the applicant’s last year of assessment ending on or before 28 February 2003, and
(b) relate to disclosed foreign assets held on 28 February 2003 (Clause 6(2)(a)).

Secondly, the applicant must disclose the identifying characteristics of the foreign asset, including its location (Clause 6(2)(b)).

Example (1). Facts. Individual owns Foreign Bank Account with a balance of $102 000 as at 28 February 2003. Of this amount, $2 000 was generated as foreign interest from 1 March 2002, and another $40 000 was generated as foreign interest before that date. None of these amounts were ever disclosed on Individual’s income tax returns.

Result. Foreign Bank Account potentially falls within the amnesty because $40 000 of the account stems from undisclosed foreign receipts and accruals arising before 1 March 2002 (i.e., the period before Individual’s 2002-2003 year of assessment). In order to receive amnesty relief, Individual must disclose the $2 000 arising during the 2002-2003 year of assessment to the Amnesty Unit as well as identifying characteristics of that account.

Example (2). Facts. Close Corporation has a tax year ending on 31 December. Close Corporation owns various foreign shares in a foreign brokerage account with value attributable to foreign receipts and accruals that have not been disclosed for many years.

Result. The key year at issue is the year of assessment from 1 January 2002 until the end of 31 December 2002 (the last year of assessment ending on or before 28 February 2003). In order to receive amnesty relief, Close Corporation must disclose foreign receipts and accruals (e.g., dividends) arising from those shares during that year as well as identifying characteristics of that account.

Deductions and other related tax issues pertaining to the foreign asset need not be disclosed to the amnesty unit because the core violation of concern is the failure to disclose economic gross revenue.

iii) Information Requirements #2: Statement of Foreign Assets and Liabilities (Clause 7)
An applicant applying for tax relief must attach a statement of that applicant’s disclosed foreign assets and liabilities for the last day of the assessment year ending on or before 28 February 2002. This statement must reflect disclosed foreign assets at both their historical cost and estimated market value. The standard for estimating market value need not meet the standard for determining value required for Exchange Control relief (see paragraph 7.b) of thismemorandum)).

This statement provides an additional level of verification for determining gross receipts and accruals for the year of assessment ending on or before 28 February 2003. This historic cost and liability information acts as a balance sheet comparison of starting and ending foreign assets for that year (useful for performing a capital reconciliation). The fair market value information assists income determination for future years (see section 78(1A) of the Income Tax Act)

If an applicant fails to properly furnish information required for the statement of foreign assets and liabilities, SARS may estimate the values of all disclosed foreign assets and liabilities for the last day of the assessment year ending on or before 28 February 2002. Failure to provide this information does not prevent the applicant from receiving amnesty relief.

iv) Information Requirement #3: Income Tax Return
The last requirement involves the submission of tax returns. Specifically, the applicant must have furnished to the Commissioner a 2002/2003 tax return or received a letter from the Commissioner granting an extension (Clause 10(2)). In cases where an extension is granted, a 2002/2003 tax return must be submitted by 29 February 2004 or the amnesty approval becomes invalid (Clause 20(1)(a)).

This tax return requirement is independently verified by the amnesty unit. Failure to satisfy this requirement will prevent any amnesty tax relief per se because one important objective of the Act is to promote disclosure on an ongoing basis. Submission of the 2002/2003 tax return ensures this ongoing disclosure.

v) Exemption for Failure to Disclose (Clause 15)
Successfully disclosed foreign assets are deemed not to trigger any tax, civil liabilities, interest, or any criminal offence stemming from previously undisclosed foreign sources of income. Full amnesty protection also automatically applies to foreign amounts stemming from undisclosed foreign assets that are no longer held by the applicant as at 28 February 2003 (e.g. closed foreign bank accounts). This latter aspect of the amnesty effectively prevents SARS from re-opening the applicant’s foreign asset affairs before 28 February 2002 (all of which are no longer relevant unless associated with continuing foreign assets that remain undisclosed).

In other words, the essential effects of the amnesty are two-fold. Firstly, failure to disclose foreign income earned prior to the tax year ending on or before 28 February 2003 is fully shielded. Secondly, the sole price of this shield is continuing liability for the 2002/2003 tax year. Failure to disclose foreign receipts and accruals involving other foreign assets for the 2002/2003 tax year will remain subject to the full force of the law.

Example (1). Facts. Individual owns a total of 100 IBM shares on 28 February 2003, none of which were ever previously reported for income tax purposes. Of this number, 60 IBM shares were held online. The other 40 IBM shares were purchased and held through a foreign brokerage firm. The IBM shares generated $5 000 of dividends during the 2002/2003 tax year, of which $3 000 stems from the 60 IBM on-line shares and $2 000 stems from the 40 IBM brokerage shares. Individual discloses the $3 000 of dividends from the 60 IBM shares held online but remains silent as to the remaining 40 brokerage shares.

Result. Under the to the extent principle, the amnesty applies on an asset-by-asset basis. The amnesty applies with respect to the 60 IBM on-line shares but not with respect to the 40 IBM brokerage shares.

Example (2). Facts. Individual owns a brokerage account in Guernsey. Individual initially transferred funds equal to £35 000 pounds, which were converted into foreign shares. The value of these shares increased to £100 000 on 28 February 2002. This growth stems from unreported foreign dividends, unreported capital gains from sold foreign shares, and unrealised growth. Individual generates another £8 000 foreign dividends from 1 March 2002 until the end of 28 February 2003.

Result. The amnesty applies to all undisclosed foreign dividends and foreign capital gains arising before 1 March 2002. As a consideration for this amnesty, Individual must disclose the £8 000 of foreign dividends arising from 1 March 2002 until 28 February 2003.

Example (3). Facts. Individual first accumulates $50 000 offshore in June 1998, all of which is placed in Foreign Bank Account A. This account generates $6 000 of undisclosed interest from that date until the beginning of 2000. In 2000, Individual places the $56 000 of funds into Foreign Brokerage Account that is used to purchase foreign shares. These shares generate $4 000 of dividends in 2001, and these dividends are invested in foreign bonds. From 1 March 2002 until the end of 28 February 2003 the foreign shares generate $2 000 of dividends, and the foreign bonds generate $400 of interest.

Result. The amnesty applies to all undisclosed foreign interest and dividends arising before 1 March 2002. As a consideration for this amnesty, Individual must disclose the $2 000 of foreign dividends and $400 of foreign interest arising from 1 March 2002 until the end of 28 February 2003.

b) Accompanying Tax Measure #2: Amnesty for Failure to Disclose Domestic Amounts Transferred Offshore
i) Basic Principle
Much of the foreign assets that are the subject of the amnesty stem from undisclosed domestically generated amounts. Many parties with these foreign assets generated the initial income from a domestic business without disclosing that domestic business income to SARS. These undisclosed amounts were then shifted offshore in contravention of Exchange Control and any further foreign income continued in its undisclosed state.

It is understood that failure of the amnesty to cover related domestic non-disclosures would seriously undermine the intended disclosure of foreign assets sought by the amnesty. Without domestic relief, parties may be reluctant to come forward because these parties may fear disclosure of foreign assets to SARS may inevitably lead SARS to an investigation of the underlying non-disclosure of domestic amounts. Hence, non-disclosure of domestic amounts is additionally covered by the amnesty to the extent the domestic non-disclosures relate to foreign assets accumulated or transferred offshore.

In particular, the amnesty covers underlying domestic tax violations relating to the Income Tax Act, 1962, as well as the Estate Duty Act, 1955. As stated previously at the beginning of this explanatory memorandum, the amnesty will not cover tax violations, such as PAYE to be withheld by employers, withholding tax on royalties, the skills development levy, UIF and RSC Levy. These taxes have been excluded from the amnesty because violations of this nature typically breach fiduciary duties with respect to sums held on behalf of another (such as wrongful use of PAYE funds from unrelated employee salaries).

ii) Information Required (Clause 6(3))
In order to obtain amnesty for domestic tax violations, an applicant must disclose two basic items of information. Firstly, the applicant must disclose the domestic amounts previously not declared to SARS (in terms of the Income Tax Act, 1962 or Estate Duty Act, 1955) to the extent those amounts were initially accumulated as or converted into foreign assets. Secondly, the applicant must disclose the dates of conversion or accumulation.

The applicant must provide documentary proof of the dates and amounts of the initial accumulation or conversion if the accumulation or conversion occurs within 5 years before the relevant 2002/2003 tax year. The applicant can rely on any other form of evidentiary support (e.g. a sworn statement) for accumulations or conversions occurring before this 5-year period.

As elsewhere, these requirements are designed to solicit the minimum information required for amnesty relief. The applicant does not disclose how these funds were derived.

iii) Domestic Tax Amnesty Levy (Clause 16)
Amnesty for domestic tax relief is conditioned on the payment of a domestic amnesty levy. This levy equals two per cent of the amount initially accumulated or converted into foreign assets that are the subject of amnesty relief. This amount must be converted into Rand at the exchange rate published by the SARB for the date of initial accumulation or conversion. This levy must be paid within three months after the amnesty unit grants approval.

iv) Domestic Tax Relief (Clause 17(1))
Successful applicants receive amnesty for undisclosed domestic amounts accumulated or converted into foreign assets. Amnesty means that successful applicants are deemed not liable under the Income Tax Act, 1962, (including donations tax and STC) or under the Estate Duty Act, 1955, equal to the taxes otherwise due on the amounts disclosed. This amnesty protects applicants in respect of domestic amounts uncovered by SARS on or before the date of accumulation or conversion into foreign assets. Amnesty additionally eliminates interest, civil or criminal penalties thereon.

Example. Facts. Individual generates the following amounts: