The Common Reporting Standard (CRS), which was developed by the OECD in response to a request from the G20 group of the world’s major economies, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
The CRS sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The financial account information to be exchanged under the CRS includes balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations.
South Africa was one of 49 countries that signed up to be ‘Early Adopters’ of CRS, whereby information was provided in September 2017 about financial accounts in existence from 1 January 2016. It has activated bilateral exchange relationships with 73 countries, either under the CRS Multilateral Competent Authority Agreement (MCAA) or based on bilateral agreements.
As of March 2021, there are over 4,200 bilateral exchange relationships activated worldwide with respect to more than 100 jurisdictions committed to the CRS, with next exchanges between these jurisdictions set to take place at the end of September 2021.
This means that the South African Revenue Service (SARS) now has approaching five years of global data on South African taxpayers and it is beginning the process of contacting those taxpayers with financial accounts abroad to request further information on such accounts.
In particular, SARS is looking at the tax disclosures of the high-net-worth South African taxpayers. In his 2021 Budget Speech, Finance Minister Tito Mboweni specifically announced that SARS had allocated an additional ZAR3 billion “to improve technology, data and machine learning capability and upskill SARS officials to improve the efficiency and effectiveness of SARS”.
To remove any doubt, he also said: “For SARS to continue to provide a customised and seamless service to various categories of taxpayers, we are establishing a separate unit to focus on individual taxpayers with wealth and complex financial arrangements.”
To this end, SARS is now sending ‘Request for Information’ letters to South African taxpayers in respect of ‘Offshore Holdings 2015-2019’. These letters state that SARS has received information through the CRS and intends to review your affairs. SARS then invites the taxpayer to confirm, within 21 days, that they have offshore holdings and then provide the following details for each year 2015-2019, specifying for each asset held, for each year:
- Where these funds are held (jurisdiction and institution)
- Intermediaries that facilitated this investment
- Nature of the investment
- Source of the funds that have been invested – i.e. How did you derive these monies? Where a loan is applicable, please provide details thereof including lender, capital amounts, interest applicable, repayments terms and guarantees given
- Capital amount invested and movements thereon
- Income earned on this investment (interest, dividends)
- Where you have changed your holdings on this account during the period, please provide details thereof (dates, amounts involved and how the holding has changed)
- What tax obligations have been discharged with regards to this holding – e.g. Declaration of foreign income, capital gains paid etc.
- Where you have not complied with disclosure of this holding in your SA return, please explain why this did not occur
If you do not comply, SARS may raise an assessment based on information available or obtained from a third party. Failure to provide requested information may also constitute a criminal offence and penalties may apply.
If the tax position declared is found to be incorrect given the relevant tax legislation, an assessment will be raised. Where no further risk is identified and no finding is made, SARS will send a notification of the finalisation of the verification.
Where SARS makes a finding, a notice of assessment will be issued. If further risks are identified, your return/declaration will then be referred for an audit and you will receive a Referral for Audit Letter. A SARS audit is more intrusive than a verification and the scope could be extensive.
Any South African taxpayer receiving such a request should keep in mind that they are not being solely targeted, they are part of a bigger process. There is no doubt that SARS is contacting them because they have been identified as a person who holds a foreign account, but there is nothing to prevent a South African from having a foreign account. The issue is one of disclosure.
We recommend that a recipient should contact a professional – accountant or tax adviser – at the earliest opportunity to ensure compliance with SARS requirements regarding the type of information that should be provided and to assist in preparing a response. The aim should be to work with SARS to ensure that your personal or business arrangements are understood and that misunderstandings or mistakes in SARS analysis can be eliminated.
It is also worth considering obtaining tax risk insurance to protect against the costs associated with an audit from SARS. Taxpayers can also apply to the SARS Voluntary Disclosure Programme (VDP) to make a voluntary disclosure but be certain to obtain expert advice before doing so. The information requested by SARS above can be delivered as part of the VDP application.
Anyone who thinks that ‘confidentiality’ still applies in the financial world needs to reconsider. CRS has made the automatic sharing of information the norm. Anyone with offshore accounts needs to be prepared to explain and evidence the source and movement of any funds held in a foreign account.
South African taxpayers with offshore entities – overseas trusts, companies, foundations etc. – needs to consider how these entities are managed, administered and the level of control the SA taxpayer has over the underlying assets. The key is to ensure that the overseas entity is managed and / or administered by a professional firm and at an arm’s length basis.