Voluntary disclosure of undeclared foreign assets in offshore trusts
28 Nov 2016
In the context of trusts situated in foreign participating jurisdictions, the Common Reporting Standards (“CRS”) require the trustees to identify the settlor, beneficiaries and other natural persons exercising ultimate effective control (including through a chain of ownership) and report the necessary financial information in respect of those persons to the relevant foreign revenue authority. In the event that the said persons are identified as residents of South Africa, the reported information will, in turn, be automatically exchanged with the South African Revenue Service (“SARS”).
The South African authorities have, with regard to the imminent reporting under CRS and the investigations surrounding the Panama Papers, provided an opportunity for non-compliant South African residents to regularise their tax and/or exchange control affairs in respect of offshore assets under the Special Voluntary Disclosure Programme (“SVDP”), which commenced on the 1 October 2016 and will close on 30 June 2017. The tax relief under the permanent Voluntary Disclosure Programme in terms of the Tax Administration Act No. 28 of 2011 (“permanent VDP”) also remains available. It has, however, been questioned whether any alternatives to voluntary disclosure are available for South African residents with undeclared foreign assets in offshore trusts.
Timing of the automatic exchange of information
Early adopters of CRS, such as Guernsey and Jersey, are committed to commence the exchange of information from 2017 in respect of the 2016 calendar year. The so-called “fast followers” of CRS, such as Mauritius and Switzerland, are committed to commence the exchange of information from 2018 in respect of the 2017 calendar year. Although some countries have not yet undertaken to exchange information under CRS, these jurisdictions could still exchange information either on request in respect of a specific tax investigation or spontaneously in respect of information that is foreseeably relevant to a competent authority of another jurisdiction, such as SARS.
SVDP – relief granted for tax non-compliance
An application for relief under the tax SVDP may not be made by or on behalf of a trust. However, a person who is a donor (or the deceased estate of a donor) or a beneficiary in relation to a discretionary trust, which is not a resident, may elect that any asset situated outside South Africa, which was held by the discretionary trust during the period 1 March 2010 to 28 February 2015, be deemed to have been held by that person for the purposes of all tax legislation (including for estate duty purposes).
The election contemplated above may only be made if the relevant asset:
- had been acquired by the trust by way of a donation or is derived from such a donation
- has been wholly or partly derived from any amount not declared to the Commissioner as required by the Estate Duty Act, 1955 or the Income Tax Act, 1962
- has not vested in any beneficiary of that trust at the time that election is made
As a result of this election, the trust will effectively be “transparent” for tax purposes, to the extent of the election made by the relevant person. Accordingly, the so-called attribution and distribution rules will not apply in respect of any income, expenditure or capital gain relating to that elected asset, during the time such asset is deemed to be held by that person.
The relevant person would then apply for relief under the tax SVDP in respect of the elected asset. The relief provided would include the following:
- the undeclared receipts and accruals will be exempt from income tax (other than employees’ tax) and estate duty in respect of any tax year ending on or before 28 February 2015
- no penalties for understatement will be levied
- no criminal prosecution will be pursued
However, an amount will be included in the taxable income of the relevant person in the 2015 tax year equal to 40% of the highest market value of the elected asset determined at the end of each of the 2011 to 2015 tax years (inclusive). The market value must be determined in the applicable foreign currency and translated to South African Rand at the spot rate on the last business day in South Africa on or before the end of each tax year.
In terms of the guidance published by SARS, the permanent VDP remains open for disclosures where it is argued that all or part of the funding of the elected asset is not taxable in South Africa or has already been taxed in South Africa.
SVDP – relief granted for exchange control contraventions
In terms of the special rules provided for donors to discretionary trusts under the exchange control SVDP, a South African resident who is a donor (or the deceased estate of a donor) may elect that any foreign asset that was held by the discretionary trust on 29 February 2016, be deemed to be held by such resident.
The election contemplated above will only apply in respect of a foreign asset of a discretionary trust which:
- was acquired by that discretionary trust by way of a donation made by a South African resident of funds transferred from South Africa or funds that have been accumulated abroad
- has been wholly or partly derived from any unauthorised asset or from any amount not declared by the donor to the Commissioner for SARS as required by the Estate Duty Act, 1955 or the Income Tax Act, 1962
- has not, at the time of that election, vested in any beneficiary of that discretionary trust
As a result of this election, the South African resident will be deemed to have held the elected asset, for purposes of the administrative relief, from the date that the trust acquired that foreign asset until that foreign asset is disposed of by that trust to another person. At that point in time, the South African resident will be deemed to have disposed of the elected asset for market value on the date of disposal.
The South African resident may apply for relief under the exchange control SVDP in respect of the elected asset. Although no criminal prosecution will be pursued in that instance, a levy equal to 5% or 10% (depending on whether the asset is repatriated to South Africa) of the value of the elected asset disclosed, will be payable. The market value, in the foreign currency of the foreign asset, will be that on 29 February 2016.
The South African Reserve Bank has confirmed in a non-binding email that residents may apportion the value of the elected asset to the extent that it was derived from both authorised and unauthorised funds. In that instance, the necessary proof should be provided in respect of the authorised portion which is excluded from the levy calculation.
What are the alternatives?
The question has been raised whether, if the trust deed of a foreign discretionary trust in an early adopter country distributes the whole of its assets to a new trust in a fast-follower country in settlement thereof for the benefit of the existing beneficiaries and the first mentioned trust is wound up before 2017, for CRS purposes, the identity of the settlor of the original trust would not be reported in either jurisdiction.
It may also be considered whether, if the trustees in an early adopter country retire and appoint new trustees in a fast-follower jurisdiction, this could have the effect of migrating the tax residence of the foreign trust, for CRS purposes, into another jurisdiction. The argument is that the outgoing trustees would not have any CRS reporting obligations in respect of the trust since its place of effective management will be located in the adopted jurisdiction. However, certain trustees hold a different view in this regard.
Subsequent to the migration, the foreign trust should, in principle, be subjected to the information exchange procedures of its adopted jurisdiction.
It is advisable for South African residents with undeclared assets in offshore trusts to have regard to the fact that the relief under the tax and exchange control SVDP will not be available in respect of offshore assets that have been disclosed to SARS under an international exchange of information procedure, such as CRS.
Although offshore trustees may have differing views regarding their obligations in respect of the implementation of CRS in the relevant offshore jurisdictions, CRS will ultimately result in the offshore assets of South African residents being reported to SARS.
This article was first published by ENSafrica on 16 November 2016(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)