Globally, governments are under revenue pressure, and SA is no different. In his February 2015 Budget Speech, then Finance Minister Nhlanhla Nene said Treasury was ‘taking further steps to combat financial leakages that deprive our economy of billions of rands through erosion of the tax base, profit shifting and illicit money flows’.

This attention on lost revenue has intensified since the global financial crisis, with the Organisation for Economic Co-operation and Development (OECD) and Group of 20 in 2013 embarking on what the OECD termed the ‘most significant re-write of the international tax rules in a century’.

Given the enormous amounts of tax revenue lost (conservatively estimated at between $100 billion and $240 billion annually), the project’s efforts have been focused primarily on base erosion and profit shifting (BEPS). This, says the OECD, ‘refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low, resulting in little or no overall corporate tax being paid’.

However, BEPS is not confined to companies alone. In a report titled Addressing Base Erosion and Profit Shifting in South Africa, the Davis Tax Committee says: ‘The heightened global trade competition and the mobility of capital in the world have encouraged South African residents, both individuals and corporations, to make considerable investments offshore, and to look for ways of minimising their global tax exposure. It is, however, difficult to reach solid conclusions about how much BEPS actually occurs in South Africa and what exactly the tax gap is.’

According to Bowman Gilfillan Africa Group tax practice partner Betsie Strydom: ‘Recent international developments have made it increasingly difficult for taxpayers to hide their assets or to avoid tax, and South Africa has joined the list of countries that fully comply with international standards on the transparency and exchange of taxpayers’ information.’

One of the main steps being taken is the sharing of information between countries that have multilateral agreements in place. Regarding individuals, of particular interest to most governments around the world are countries that have historically been considered tax havens, such as the Cayman Islands, Gibraltar, Guernsey, Jersey, Lichtenstein and San Marino.

In last October’s medium-term budget policy statement, Nene confirmed that the first exchange of information had taken place in September. ‘Over 90 countries have committed to exchanging information by 2018, including several low-tax jurisdictions.’

The Tax Administration Laws Amendment Bill, passed in October 2015, requires that relevant SA financial institutions collect information required to comply with these international tax standards. It also places an obligation on those institutions to register with SARS and to assist it with the administration and enforcement of those standards.

‘If the resident was liable for taxes offshore, they would be able to claim relief in SA for any “double taxes” paid’

MADELEINE SCHUBERT, STRATEGIC DIRECTOR OF TAX AND FIDUCIARY, CITADEL

Interestingly, in early 2015 Treasury increased the annual offshore investment allowance for South Africans from R4 million to R10 million. Residents, however, are still taxed on their income, regardless of whether or not that income was generated in SA. This includes foreign income, such as interest and dividends. The exemption on tax on foreign interest was removed in 2012.

Following the introduction of dividends withholding tax on local dividends in 2012, most foreign dividends received by an investor are also treated as taxable, at a maximum rate of 15%. Collective investment scheme distributions or proceeds from the redemption of an offshore unit trust are not considered ‘foreign dividends’.

Madeleine Schubert, strategic director of tax and fiduciary at Citadel says that SA tax residents who have ‘offshore investments are liable for income tax on a worldwide basis. This means any income that accrues to them must be included in their gross income, and any capital gains arising from the disposal of assets must also be accounted for in their tax return’.

For long-term investors, capital gains tax (CGT) virtually always comes into play. Income tax would be due on proceeds if an investment was held for speculative purposes. Taxes are only payable on disposal, however. Income tax would be levied at a current maximum marginal rate of 41%.

For CGT, 33% of the gain ‘is included in [the investor’s] taxable income and then taxed at their marginal rate’. With 41% being the ceiling, the maximum CGT rate is 13.65%.

According to Schubert: ‘If the resident was liable for taxes offshore, they would be able to claim relief in SA for any “double taxes paid”, either in terms of a double taxation agreement or in terms of Section 6 of the South African Income Tax Act.’

CGT is also triggered as normal when investors realise any profits (gains) on their offshore investments. Any profits would need to be greater than the annual exemption of R30 000.

Since 2013, SARS has calculated gains for individuals differently to those of companies and other legal entities. Simply, the gain in foreign currency is calculated and then converted to rands in the year that the gain is realised.

The tax treatment of offshore investments and earnings is unlikely to change in any meaningful way in the medium term. With increased information sharing, individuals in particular will find it near impossible to hide assets in more tax-friendly jurisdictions in future.

Most do not expect the Davis Tax Committee to address tax avoidance by individuals, particularly offshore, given its terms of reference. To date, it has made recommendations on tax for SMEs, value-added tax, estate duty, mining taxation and carbon tax. Its BEPS report, which is chiefly focused on six of the OECD’s 13 actions, is comprehensive.

In its macroanalysis, the committee makes the points that ‘given South Africa is a small, open economy, it faces stringent international tax competition and challenges to protect its tax base’.

The committee was not constituted to produce tax legislation. Rather, it will make recommendations to the Minister of Finance and any proposals following from these will fold into the standard budget process. Still, the majority of its recommendations are likely to find their way into budget speeches and frameworks over the coming years, providing useful cover to Treasury, especially in particularly contentious areas.

Many of its recommendations regarding BEPS are expected to be adopted. The Davis Tax Committee report states: ‘Over the years, South Africa has made good progress in devising provisions to deal with BEPS. South Africa’s legislation in this regard is comparable to many developed countries; in fact, in many respects South Africa has done better than many developed economies.’

Crucially, however, it adds that we must consider ‘whether it is necessary to tighten its laws any further or introduce new laws’, especially when ‘considering all the legislation in place’ and the ‘competitive edge’ SA needs to maintain them.

‘Despite all of these provisions, tax planners constantly seek to be one step ahead of tax administrations, coming up with various schemes that take advantage of the loopholes in the law. To curtail these schemes, the legislators often come up with ad hoc amendments, which have complicated the tax legislation and have unsuspectingly opened up further loopholes – and the cycle goes on.’

By Hilton Tarrant
Image: Andreas Eiselen/HSMimages