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Exchange Control
1092. Amnesty and related tax measures
June, 2003
Introduction
The Exchange Control Amnesty and Amendment of Taxation Laws Bill which contains the legislation introducing the Exchange Control amnesty and related tax measures was released by the Commissioner: SARS on 24 April 2003. The latest draft Bill has been approved by the Cabinet and was subject to parliamentary committee hearings during May 2003. The Bill was enacted as an Act on Friday, 30 May 2003.
On 26 May 2003 the Minister of Finance granted an exemption in terms of the Financial Intelligence Centre Act, 2001, in respect of any person who advises a client in connection with an application or prospective application for amnesty in terms of the Exchange Control Amnesty and Amendment of Taxation Laws Act 2003, whether in fact an application is made by or on behalf of the client in respect of every transaction relating to such an application. The exemption appeared in the Government Gazette No. 24906 dated 26 May 2003. The exemption will apply to all professional advisors by operation of law and does not require the advisor to apply therefor. Clients therefore seeking advice and assistance in respect of the amnesty legislation can do so without concern that such request for advice will result in the advisor having to report to the Financial Intelligence Centre. (The notice is available at the Treasury website, namely www.finance.gov.za, in the press releases section of that site).
Amnesty period
The amnesty will commence on 1 June 2003 and terminate on 30 November 2003.
Objectives of Act
T enable violators of Exchange Control Regulations and certain tax Acts to regularise their affairs in respect of foreign assets from those violations.
o ensure maximum disclosure of foreign assets and to facilitate repatriation thereof to South Africa.
To extend the tax base by disclosing previously unreported foreign assets.
This will affect future income tax, estate duty and CGT issues.
Qualifying applicants
The legislation provides that any natural person, close corporation or trust that constitutes a resident as defined under the provisions of the Income Tax Act, Act 58 of 1962 as amended ("the Income Tax Act") which holds any foreign asset on 28 February 2003, the value of which has been wholly or partly derived from the remittance of funds from South Africa, in violation of the Exchange Control Regulations, will be entitled to apply for the exchange control amnesty and related tax relief. It must be noted that companies are specifically excluded from applying for amnesty relief and thus any company that has remitted funds abroad in violation of the Exchange Control Regulations will not be able to apply for amnesty relief under the legislation.
The legislation introduces the concept of "foreign bearer instrument". This means a financial instrument issued by a non-resident where the identity of the beneficial owner thereof cannot be established by having regard either to the instrument itself or to the issuer thereof. However, the definition specifically excludes an instrument where the beneficial owner can prove that the financial instrument was derived from such person’s own funds which had been held for a period of at least 18 months before the acquisition of that financial instrument. In the event that the applicant’s assets located abroad fall into the definition of "foreign bearer instruments" they will be unable to qualify for amnesty relief in respect of those assets.
A natural person, close corporation or trust that is a resident of the country and which holds any foreign asset, the value of which was derived wholly or partly from amounts of income not declared to the Commissioner: SARS as required under the Income Tax Act or the Estate Duty Act, will be entitled to apply for the exchange control amnesty and related tax relief.
However, the amnesty will not apply in respect of any amount of remuneration from which a natural person, close corporation, trust or facilitator should have deducted PAYE. It will also not apply to any amount that relates to an amount of withholding tax on royalties which was due to the Commissioner: SARS in terms of section 35 of the Income Tax Act.
The legislation introduces the concept of what is referred to as a "related party facilitator". Such facilitators who assisted the applicant by accumulating foreign assets or transferring funds or assets from the country for the benefit of the applicant in such a manner that the Exchange Control Regulations were breached and those foreign assets are no longer beneficially owned by the related party facilitator will be entitled to apply for amnesty also. A related party facilitator is defined in relation to an applicant as constituting a person that is a natural person, a company all of the shares of which are owned either by the applicant, or in the event that the applicant is a natural person, owned by the applicant or relatives of that applicant. The term also includes a trust or deceased estate of which the applicant is a beneficiary.
It would appear that funds were removed illicitly from the country by companies as a result of over and/or under invoicing in violation of the Exchange Control Regulations and such companies may qualify for amnesty relief if they fall into the definition of "related party facilitator". It is intended that where a natural person or relative owns all of the shares in a private company, and the foreign assets are owned by a natural person either personally or by a discretionary trust, such company will be regarded as a related party facilitator and such facilitator will be entitled to apply for amnesty relief. It is unfortunate that the legislation does not include a reference to connected persons. If for example, three unrelated shareholders own the company that was involved in over or under invoicing, such company will not qualify for amnesty relief although the shareholders may apply in their individual capacities. The legislation contains no provisions enabling advisors to supply information to the authorities regarding the removal of funds illicitly from the country and obtain amnesty relief nor is there an obligation on applicants to disclose such information to the authorities.
Foreign assets owned by non-resident trusts
Special rules have been introduced to deal with the situation where a South African resident has removed funds from South Africa in violation of the Exchange Control Regulations and created a discretionary trust in an overseas country. The rules provide that the donation made by the South African resident to the discretionary trust located abroad will in effect be disregarded such that the assets owned by the trust will be deemed for fiscal purposes to be owned by the donor resident in South Africa. It is specifically required that the foreign assets were acquired by the discretionary trust as a result of a donation or similar disposition made by the donor in South Africa as a result of the illicit remittance of funds from South Africa and none of the assets have vested in any beneficiary of the discretionary trust in question. It is specifically provided that the donor who makes the election contained in the rules will be deemed to have held the assets located abroad, but owned by the trust, for the purposes of the amnesty legislation from the date upon which the trust acquired the foreign asset and for the purposes of the Income Tax Act until the foreign assets in question are sold or donated by the discretionary trust to any other person. In the event that the foreign assets are disposed of by the trust such disposal will be deemed to be a disposal by the donor personally in South Africa. The effect of this provision is that the assets that were transferred to the non-resident trust will be deemed to be owned by the South African resident for income tax purposes. In addition any gains realised upon the disposal of the assets technically owned by the trust will be liable to South African capital gains tax in the hands of the donor as and when such assets are disposed of. The legislation provides that the deeming rules contained in the anti-avoidance provisions of the Income Tax Act insofar as income tax and CGT are concerned in relation to the non-resident trust, will not apply in respect of any income, deductions or capital gains relating to the foreign assets that are technically owned by the trust. The effect of the provision is that the donation of the funds by the South African resident to the non-resident trust is to be disregarded for South African fiscal purposes. In order to make the election contained in the rules relating to a discretionary trust, the applicant is required to submit to the tax amnesty unit the founding document of the discretionary trust as at 28 February 2003 together with the application for amnesty relief.
Information to be submitted by an applicant
Those natural persons, close corporations or trusts that hold foreign assets at 28 February 2003 in contravention of the Exchange Control Regulations are required to supply the following information in their application for exchange control relief:
· the market value of the foreign assets in foreign currency of the country in which the foreign asset is located on 28 February 2003.
· include a description of the underlying characteristics and location of the foreign asset;
· in respect of the market value in foreign currency, of the foreign asset, the following:
o a valuation certificate by a valuator of the country in which the foreign asset is located;
o a valuation by a sphere of government of the country where the foreign asset is situated;
o an original certified copy of statement of account indicating the balance or market value as at 28 February 2003 in respect of the foreign asset that constitutes a financial instrument; or
o any other form of proof of the value of the foreign asset that will be acceptable to the amnesty unit.
In the event that a natural person, close corporation or trust that is a resident of the country owns foreign assets, which assets were derived from amounts not previously declared to SARS as required, the following information must be supplied in the application for foreign tax relief:
· details of the receipts and accruals for the last tax year of the applicant concerned earned on or before 28 February 2003 relating to any foreign asset held by the applicant on that date, the value of which was wholly or partly derived from receipts from a source outside the country that were not previously declared to SARS in any previous tax year as required by the Income Tax Act;
· a description of the identifying characteristics and the location of the foreign asset.
An applicant applying for domestic tax relief must disclose the amounts that were not declared to the Commissioner: SARS as required by the Income Tax Act or Estate Duty Act to the extent that those amounts were invested in foreign assets. The applicant must also supply the date on which the amounts in question were invested in foreign assets. In addition, the applicant must submit documentary proof of the dates in question as well as the amounts which were accumulated as or converted to foreign assets after 28 February 1998.
All applicants are required to confirm in their application that no foreign assets owned by them were derived wholly or partly from the proceeds of any unlawful activities. It must be noted that the legislation now defines what is envisaged by "unlawful activities". It is specifically provided that "unlawful activities" means unlawful activities as envisaged in the Prevention of Organised Crime Act, other than any exchange control contravention or failure to comply with the Income Tax Act or the Estate Duty Act or any activity constituting fraud as a result of the misrepresentation or non-disclosure that gave rise to the exchange control violations or failure to comply with the fiscal statutes.
Statement of foreign assets and liabilities
Together with the information required in order to apply for exchange control amnesty and tax relief, the applicant is obliged to submit a statement of assets and liabilities on the last day of their 2002 tax year, in the case of natural persons that will be as at 28 February 2002, in respect of all foreign assets and liabilities owned by that applicant outside the country. It is necessary to reflect the historical cost of the foreign assets as well as the market value thereof. In the event that the applicant fails to supply the information required under the legislation the Commissioner is empowered to estimate the market value of all foreign assets and liabilities held by the applicant outside the country as at the last day of the tax year.
Applications by related party facilitators
In the event that a related party facilitator applies for amnesty they are required to apply jointly with an applicant on the prescribed form submitted by the applicant in question. The related party facilitator is required to confirm that they had no reason to believe that the funds remitted abroad illegally were derived from unlawful activities. If the facilitator seeks domestic tax relief as envisaged in the legislation it is necessary to disclose the amounts of income that were not disclosed to the Commissioner or the relevant amounts not disclosed under the Estate Duty Act to the extent that those amounts were accumulated as foreign assets as well as the dates upon which the amounts were accumulated as such. In addition, documentary proof of the said dates and amounts which were accumulated as or converted to foreign assets after 28 February 1998 must be submitted.
Processing of applications
The legislation creates a separate body to be known as the amnesty unit. That unit will act as an independent body and will evaluate all applications received for amnesty and will decide upon the success or otherwise of the applications received. It is provided that the amnesty unit shall comprise a chairperson appointed by the Minister of the National Treasury and at least four persons from the South African Reserve Bank and at least four persons from SARS. All persons are required to be appointed by the Minister in consultation with the Governor of the Reserve Bank and the Commissioner: SARS. When an applicant complies with the requirements of the legislation and has submitted all necessary information, the amnesty unit is required to grant approval such that the applicant will be granted the exchange control amnesty relief and to the extent that is appropriate, the tax relief also. The amnesty unit is compelled to supply the applicant or related party facilitator, as the case may be, with a proper notice of its decision to approve the application made. The amnesty unit is specifically prohibited from granting approval in those cases where the applicant fails to submit their application within the period allowed, that is from 1 June 2003 until 30 November 2003. Where the applicant or related party facilitator is subject to audit or investigation or other enforcement action relating to the contravention of the Exchange Control Regulations or the Income Tax Act relating to their foreign assets or foreign bearer instruments, such applicant or related party facilitator will not qualify for approval unless the Commissioner or the General Manager of the South African Reserve Bank withdraws a notice advising the applicant of the audit in question. In the event that the applicant or related party facilitator fails to confirm that no foreign assets were derived from the proceeds of any unlawful activities the application for amnesty relief will fail. It is important that the applicant seeking tax relief as envisaged in the legislation has either submitted a tax return for the 2003 tax year or alternatively has received an extension for the submission of that return. Failure to comply with this requirement will result in the application for relief being denied.
It is a specific requirement that related party facilitators submit their applications for amnesty relief together with the applicant as envisaged in the legislation. Failure to apply jointly or in the event that the applicant’s application is denied will result in the related party facilitator’s application being denied also. Once again the amnesty unit is obliged to advise the applicant or related party facilitator of its decision to deny the application made and is obliged to set out its reasons therefor.
It must be noted that the amnesty relief once granted may be withdrawn in the event that the exchange control levy on foreign assets is not paid within the required period or in the event that the domestic tax amnesty levy, due on undeclared South African income invested in foreign assets, is not paid by the applicant within the required period or in the event that the applicant fails to submit their 2003 tax return by 29 February 2004. The amnesty unit is obliged to inform the applicant of the withdrawal of the amnesty relief and to advise their reasons therefor. Furthermore, in the event that it is discovered that any foreign assets or foreign bearer instrument held by the applicant were derived from the proceeds of unlawful activities the relief granted will be withdrawn.
In the event that an applicant or related party facilitator is aggrieved by a decision made by the amnesty unit such person is entitled to lodge an objection to the chairperson of the amnesty unit. That objection is then required to be submitted by the chairperson of the amnesty unit to a panel consisting of one senior person respectively from SARS and the Exchange Control Department of the South African Reserve Bank, co-opted by the amnesty unit for the purposes of reconsidering the application. In the event that the applicant’s objection is dismissed that applicant, in the event that they remain dissatisfied with the decision made by the panel, may appeal to the Tax Court as envisaged in the Income Tax Act and the rules relating thereto shall apply to the hearing of the appeal against the amnesty unit’s decision.
Payment of exchange control amnesty levy
A person qualifying for the exchange control amnesty is required to pay the levy prescribed in the legislation. The levy is based upon the total market value of all foreign assets disclosed by the applicant reduced by the market value of those foreign assets as is proved by the applicant not to have been held by them in contravention of the Exchange Control Regulations and in the case of a natural person the permissible foreign investment allowance, currently R750 000 in accordance with the Exchange Control Regulations translated to the relevant foreign currency at the applicable closing spot exchange rate on 28 February 2003, to the extent that such allowance has not previously been used by the applicant.
In the event that the foreign assets are repatriated to South Africa by an authorised dealer within three months after the date of approval the applicant is required to pay 5% of the leviable amount determined in the manner set out above. In the event that the applicant chooses to retain the foreign assets abroad, the levy will amount to 10% of the leviable amount in foreign currency remaining after deducting the amount repatriated on which the applicant chooses to pay the 5% levy. The applicant can choose to retain all their assets located abroad if they pay the 10% levy.
In the event that the applicant only holds immovable property abroad it will be necessary to obtain the consent of Exchange Control Authorities to raise a bond in order to pay the exchange control levy.
The amnesty unit is entitled to extend the period of payment of the exchange control amnesty levy by a further period of no more than three months in the event that the applicant can satisfy the amnesty unit that an amount which the applicant wishes to repatriate cannot reasonably be converted into Rand within the prescribed period. It must be noted that the leviable amount upon which the levy is to be paid is to be calculated before taking into account any fees or commissions payable by the applicant.
The applicant is required to pay the exchange control amnesty levy to an authorised dealer, in the case of the 5% levy no later than the date of repatriation of the foreign assets to South Africa and must be converted into Rand using the ruling spot exchange rate on the date of repatriation of the assets concerned. In the case of the 10% levy it is required that the levy be paid three months after date of approval of the application and converted into Rand using the ruling spot exchange rate on the date of payment. It is specifically provided that the 5% levy must be paid from the foreign funds repatriated to South Africa and in the case of the 10% levy it is required that the levy be paid from foreign assets which are not repatriated. In the event that the authorised dealer does not accept the foreign currency offered for sale by the applicant the method of payment is required to be determined by the amnesty unit. The amnesty unit is entitled to extend the period of payment in respect of the 10% levy by no more than three months in the event that an applicant is unable to repatriate the funds required within the prescribed period.
The successful applicant will be deemed not to have contravened the Exchange Control Regulations in respect of the foreign assets disclosed by them under the legislation. In addition, a related party facilitator who has been granted approval will also be deemed not to have contravened the regulations in respect of any foreign asset dealt with in the legislation. This means that the applicant is relieved from all criminal liability in respect of the violation of the Exchange Control Regulations.
Tax relief on undeclared foreign and domestic income
An applicant that is granted the exchange control amnesty will be deemed not to have violated the Income Tax Act in respect of the income derived from a source outside of the country in respect of the foreign assets owned by them in respect of years of assessment ending on or before 28 February 2002. This means therefore that those persons who received interest, rentals and other amounts on foreign assets not previously disclosed to the Commissioner will be relieved from any income tax, interest and penalties on the income that was in fact liable to tax in South Africa. In the event that the applicant removed funds from South Africa before paying income tax thereon they will be required to pay the domestic tax amnesty levy thereon. This amounts to 2% of the amount removed from South Africa and not previously taxed in the country. The levy will be payable either by the applicant or the related party facilitator. In the event that the applicant controlled a company which was utilised for under or over invoicing in order to remove funds illicitly from South Africa and to invest same abroad, the levy will be required to be paid by that company which is the related party facilitator.
In the event that amnesty relief is granted to an applicant in respect of amounts not previously declared for income tax or under the provisions of the Estate Duty Act no further amounts of interest, tax, estate duty or penalties will be payable. The applicant or related party facilitator will only be required to pay the domestic tax amnesty levy of 2% in respect of those domestic amounts that should have been disclosed to the Commissioner.
It must be noted that the tax relief available will not apply in respect of any amount which has been paid by the applicant at the date of application nor will the relief be available in the event that the tax is payable or becomes payable by an applicant as a result of any return or information furnished by such applicant to the Commissioner or by any representative of the applicant. In the event therefore that the applicant has approached the Commissioner: SARS with information pertaining to the amounts of income not previously subjected to tax the tax amnesty relief will not be available. It is unclear exactly what information must have been furnished to the Commissioner in order that the amnesty will not be available. Where the taxpayer has supplied sufficient information to the Commissioner in order to issue an assessment it would appear that the tax amnesty relief on domestic and foreign income will not be available. If, however, the taxpayer has merely indicated that amounts of income have not been previously disclosed it is questionable whether or not such information will result in the tax amnesty relief not being available. It must be noted that no assessed loss or assessed capital loss or rebates in respect of any foreign taxes payable which relates to the amounts subject to tax amnesty relief will be deductible or recoverable by the applicant in South Africa.
Use of information received by the amnesty unit
Where the applicant’s application is successful the legislation specifically provides that a copy of the approved application together with all information submitted therewith, but without reflecting any names of persons who have not jointly applied with the applicant for amnesty is required to be submitted to the General Manager: South African Reserve Bank to be used in order to amend their records. Furthermore, a copy of the said information is required to be submitted to the Commissioner: SARS to update the information retained by SARS on the applicant. The legislation specifically provides that notwithstanding any provision contained in any other fiscal statute neither SARS nor the Exchange Control Department may request details from the applicant with regard to any person who advised an applicant in respect of whom approval has been granted on the method of transferring funds or assets from South Africa abroad or who assisted the applicant by accumulating foreign assets overseas. It must be noted that any information submitted by an applicant or related party facilitator may not be disclosed to any person where approval in respect of that applicant was denied. It is required that in such a case, the information be submitted to National Treasury on the date of termination of the existence of the amnesty unit and must be retained by National Treasury for a period of at least five years. The transfer of information to National Treasury will only apply in those cases where the amnesty application has been denied and not in those cases where the approval for amnesty was withdrawn by the Amnesty Unit for the reasons specified above. The secrecy provisions applicable to the amnesty unit will apply equally to National Treasury in respect of the information pertaining to applications that have been denied.
Publication of details pertaining to amnesty
The chairperson of the amnesty unit is required to supply the Minister with a list of all applications for exchange control relief in terms of the amnesty giving an indication in respect of each application whether or not it was approved setting out details of the amount of relief granted and details of the amount of levies payable by the applicants. In addition, information is to be supplied to the Minister and the Auditor General listing all applications for tax relief in terms of the amnesty, indicating in respect of each application, whether or not it was approved setting out details of amounts of income from foreign sources which have been declared in respect of the tax year ending 28 February 2003 relating to foreign assets in respect of which exchange control amnesty has been granted. It is specifically provided that the information must be supplied such that it does not disclose the identity of any applicant and it is to be submitted at such times as may be agreed between the chairperson of the amnesty unit and the Minister or the Auditor General as the case may be. Parliament is required to be advised by the Minister as to the number of applicants and facilitators who have applied for amnesty, the total market value of foreign assets which have been disclosed in terms of the amnesty as well as the total amount of all levies payable by applicants. The total amount of receipts and accruals from foreign sources on foreign assets disclosed under the amnesty provisions are required to be disclosed to Parliament also.
Capital gains tax
The CGT rules have been amended to deal with the determination of the base cost of foreign assets subject to the exchange control amnesty levy. It is required that the applicant determines the base cost of the assets held abroad as if that person became a resident on 1 March 2003. This means that the successful applicant will be required to determine the market value of the foreign assets as at 1 March 2003 and will be regarded as having acquired the assets on that date. This means that in the event that the foreign assets are ever disposed of the applicant will be liable to capital gains tax on the difference between the proceeds received and the market value of the foreign assets as at 1 March 2003.
Conclusion
The decision to introduce an amnesty on exchange control and tax for those persons who have removed funds illegally from South Africa must be welcomed and supported. It is hoped that those persons who qualify for relief will apply and take advantage of the opportunity to regularise their affairs with the South African Reserve Bank and the Commissioner: SARS. Applicants will end up paying a levy of either 5% or 10% in respect of the exchange control relief depending on whether or not they return the assets to South Africa. Where domestic income was not previously declared to SARS the 2% domestic tax amnesty levy will become payable and in the case of foreign income no tax levy is payable in respect of income received or accrued up to 28 February 2002. It is submitted that the levies have been set at a reasonable level and are not excessive relative to the amounts of interest, tax and penalties which would otherwise have become payable. Furthermore, the successful applicant is relieved of all possible criminal sanctions that could arise in the event that the South African Reserve Bank or SARS identified the person as having removed funds illegally from South Africa and failed to disclose the income in question for income tax purposes to SARS.
Exchange Control Amnesty and Amendment of Taxation Laws Act, 2003
Editorial comment: The Minister of Finance announced the members of the Amnesty Unit on Thursday, 30 May 2003 and full details thereof are available from the press releases section of the Treasury website, namely www.finance.gov.za. Furthermore, the Treasury released a comprehensive explanatory memorandum on the amnesty legislation which contains examples which is available from the Treasury website at the legislation section at the website www.finance.gov.za. On Saturday, 31 May 2003, the application form required to be used by applicants seeking amnesty was released and is available from the dedicated Amnesty Unit’s website, namely www.amnestyunit.gov.za.
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