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Pandora Papers – Nowhere to hide? Some considerations for SA residents

In the past week, 11.9 million financial records known as the Pandora Papers were leaked, revealing the offshore financial assets of many internationally well-known persons. One of the questions raised pursuant to the leak is whether the investments made by these persons are legal from a tax perspective.

From a South African tax perspective, it provides an opportunity for South African residents who have investments offshore or who intend to invest offshore in future, to ensure that such investments are made in compliance with all relevant South African tax laws. In this article, we discuss some of the considerations and developments that South Africans must bear in mind.

Common Reporting Standard (CRS) and exchange of information

One of the most significant changes that has taken place in international tax law in the last few years, is the introduction of Common Reporting Standard (CRS). In terms of CRS, the tax authorities of countries which have opted into and implement CRS, must exchange certain information held by reporting financial institutions operating in their jurisdiction, with the tax authorities of other countries implementing CRS. Therefore, SARS will first collect information from South African institutions that must report information to it under CRS, and once collected, exchange the information with the relevant foreign tax authorities. As a result, if a South African resident holds an account with a foreign financial institution that is obliged to report information under CRS to its local tax authority, the information pertaining to that account is likely to come to SARS’ attention pursuant to the exchange of information between SARS and the foreign tax authority.

The bottom line is this – South Africans cannot make use of offshore structures to hide the existence of assets. South African residents must also keep in mind that even though South Africa does not have double tax agreements with certain so-called low tax jurisdictions, it still has agreements providing for the exchange of tax information with many of these jurisdictions. This means that SARS can rely on these agreements, if necessary, to obtain information regarding a South African resident from a specific foreign tax authority.

Developments regarding enforcement of tax laws by SARS

In 2021, the following notable developments occurred, amongst others:

  • In the 2021 Budget, the Minister of Finance announced that SARS would receive additional financial resources to increase its capacity to enforce tax laws and investigate the affairs of so-called high net worth individuals (HNWIs);

  • Pursuant to this announcement, SARS’ HNWI unit was created and started sending letters to taxpayers who will be classified as HNWIs;

  • More recently, SARS and the United States’ Internal Revenue Service (IRS) announced that the IRS’ Criminal Investigation Division and SARS’ enforcement division would be joining forces to fight tax and economic crimes affecting both countries; and

In the 2017/2018 period, the Inter-Agency Working Group on Illicit Financial Flows was created, which comprises SARS and the following agencies:

  • South African Reserve Bank (SARB);

  • Financial Intelligence Centre (FIC);

  • Hawks Directorate for Priority Crime Investigation;

  • National Prosecuting Authority;

  • Special Investigating Unit;

  • South African Police Force; and

  • Financial Sector Conduct Authority.

While the Tax Administration Act, 28 of 2011 generally prohibits SARS from disclosing certain confidential information regarding a taxpayer with third parties, it does provide for exceptions and specific instances where information can be shared. On the other hand, SARS would be able to obtain information regarding a specific taxpayer from one of the aforementioned agencies, to the extent that such agency is allowed to share information regarding a specific taxpayer.

What South African residents should therefore bear in mind, is that it might be easier for SARS to obtain information regarding their financial affairs than they might think.

From information sharing to paying additional tax

While it therefore appears that SARS can obtain information regarding a South African taxpayer’s financial affairs or financial status lawfully through different avenues, it is still required to comply with the provisions of the TAA regarding audits, before it can assess that taxpayer for additional tax. In other words, the mere sharing of information does not automatically equate to a taxpayer with foreign assets being liable for more tax. In this regard, one should note especially sections 40 and 42 of the TAA.

In terms of section 40 of the TAA, SARS is entitled to audit a taxpayer. It has also been confirmed in Carte Blanche v Commissioner for the South African Revenue Service and Others, that the decision to audit is not subject to review (see our Tax and Exchange Control Alert of 8 October 2020). In other words, a taxpayer faced with an audit cannot prevent SARS from undertaking that audit. However, if SARS does not conduct the audit in accordance with the section 42 of the TAA, this could constitute an infringement of a taxpayer’s constitutional right to fair administrative action under the Constitution of the Republic of South Africa, 1996. If so, it could result in the additional assessment issued pursued to such a flawed audit process, being set aside (see our Tax and Exchange Control Alert of 4 May 2018).

Conclusion: Principles for prevention of tax pain

The saying goes that “prevention is better than cure