SA tax payers and the Common Reporting Standard

It began with the Davis Tax Committee

In 2013, during his first stint as South African Minister of Finance, Pravin Gordhan established the Davis Tax Committee (DTC) to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.

The committee was instructed to consider recent domestic and international developments and, particularly, the long-term objectives of the government’s National Development Plan. The DTC was specifically requested by the Minister to inquire as to whether it would be appropriate to introduce additional forms of wealth taxation and the feasibility of doing so.

What taxes are being considered by the DTC ?

The DTC invited submissions by 31 May 2017 on the desirability and feasibility of the following possible forms of wealth tax:

1. A land tax
2. A national tax on the value of property (over and above municipal rates)
3. An annual wealth tax

Presently, it seems the state is broke and is looking to generate revenue in every possible place. We’ve already seen the 2017 budget speech propose the taxation on foreign employment income where the employee is not taxed in such foreign country. Now, whether it would consider the cost of living in most of those countries, and that the majority of people would be forced to leave if they had to give up 45% of their overseas income, remains to be seen. What we can infer from this, however, is that no income is off the tax table.

Changes in the taxation to pensions funded from abroad has already taken effect and those who had funded these for years and hoped to receive the benefits tax-free have been dealt a nasty blow.

Introducing a wealth tax may well be the next step, and, given the fact that South Africans pay tax on our worldwide income, foreign assets may become subject to a general wealth tax.

Beyond all this, however, there is another, more insidious change taking place which should make South Africans with foreign investments very nervous – and it’s all got to do with the Common Reporting Standard (CRS).

What is the CRS?

The CRS is formally known as the Standard for Automatic Exchange of Financial Account Information. It is a legal framework created by the OECD, with the close cooperation of the G20 and the EU. Essentially, it requires financial institutions to report information (to the appropriate tax authorities), about financial assets held on behalf of tax payers, from jurisdictions with which their tax authority exchanges information. This information is shared automatically each year.

Following on from implementation of the Foreign Account Tax Compliance Act (FATCA) in 2010 in the United States, the OECD has, in response to a request from the G20, pushed the CRS since 2014. There are now 101 jurisdictions in agreement to start automatically exchanging information by 2018.

Why CRS matters to South Africans with foreign assets

CRS is a gamechanger and investors must pay attention.

An investor with assets outside the country where he or she is resident, should be aware that the financial institutions will give their personal account information to the local tax authority, which may then be shared automatically on an annual basis with the tax authority where he or she is a tax resident. That tax payer’s individual accounts, as well as dividends, interest and other incomes earned outside their country of tax residence, will thus be under investigation.

Thinking of flying under the radar? CRS is not just about the big fish

With revelations of offshore assets (for whatever reason) the perception is of non-compliance which comes with the potential for reputational damage. People may assume that it is the high profile, large impact clients who are being targeted, but the average person should not assume they will fly under the radar.

CRS will allow SARS to collect taxes more efficiently and we may see significant tax revenues generated once the first reporting period ends. South Africa has a large budget deficit and under CRS, the South African Revenue Services (SARS) will have access to an unprecedented volume of information on South African tax residents’ offshore dealings and their offshore structures.

Expect the taxman to come down hard on foreign assets as he tries to fill the budget deficit gap.

The taxman’s not the only one after your money

In an age where cybercrime is rampant, your information will be held by governments in digital format. This will include your full details, the account details, balances, trades, your tax number and more. A hacker or dodgy government employee’s dream.

I expect to see the number of fraud attempts on these accounts to increase. Especially since these are often very cleverly disguised with financial institutions regularly fooled by such attempts.

What you need to do

It’s time to review your affairs and understand clearly from your adviser what the potential effects on you may be in the event of loss, and what measures are in place to ensure you are protected.

Don’t stick your head in the sand. It’s best to get ahead of potential problems before they cause undue stress. Send an email to wealth@sableinternational.com, or give us a call on +27 (0) 21 657 1578 or +44 (0) 20 7759 7519 and we’ll help you figure out your best course of action.