International tax transparency: the need for automatic exchange of information

taxation 6In recent years, the international tax environment has seen an increase in the global drive towards greater financial transparency and the automatic exchange of financial information, which replaces the earlier standard of information exchange on request.

The standard of exchanging information automatically calls on jurisdictions to obtain information from financial institutions and to exchange that information automatically with other jurisdictions on an annual basis to detect, deter and discourage offshore tax abuses.

South Africa plays a leading role in the global movement towards transparency and the exchange of information in tax matters to ensure fairness in the international tax system and to prevent the erosion of the international tax base. To this end, on 8 February 2013, the National Treasury and the South African Revenue Service (SARS) announced that negotiations with the United States of America’s (USA) Department of the Treasury had commenced, with the aim of entering into an inter-governmental agreement in respect of the USA’s Foreign Account Tax Compliance Act (FATCA).

By way of background, FATCA is a USA law, enacted in 2010 to combat offshore tax evasion and to recoup much needed revenues. FATCA therefore requires non-USA foreign financial institutions and non-USA non-financial entities to identify and disclose their USA account holders and members or become subject to a new 30% USA withholding tax.

Accordingly, once the inter-governmental agreement is signed into law, the USA Treasury will view South African financial institutions, such as custodial institutions, depository institutions, investment entities and specified insurance companies (unless they present a low risk of being used for evading tax), as being generally compliant with FATCA. Furthermore, once the inter-governmental agreement takes effect, the relevant financial institutions in South Africa will be required to obtain information on USA citizens and to report such information to SARS, which will in turn exchange the information with the USA in accordance with the relevant provisions of the double taxation agreement entered into between South Africa and the USA.

To cater for the automatic exchange of specified information by financial institutions, SARS has proposed a business requirement specification (BRS) which will regulate the systematic and periodic transmission of taxpayer information by the source country to the residence country.

To give effect to the requirement to provide information for purposes of FATCA, SARS has published two draft public notices in terms of s26 and s29 of the Tax Administration Act, No. 28 of 2011 (TAA), which requires a return as specified in the BRS, and s30 of the TAA, which requires the record keeping of this information. The closing date for comments to the draft public notices is 6 June 2014.

Although there is a global drive and indeed a global need for the automatic exchange of information, the onus of implementing such a reporting structure lies not so much with the relevant revenue authority but rather with the selected financial institutions as the financial institutions will have to ensure that the mechanism of the reporting process is fully understood and synchronised with its existing reporting requirements.

It will be interesting to see how financial institutions develop the necessary systems and frameworks to facilitate its reporting obligations to mitigate its reputational risk and risk of financial penalties.

  • DLA Cliffe Dekker Hofmeyr
  • Global, South Africa, USA