New rules for international cooperation on taxpayerís affairs

oecdAuthor: Ferdie Schneider (BDO).

Greater transparency will expose undeclared offshore accounts

Globalisation has dramatically increased cross-border financial activities.This necessitated enhanced co-operation and understanding between tax authorities to curb tax evasion and to ensure a fair allocation of taxes among the jurisdictions in which the activities take place.

The Organisation for Economic Co-operation and Development (OECD) developed a Common Reporting Standard (CRS) for the automatic exchange of information relevant to tax. Over 50 jurisdictions have agreed to comply with the CSR, including South Africa, committing to exchange data in September 2017. Other jurisdictions will participate from 2018.†

The bottom line of the reporting standard is: “I will show you mine if you will show me yours.Ē The effect is that the UK, for example ,is obliged to report all financial accounts held in the UK by the South Africans residing there.

It forms part of the initiative by the G20 leaders to address base eriosion and profit shifting by multinational companies engaged in cross-border activities. It aims to promote greater fairness and trust in the international tax system.

South African tax residents who have relied on offshore bank-secrecy rules to keep their financial matters beyond SARSí reach are left with a small window of opportunity to regularise their tax position before SARS starts knocking on their doors.

SARS is likely to discover undeclared offshore funds given the greater transparency due to the reporting standard. This may result in criminal prosecution and understatement penalties. However, an application to SARS under the Voluntary Disclosure Program (VDP), prior the undeclared funds being discovered could grant relief from criminal prosecution, depending on the circumstances.

All financial institutions have to provide SARS with the financial data of their clients who are residents of other countries participating in the exchange of information process. This data includes interest in trusts and other entitities. This information can readily be imported into the taxpayer database of each participating country, by using a standard reporting format. It will flash out taxpayers who have evaded or avoided paying tax, as well as those who may have made an error when submitting their tax returns.

This initiative, in conjunction with other legislations such as the US Foreign Account Tax Compliance Act (FACTA) and the EU Savings Tax Directive, aims to build and strengthen tax transparency and reporting globally. FACTA is aimed at forcing non-US financial institutions (including banks, investment managers and even trusts) to report on US citizen account holders.

For a developing country like South Africa the common global reporting standard may be counterproductive as more resources are required to set up the relevant structures. In South Africa we may not have the capacity as yet to take on the extra reporting. Furthermore, the privacy of the collected and submitted information is not clearly stated.

Implementing the CSR will place significant responsibilities on financial institutions. Clear communication with clients is paramount for effective management of these new responsibilities. All customers will have to be informed of the new reporting requirements regarding their documentation.

It is vital that clients and customers are warned of the potential tax consequences of not reporting under the CRS and that the penalties could be high.

This article first appeared on the January/February 2016 edition on Tax Talk.