Budget 2003 Exchange Control Amnesty

1
Budget 2003 Exchange Control Amnesty
Amendment of Taxation Laws Bill

• Presentation to the Portfolio and Select
  Committees on Finance
• by the National Treasury
• 3 April 2003

2
Consultation process

• This is the product of many rounds of discussions
  between National Treasury, SARS, SA Reserve Bank,
  National Prosecution Authority and the Financial
  Intelligence Centre.
• Some practitioners and financial advisers were
  drawn into the process.
• This Bill encapsulates fully Ministerial intent
  as pronounced in the 2003 Budget.

3
Contents of Exchange Control Amnesty Amendment
of Taxation Laws Bill

• Chapter 1 Exchange Control Amnesty and
  Accompanying Tax Measures
• Definitions, administration eligibility
  requirements
• Period for amnesty application, required
  information for application
• Statement of foreign assets and liability for tax
  relief
• Information requirements for application by
  advisors physical facilitator
• Evaluation and approval process
• Circumstances which disallow granting of amnesty
• Exchange Control Amnesty 5 10 amnesty levy
• Payment of amnesty levy
• Exchange control relief

4
Contents of Exchange Control Amnesty Amendment
of Taxation Laws Bill

• Tax relief in support of Exchange Control Amnesty
• Exemption from payment of tax and duty
• Exemption from additional tax and penalties
• Indemnity from criminal prosecution
• Withdrawal of approval review of decision
• Cases when approval will be withdrawn
• Review of amnesty units decision
• Establishment of short-term Amnesty Unit
• Establishment and constitution of unit
• Powers, functions and duties
• Disclosure of interest
• Reporting, use of information in cases where
  approval is not granted
• Offences and Regulations

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Rationale of Exchange Control Amnesty

• South African individuals have long history of
  shifting assets offshore in contravention of
  Excon Regulations.
• Revenue streams from illegally held foreign
  assets are typically unreported for income tax
  purposes since 1997 a violation of Income Tax
  Act provisions dealing with portfolio
  investments.
• Government takes position that Excon related
  Income Tax violations should not be tolerated,
  which must be contrasted with many individuals
  wish to regularise their tax affairs repatriate
  some or all of their foreign assets.
• Desire to repatriate/regularise is triggered by
  economic legislative factors such as regulatory
  reforms / enhanced law enforcement /
  international exchange of information overriding
  bank secrecy rules and frontal attack on tax
  haven countries.

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Objectives of exchange control amnesty
accompanying tax measures

• To enable applicants who have contravened Excon
  Regulations or failed to comply with Income Tax
  provisions relating only to foreign assets to
  regularise their affairs.
• To ensure maximum disclosure of foreign assets
  to facilitate repatriation thereof to RSA.
• To extend tax base over long-run by disclosing
  previously unreported foreign assets for purposes
  of taxing revenue flows capital gains.
• Disclosure will allow these residents to
  exonerate themselves at minimal cost of a
  one-time levy income tax payments on previously
  unreported revenue from foreign assets since 28
  February 2002.

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Joint Amnesty Unit Part F sections 2, 19 to 23

• Amnesty will apply to both excon income tax
  contraventions.
• Independent body will be established that
  evaluates all applications for amnesty
  grants/denies approval of applications.
• Minister determines by regulations functioning of
  unit.
• Independent chairperson appointed by Minister.
• Appointees appointed by Minister and drawn from
  SARB/SARS (s20) officials involved in Excon
  portion of amnesty will be sourced from SARB
  (s20) officials dealing with accompanying tax
  measures will be drawn from SARS

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Joint Amnesty Unit Part F sections 2, 19 to 23

• Amnesty applicant will file joint application
  accompanied by affidavit that transgression only
  relates to excon income tax/estate
  duty/donations tax violations.
• SARB will process excon portion of amnesty.
• SARS will process tax portion of amnesty.
• Separate track processing will be more
  efficacious.
• Chairperson of amnesty unit will fully report to
  Minister on successful/unsuccessful applications,
  amounts of relief granted, amounts
  repatriated/retained offshore, total amount of
  all levies paid tax relief in terms of amnesty
  will be reported to Minister Auditor-General.
• Minister will report to Parliament on progress
  with amnesty.
• Information will be in aggregate format with a
  view of not disclosing identity of applicant or
  physical facilitator.

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Exchange of information between SARB SARS
(clauses 31 47 of Bill)

• Amnesty applications will be streamlined by
  exchange of tax excon information about SA
  persons.
• Interdepartmental information sharing between
  SARS SARB is vital for administering amnesty
  process.
• To protect SA persons, SARB SARS employees must
  sign secrecy waiver that if breached exposes them
  to criminal civil liability.

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Eligible persons - (section 3)

• Two types of applicants individuals/natural
  persons physical facilitator who transferred
  through his actions funds from SA to foreign
  jurisdiction.
• Individual must be SA resident as defined in ITA
  Excon Regulations, who is direct beneficial
  owner of foreign assets as held on 28 February
  2003 (either through foreign co or trust) if
• Value of foreign asset is derived in whole or
  part from contravention of exchange control
• Value of that foreign asset is derived in whole
  or part from receipts accruals that were not
  declared as required by ITA

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Eligible persons - (section 3)

• Foreign asset is defined as funds held in
  foreign currency as well as any assets
  transferred from or accumulated outside SA.
• Does not include financial instrument if identity
  of that instruments beneficial owner cannot be
  determined by reference to instrument itself or
  person issuing instrument.
• Indirect interests in foreign cos holding
  illegal funds qualify for amnesty as well, if
  individual unwinds co structure or distributes
  back to him/herself illegal funds of that foreign
  co (by way of a dividend).

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Eligible persons - (section 3), trusts

• Special rules apply to individual holding
  discretionary interest in foreign trust with
  assets held on 28 Feb 03.
• Individual with discretionary trust interest can
  elect to treat that asset as held/beneficial
  ownership on 28 Feb 03.
• This election allows individual to participate in
  amnesty with respect to foreign trust assets that
  are not legally held on 28 Feb 03 - but which
  may be under economic control of that individual.
• Individual electing to be treated as holders of
  foreign trust assets are deemed to be direct
  owners of these trust assets.
• Hence, sale of elected foreign trust assets could
  trigger capital gains/losses.

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Eligible persons advisors assisting to come
clean

• Any possible exemption from provisions of
  Financial Intelligence Centre Act, 2001 (FICA),
  is a separate issue from amnesty provisions for
  applicants advisors in terms of the Amnesty
  Bill.
• It is therefore not covered in Amnesty Bill.
• Reporting obligation under section 29 of FICA
  requires persons in business to report on
  suspicious unusual transactions in which they
  are involved.
• FICA provision would apply to advisors not
  applicants.
• Treasury is giving consideration to desirability
  of Minister of Finance granting a FICA reporting
  exemption for advisors as defined in the Amnesty
  Bill.

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Eligible persons other advisors physical
facilitators

• Advisors physical facilitators who assisted
  clients in accumulating foreign assets or
  transferring funds or assets from the Republic
  will NOT qualify for the amnesty for the
  following reasons
• They are not beneficial owners of assets on which
  amnesty levy is charged
• FIC concerns are effectively addressed by their
  exclusion
• Pursuit of higher standards of professionalism in
  these financial advisory services is maintained
• As Amnesty Bill minimises on disclosure
  requirements, the perceived danger of them
  discouraging individuals to come forward with a
  view of coming clean falls away.

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Minimum entry requirements

• Failure to satisfy following minimum requirements
  will prevent amnesty unit from granting approval
• Amnesty applicants must submit application by way
  of sworn affidavit / solemn declaration.
• Amnesty applications must be submitted to amnesty
  unit from 1 May 2003 to 31 October 2003.
• Individual will not receive any form of amnesty
  (excon or tax) if SARB or SARS delivered a notice
  to applicant or his/her representative of an
  audit, investigation or other enforcement action
  (blocking of acct) against that applicant for
  contravening excon regulations or income tax
  provisions with respect to foreign assets
  notice must be delivered before application is
  submitted.
• Statement by applicant that NONE of foreign
  assets disclosed are wholly or partly derived
  from unlawful activities as defined.

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Exchange Control Amnesty for Individuals with
foreign assets

• Basic principle
• Excon aspect of amnesty will apply TO THE EXTENT
  foreign assets are disclosed on an asset-by-asset
  basis
• Thus, amnesty applies only to disclosed foreign
  assets while non-disclosed assets remain subject
  to full civil criminal excon prosecutions (post
  28 Feb 03 violations do not cause withdrawal of
  amnesty for disclosed amounts but no amnesty for
  new violations)
• To the extent principle creates amnesty
  certainty for applicants disclosed assets even
  if later further undisclosed assets are
  uncovered.
• This certainty maximises number of applicants.
• Reduces administrative complexity of verification
  process.

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Exchange Control Amnesty for Individuals with
foreign assets

• Information required (s5)
• Disclosure of foreign assets must be accompanied
  by statement of these assets market value as well
  as description of these assets identifying
  characteristics location.
• Supported by valuation certificate by a valuator
  of country where asset is located
• Supported by valuation by sphere of government of
  country where foreign asset is located
• Supported by any other form of proof of value of
  that foreign asset
• If foreign asset stems partly in contravention of
  excon and partly not applicant must treat
  foreign asset as in contravention of excon except
  if applicant can prove otherwise.

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Amnesty levy for excon violation s11

• Disclosure of foreign assets attracts excon
  relief at price of amnesty levy
• 5 levy on amounts repatriated to SA
• 10 levy for amounts held offshore.
• The leviable amount or base of amnesty levy is
  the same regardless whether levy is 5 or 10.
• Base starts with total market value of foreign
  asset less legal limit under excon (ie R750 000
  for individual or R1,5 million per married
  couple).
• 28 Feb 03 fixed date simplifies admin
  compliance.
• Individual must convert amnesty levy into Rand
  with authorised dealer payment of levy must
  come from foreign assets.
• Repatriation payment of 5 levy must occur
  within 3 months after amnesty unit grants
  approval.
• Extension can be granted by another 3 months.

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Tax relief excon relief

• Please note as minimum disclosure needed, no
  amnesty will be granted for domestic tax
  violations for any revenue acts that may have
  provided funds for illegal transfer of funds
  offshore.
• Tax relief follows same basic principles of excon
  amnesty.
• Tax Amnesty applies to the extent foreign
  assets respective income streams are disclosed
  on asset-by-asset basis.
• In order to qualify, applicant must report
  earnings (gross receipts accruals) of foreign
  assets for 2002/03 tax year, description of
  identifying characteristics location of assets.
• Failure to report gross receipts accruals means
  that applicant remains exposed to full tax
  prosecution.

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Tax relief excon relief

• Applicants applying for tax relief portion of
  amnesty must copy of 2002/03 tax return failure
  to comply will prevent applicant from receiving
  tax amnesty with respect to foreign held assets.
• Successful applicants are deemed not to have
  violated Income Tax Act to extent they satisfy
  above requirements.
• Full amnesty protection also automatically
  applies to extinguished illegal offshore funds
  (closed foreign banks accounts) WITHOUT FURTHER
  BURDEN OF REPORTING.
• This latter aspects prevents SARS from re-opening
  applicants tax affairs that are no longer
  relevant after 28 Feb 2003 (section 25).

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Withdrawal and forfeiture

• Amnesty relief cannot be withdrawn or forfeited
  except in extreme circumstances this enhances
  certainty, and minimises risk for applicants.
• It should maximises number of applicants.
• Governments interests protected through to the
  extent system of disclosure, as applicants are
  only covered for disclosed amounts/values.
• Amnesty unit withdraws amnesty in its entirety if
  applicant fails to pay 5 or 10 amnesty levy in
  full within 3 or 6 months.
• Amnesty unit withdraws tax portion of amnesty
  approval if applicant fails to file 2002/03 tax
  return on or before 28 Feb 2004.

22
Withdrawal and forfeiture

• In order to ensure that amnesty is not used as
  method of money laundering or other comparable
  criminal activity, amnesty approval becomes
  immediately void if it can be determined that
  foreign assets represent proceeds from criminal
  activity such as
• Drug smuggling
• Money laundering
• Racketeering
• Terrorism
• The withdrawal of amnesty in those case will also
  lead to forfeiture of levies paid.

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Contents of Exchange Control Amnesty Amendment
of Taxation Laws Bill

• Chapter 2 General amendments giving effect to
  taxpayer-favourable adjustments of personal
  income tax rates
• Direct tax
• Personal income tax rate bracket adjustments
  (c29)
• Income tax payable by individuals below age 65
  (c32)
• Income tax payable by individuals age 65 gt (c32)
• Interest dividend exemption (c33)
• Transfer duty relief (clause 28)
• Tax on Retirement Funds (c50)
• Small business tax stimulus measures
• Enlargement of small business corporation
  category (c 34)

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Contents of Exchange Control Amnesty Amendment
of Taxation Laws Bill

• Exchange of information rules for SARS and SARB
• Clauses 31, 38, 47, 49 (VAT)

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Contents of Exchange Control Amnesty Amendment
of Taxation Laws Bill

• Indirect tax (Schedule 2)
• Excise duties on alcoholic beverages with new
  definition of clear sorghum beer
• Excise duties on tobacco products
• Fuel taxes
• Reducing ad valorem excise duties on new cars
• Repealing ad valorem excises on IT equipment
• Fiscal measures in support of environment
• Increases in Air Passenger Departure Tax (c39)
• Increased VAT threshold for commercial
  accommodation (c48)