Budget 2003 – Exchange Control Amnesty & Amendment of Taxation Laws Bill

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• Indemnity from criminal prosecution • Withdrawal of approval & review of decision • Cases when approval will be withdrawn • Review of amnesty unit’s decision • Establishment of short-term Amnesty Unit • Establishment and constitution of unit • Powers, functions and duties •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

5. 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.

6. 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.

7. 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

8. 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.

9. 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.

10. 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

11. 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 instrument’s beneficial owner cannot be determined by reference to instrument itself or person issuing instrument. • Indirect interests in foreign co’s 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).

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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).

21. 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. • Government’s 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.

23. 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 > (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)

24. Contents of Exchange Control Amnesty & Amendment of Taxation Laws Bill • Exchange of information rules for SARS and SARB: • Clauses 31, 38, 47, 49 (VAT)

25. 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)