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Have you declared your offshore interests?

Summary: South Africa is increasingly linking up with foreign governments on tax reporting, making it increasingly important to stay compliant, says Tony Barrett, FNB Financial Advisory Wealth Manager

For most investors, an offshore component to their financial portfolio is an integral part of the wealth management process and an essential diversification tool in an interlinked global marketplace.

There is nothing untoward about having an offshore portfolio, provided your financial advisor has ensured you are fully tax compliant and your accounts have been disclosed to the relevant authorities. South Africans are allowed by law to invest up to ZAR 10 million outside South Africa on an annual basis, on the proviso that tax clearance has been given by the South African Revenue Service.

Until now, a lack of co-operation between different countries has created some grey areas, but increased global vigilance and the launch of the Organisation for Economic Cooperation and Development's (OECD) new Automatic Exchange of Information portal will increase the necessity for compliance, said Tony Barrett, FNB Financial Advisory Wealth Manager.

While South Africa has joined a raft of developed world economies in signing up for the portal, it is important to note that the declaration of offshore interests has long been on the country's radar. "The first offshore exchange control and income tax amnesty appeared in 2003 and a second similar amnesty followed in 2010," Barrett said.

In his 2016 Budget Speech, Minister of Finance Pravin Gordhan announced another exchange control and tax amnesty for errant South African taxpayers. Under the OECD programme, data will be collected in 2016 and the first exchange of information between co-operating countries will take place in 2017. Therefore, with this automatic exchange of information on the horizon, the current amnesty is likely to be the last one offered, Barrett said.

"There will be no place to hide for offenders," he said. "So there will be no need to offer further amnesties as the information will be readily available. Version three of the South African amnesty could, therefore, literally be the last chance saloon for offenders."

National Treasury has outlined the terms of the third amnesty which, from an exchange control perspective, are not dissimilar to the previous two amnesties.

Where the owner wishes for the funds to remain offshore, there is a 10 per cent penalty on funds that are in breach of exchange control regulations. If the funds are remitted back to South Africa, only a five per cent penalty is payable. These penalties must be paid from the offshore funds and where there is a lack of available offshore cash, such as for property holdings, the penalty can be paid from rand- based sources, but an extra two per cent additional penalty is added.

"There are, of course, also tax implications, with National Treasury advising that 50 per cent of taxes owing would be due and payable for the last five tax years. This is a point on which some clients may need professional tax opinion as there has been no detail given as to how this 50 per cent would be computed.

"Interest would be charged on outstanding taxes, but no penalties would be levied. It is presumed that applicants would need to re-open previous assessments on their SARS e-filing profile and resubmit tax returns for these periods," he noted.

Both the exchange control regulations and income tax Acts are extremely technical in nature and potential contravention may well be error of omission, says Barrett, stressing the importance of taking appropriate advice in this regard.

With the amnesty application period running for six months, from 1 October 2016 to 31 March 2017, Barrett believes that South Africans have a generous opportunity to regularise their affairs.

"South African residents who believe that they may have funds offshore that contravene either or both exchange control and tax regulatory provisions should take professional advice to ensure that, if necessary, they avail themselves of the terms of the 2016 amnesty," he concluded.

Snapshot: South Africa

All three of the major ratings agencies have recently released commentary, and in some cases ratings changes, for South Africa and its major financial institutions.

Moody's Investor Services, in its May annual report on South Africa, revised its outlook for the banking system to negative from stable. The country's subdued economic growth, depreciated currency and weakened operating conditions have challenges banks' asset quality and profitability--Moody's projects that non-performing loans (NPLs), for instance, will rise to four per cent by end-2017 compared to 3.1 per cent at end-2015.

Standard & Poor's Rating Services (S&P) also released a statement saying that South African banks face profitability pressures over the next few years.

"The outlook on all banks we rate in the country turned negative at the end of 2015, reflecting the negative outlook on the sovereign, the prospect of slower economic growth, rising interest rates and inflationary pressures on the banking system's asset quality," said S&P Credit Analyst Matthew Pirnie. S&P expects these trends to continue with top-tier banks facing credit losses on their lending activities ranging between 0.9 per cent and 1.2 per cent in 2016, worsening by another 20 basis points in 2017.

On 9 June, the South African Government released a statement welcoming the recent Fitch Ratings that affirmed South Africa's long-term foreign and local currency debt at 'BBB-' and 'BBB' respectively. However this follows the downgrade Fitch announced in December 2015. The foreign currency bond rating remains one notch above sub-investment grade whereas the domestic currency bond rating remains two notches above sub-investment grade.

Version three of the South African amesty could, therefore, literally be the last chance saloon for offenders.

-- Pravin Gordhan, South Africa Minister of Finance, in his 2016 Budget Speech

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Publication:Banker Africa
Geographic Code:6SOUT
Date:Jul 10, 2016
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