Warning to taxpayers looking to invest offshore

 ·9 Dec 2022

Tax Consulting SA says that no matter how much money a South African taxpayer transfers offshore, the South African Revenue Service (SARS) will have information on the process.

According to tax experts Darren Britz and Colleen Kaufmann from Tax Consulting SA, South Africans moving assets and money abroad must keep in mind that the foreign financial institutions that they are investing with are obligated to share the taxpayer’s investment information with SARS.

“Gone are the days where offshore holdings are held in secret, as most jurisdictions around the world subscribe to the bilateral exchange of information for tax purposes,” said Tax Consulting SA.

Financial institutions subject to these reporting requirements include banks and trust companies. Every year, the institution must prepare an annual investment report for each South African taxpayer, which is then shared with that country’s tax authority, which then sends it on to SARS.

The tax consultants said that if SARS notices something in the report, they will typically issue a letter titled “Request for Information: Offshore Holdings”. This letter aims to inform the taxpayer that SARS has received information from the other jurisdiction.

“The bulk of the letter are questions directed to the taxpayer concerning their offshore holdings, including where the funds originated from and whether the taxpayer is of the belief that they have discharged their South African tax obligations insofar as these holdings,” said Tax Consulting SA.

South Africa’s government has recently incentivised inward investment from its citizens.

In January 2021, they lifted the restriction of ‘loop structures’ in relation to resident individuals, companies and private equity funds.

Both Britz and Kaufmann said that a loop structure refers to a situation whereby a South African resident invests in an offshore structure, which in turn invests in South African assets.

“The ease of the restriction means more South Africans will explore foreign trust and company structures as holding entities for the taxpayer’s wealth and/or business.”

Tax Consulting SA has cautioned that the underlying motivation for the government’s relaxing of looping restrictions was the government’s trust in the tax laws and SARS’ ability to collect tax from these structures.

“The effectiveness of CRS, means the government will not stop the outflow of capital from South Africa, but the tax man will be ever-present.”

SARS has been updating the means by which it acquires information and retains data on select taxpayers.

In August of this year, the SARS commissioner Edward Kieswetter, said that the tax collecting agency has been expanding its use of data, adding that this data is being used to do a risk profiling of every taxpayer in the country.

“We use data and artificial intelligence to select taxpayers for further auditing or investigation, but we also use data and technology to provide a seamless experience for most taxpayers,” said the commissioner.

The tax authority has been cracking down on non-compliant taxpayers of late, domestically and abroad.

Read: SARS is not pulling its punches – not even your bank account is safe

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