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Taxman poised to pounce on offshore investments
Changes in the pipeline will enable the Receiver to net his share of revenue from cash that exits the country, writes LEIGH ROBERTS
SOUTH Africans who have money invested overseas could soon be paying tax on their offshore income. The final relaxation of exchange controls, which will allow locals to legally send their money overseas, is drawing closer. However, before that happens there may have to be a shift in our tax system to cater for the free-flow of funds. South African tax law is centred on the source basis - generally, citizens are taxed only on the income earned in South Africa (although some foreign income such as interest is deemed to be from a local source and is taxed locally). The source basis works best in an insular economy, for instance if money is locked into the country by strict exchange control measures. But when South Africa's exchange controls go, so will a part of the tax base as wealthier locals rush to remit their money to foreign destinations to safeguard it from the diminishing rand. The Katz Commission of Inquiry into Taxation will be issuing its solution to the problem of a diminishing tax base in the first chapter of its latest report, which is likely to be released within the next few weeks. The commission is almost certain to recommend a switch, in the longer term, to an alternative tax system - the residence or worldwide basis. This system is used by most industrialised countries and caters for today's global village where individuals and corporations are highly mobile and not restricted to living or investing in their home countries. The residence basis essentially taxes a local on taxable income earned anywhere in the world. To the many wealthy South Africans who sneaked assets offshore during the decades of exchange control (according to a rough estimate, about R80-billion of SA money is offshore!), a shift to the residence basis means their foreign income will become taxable - and thatthe taxman will be more likely to locate their hidden bounty. The saving grace for these taxpayers, at least in the short-term, is that the switch to the residence basis is unlikely to happen overnight. The reason, according to some experts, is that Inland Revenue is not ready to cope with the complications of a new tax system. But it is to be hoped that this will not cause the further relaxation of exchange controls to be delayed. As a stopgap measure for the next year or so, the tax authorities could employ, on a more extensive basis, the deemed source provisions (already in the Income Tax Act) to scoop up the foreign earnings of residents. This stopgap strategy would allow for individuals to hold foreign currency in local bank accounts - a relaxation hinted at recently by Reserve Bank Governor Chris Stals. A switch to the residence basis will bring with it a new set of problems, says tax consultant and author Martin Kourie of Momentum Life. "The effectiveness of a residence system relies on adequate international information systems to police disclosure by residents of their foreign assets" says Kourie. Double taxation treaties with other countries are commonly used to police foreign assets as they usually contain information-sharing agreements which make it easier for local tax authorities to pick up foreign income. Kourie says while many new double tax agreements have been entered into by South Africa in the post-apartheid years, we still have a long way to go. For this reason the gathering of information will not be that easy. And the taxman's search will definitely be thwarted by tax-haven countries, such as Guersney, Ireland and the Isle of Man. Tax-haven status is a deliberate attempt to outsmart mainland tax systems and attract investment from those countries. Another problem with the residence basis, says Kourie, is that it needs a strong revenue service to administer the system. "Given that our revenue services are already over-stretched, one must question the wisdom of altering the present basis."
A negative of the residence basis that has far-reaching implications for all individual taxpayers is that it may precipitate a tax on dividends, which are exempt from tax at present. After all, why go to the trouble of changing to a residence basis if the bulk of the foreign income is in any event tax-free dividend income? Kourie says many countries which use the residence system tax individuals on dividends, but allow for a rebate based on the amount of tax paid by the issuing company. This is called an imputation system and, if introduced, will mean Secondary Tax on companies can be abolished.
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