A South African company in that group (Coronation SA) indirectly, through an Isle of Man subsidiary, held all the shares of an Irish subsidiary (Coronation Ireland). Because a South African resident (Coronation SA) directly or indirectly held the shares in Coronation Ireland, it was uncontested that Coronation Ireland was a controlled foreign company (CFC) for South African tax purposes.
In the media statement issued on 3 May 2023, SARS confirmed that the enhanced TCS system would aim to make the process easier for compliant taxpayers and to improve turnaround times in these cases; however, this system would also aim to make it ‘harder for taxpayers who are unwilling to comply’. Put differently, where the AIT process is concerned, SARS is tightening the compliance screws for those with skeletons in the closet.
The new compliance standard—SARS’ gambit
In the past, SARS has sometimes been criticised for lack of enforcement in the face of tax non-compliance. There is perhaps a portion of South African taxpayers who have a nonchalant approach to tax compliance. They may have been lulled into a false sense of security in the belief that SARS does not take notice of discrepancies or take umbrage with inaccurate or absent disclosures.
According to SARS, as the previous TCS process had been operational since April 2016, it had processed substantial and growing volumes of taxpayers requesting third-party verification, including verification for FIA and Emigration. Given the removal of the separate South African Reserve Bank emigration application requirements, the changes to SARS’ processes and forms were necessary.
However, one should also consider the impact of the greylisting of South Africa by the Financial Action Task Force in February 2023 which was prompted by South Africa’s failure to adequately tackle illicit financial flows. It was thus inevitable that significant changes in SARS policies were on the horizon.
Confirming the focus on compliance enforcement, SARS has further mentioned in its media statement that the additional information requested “allows SARS to ensure that all required tax payable has been accounted for and, if required, address any noncompliance that is detected through a verification and/or an audit”
Opportunity or risk?
The AIT process requires a much deeper level of disclosure on behalf of the taxpayer concerned compared to its previous iterations. The taxpayer is expected to make full disclosure of the sources of the amount to be remitted abroad, with an expansive list of supporting documentation required. This is in addition to full disclosure of local and foreign assets and liabilities (at cost), as well as other strict requirements by SARS.
This could be simple in some cases—in others, however, not that much. In a poll from a training session held for SAIT members and hosted by Jerry Botha, Managing Partner at Tax Consulting
South Africa, 71% of the attendees believed that the enhanced AIT process was implemented to audit wealthy taxpayers to uncover potential non-compliance.
Regarding the additional documentary requirements for the AIT application, 82% of the attendees were of the view that, given the level and risk of criminal sanction, the assistance of a tax practitioner and/or an accountant is now an essential element in this process. Overall, 82% of attendees believed that the new AIT process would involve significantly and materially more work. Compared with the poll results from a previous session on the same topic, hosted for members of the Financial Planning Institute, 88% of the financial advisors believed the AIT process to be significantly different and materially more work. Therefore, the advisory market appears aligned that the new AIT process is not something to be ignored. Notably, 70% of financial advisors believed that both a financial advisor and a tax practitioner are required for the new AIT process.
They are probably required because assets and liabilities, both local and foreign, are required to be disclosed on a cost price and market value basis. The cost price disclosure is requested at the submission of the AIT, whereas the market value for three years is requested at the supporting documents stage. It is unclear whether SARS will retain this request for all AIT applicants or if this is limited to certain higher value or higher risk segments only.
This presents an opportunity for tax practitioners to add more value and to expand their practices. However, it also presents new potential risks for both practitioners and their clients because the AIT is a permanent record created; they will effectively remain visible on eFiling for an indefinite time.
Unchecked, check, checkmate
Anyone who has practically worked through the entire new AIT process can attest to the stringent level of taxpayer scrutiny. As one delves deeper into the process, one may be left with more questions than answers about the required disclosures. At the same time, any missteps made may be met with further verification requests by SARS, a rejection of the application or a stringent audit of the taxpayer’s affairs. Presumably, tax practitioners, who are keenly aware of the risks presented by this level of scrutiny by SARS are uniquely poised to tackle this new challenge.
However, it is important to ensure that a consistent approach is taken. Where a client does not make full disclosure of their interests to the tax practitioner, this can quickly backfire and result in tax practitioners having to face difficult questions from SARS and / or their client.
Further, the AIT process invokes a necessary tactical change to one’s approach in practice where
it is required, such as section 235(2) of the Tax Administration Act, which places the onus on a practitioner to prove that a false statement made (e.g. the disclosure of incorrect amounts in an AIT application) was not negligent, and that there was a reasonable possibility that they were not aware of the falsity.
Follow the money
Any taxpayer who emigrates or resident who seeks to transfer more than R1 million from South Africa within a year would first be required to confront any historic non-compliance. Where the taxpayer does not directly deal with this, their children or legatees may otherwise have to do so at a later stage. It should suffice to say that this is now an essential element to factor into one’s tax planning.
SARS questions will arise where, for example, it is determined that the taxpayer has undisclosed wealth beyond their means based on a mismatch between their AIT disclosures and the disclosures made in their previous tax returns. This new reality thus requires that tax practitioners measure twice and cut once when completing an AIT application for their client.
A focus on the historic compliance of a taxpayer and a proper understanding of the disclosures to be made in the AIT application has moved beyond being a mere tool in one’s arsenal as a tax practitioner. Rather, we foresee this becoming a very important component of a holistic services offering. The AIT process is no mere exercise in filling in a form—these disclosures will add up in a world where eFiling and evolving electronic data capabilities will never forget.
The more sophisticated the taxpayer’s affairs are, the higher the level of scrutiny will be and the more important it becomes to ensure that the correct expertise is engaged to ensure success. When embarking down this road, it is important to remember that a careful, strategic and consistent approach to the AIT application process is essential to avoid becoming the canary in the coal mine for others to follow. When in doubt, especially when it comes to tax, conservatism is always the best approach.
“There is perhaps a portion of South African taxpayers who have a nonchalant approach to tax compliance. They may have been lulled into a false sense of security in the belief that SARS does not take notice of discrepancies or take umbrage with inaccurate or absent disclosures”