The Panama Papers represent a leak of some 11.5 million files from a Panamanian based advisory firm, Mossack Fonseca. The leak provided information on offshore bank accounts and offshore trusts based in Panama, the British Virgin Islands and the Seychelles, among other jurisdictions. Many politicians and celebrities have been named, including the British Prime Minister, David Cameron, who is perhaps the highest profile individual named in this leak. He has subsequently admitted that he benefited from an offshore trust fund based in the Bahamas, which was set up by his late father.

However, while numerous reports on the controversial Panama Papers point out that a number of these structures are entirely legal, they do not provide any clear guidance on which structures are legal and which are not. Perhaps a reason for this is that the question needs to be posed with reference to the laws of the relevant countries.

From a South African perspective, offshore structures are quite common. If, for example, you have a pension fund or have invested in offshore funds, chances are that you have investments in a tax haven. You may therefore, either directly or through your pension fund, hold units or shares in a company or some other offshore vehicle located in some or other tax haven. This vehicle will then hold the underlying shares and other assets that make up your investment portfolio. The reason for setting up these investment vehicles in a tax haven is precisely to avoid paying multiple levels of tax on your underlying investments. These are examples of legal structures.

If South African resident individuals establish their own offshore trust or some other offshore investment vehicle in a tax haven, and the vehicle acquires various offshore assets, the individuals will be required to make disclosures to the exchange control authorities at the South African Reserve Bank and  the South African Revenue Service. Provided that these disclosures have been made, that approvals are obtained, and that the relevant tax returns have been correctly completed on an annual basis, these also constitute examples of legal offshore structures.

South Africa’s tax law caters for exactly these types of structures. In fact, there are tax provisions that detail the circumstances in which such structures will be subject to South African tax. These rules also set out the circumstances in which the distributions made from income earned, in terms of these structures, are to be taxed in the hands of any South African beneficiaries or founders.

The Davis Tax Committee is in the process of making recommendations on how to adapt and amend South Africa’s tax law regarding offshore trust structures. Provided that there is compliance with South Africa’s existing tax law and exchange control rules, these structures are also legitimate.

Illegitimate offshore structures are, for example, ones where individuals set up offshore trusts without making the necessary disclosures and obtaining the necessary approval either from the exchange control authorities or the South African Revenue Service. An offshore structure is also illegitimate when there is no ongoing compliance with the relevant tax laws, such as instances where the relevant tax returns are not correctly and timeously submitted by the relevant parties.

It is interesting that a six-month tax and exchange control amnesty is proposed from October 2016. For any South Africans with illegal offshore structures, given the increasing likelihood of these structures coming to light (either through leaks such as the Panama Papers or due to the increasing information sharing between international revenue authorities), this may be their last chance to avoid being named and shamed.