The first agreement for the exchange of information relating to tax matters concluded by South Africa with San Marino took effect on 28 January 2012. In addition, tax information exchange agreements were concluded with Bermuda, Cayman Islands, Guernsey and Jersey and have taken effect.
South Africa has concluded a large number of double taxation agreements with its trading partners which generally contain an article which authorises the exchange of information between South Africa and the treaty partner. Furthermore, exchange of information agreements are in the process of negotiation between South Africa and Bahamas, Argentina, Barbados, British Virgin Island, Brunei Darussalam, Costa Rica, Dominica, Georgia, Gibraltar, Jamaica, Liberia, Lichtenstein, Monaco, Saint Kitts and Nevis, Samoa and the Turks and Caicos Islands. In addition, South Africa signed on 3 November 2011, but has not yet ratified, the Multilateral Convention on Mutual Administrative Assistance on Tax Matters as amended by the protocol which facilitates the exchange of information between parties who have adopted the Convention. Furthermore, South Africa is in the process of negotiating the Multilateral Southern African Development Agreement on Assistance in Tax Matters. South Africa is a member of the Organisation for Economic Co-operation and Development (OECD)’s Global Forum on Transparency and Exchange of Information for Tax Purposes. At the Global Forum’s meeting held in Mexico during 2009 it was decided to put a peer review mechanism in place for all members of the Global Forum based on its standards of transparency and information exchange for tax purposes.
The Global Forum established a Peer Review Group to create the methodology and detailed terms of reference for the peer review process and decided that there would be two phases of that process. Phase 1 of the peer review process will examine the legal and regulatory framework in each jurisdiction and phase 2 will evaluate the implementation of the standards in practice. According to the schedule of reviews published by the Global Forum, South Africa was due to have been reviewed during the second half of 2011.
The Global Forum was, under Phase 1 of the peer review process, mandated to evaluate the legal framework in South Africa regarding the exchange of information for tax purposes and phase 2 would have required the Global Forum to establish from the Commissioner: South African Revenue Service the extent to which South Africa has implemented the Global Forum’s standards in practice.
South Africa has therefore undertaken an obligation to ensure that it complies with the standards prescribed by the Global Forum and is therefore required to conclude exchange of information agreements with various countries so that it complies with those standards. It is for the above reason that the South African government has concluded exchange of information agreements with a number of countries and is in the process of finalising other agreements. The San Marino agreement was published in the Government Gazette on 25 January 2012 and it is stated that the agreement entered into force on 28 January 2012.
The purpose of the agreement is described as being to promote international efforts in the fight against financial and other crimes, including the targeting of terrorist financing. Furthermore, the agreement is aimed at facilitating the terms and conditions governing the exchange of information relating to taxes. The scope of the agreement is described as providing assistance via the exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the contracting countries relating to the taxes covered by the agreement. This includes information which is foreseeably relevant to the determination, assessment, enforcement or collection of tax with respect to persons subject to those taxes or to the investigation of tax matters or the prosecution of criminal tax matters in relation to such persons.
Article 2 of the agreement deals with the taxes covered by the agreement and in the case of South Africa relates to normal tax, secondary tax on companies, withholding tax and royalties, the tax on foreign entertainers and sports persons and value-added tax. The agreement does not directly refer to the new dividends tax which took effect on 1 April 2012. The agreement envisages the provision of information upon request by one of the countries for purposes of complying with the agreement.
Article 4 of the agreement provides that where the information in possession of the respective authority of the country from which the information is requested is insufficient to enable it to comply with the request for information, that country shall use the information gathering powers it considers relevant to provide the requesting country with the information requested. The article provides that each country will ensure that it has the authority to obtain and provide, via the competent authority, as defined and on request, information held by banks and similar financial institutions, information regarding legal and beneficial ownership of companies and similar businesses and in the case of trusts, information on settlors, trustees and beneficiaries.
It is required that any request for information must be formulated in detail specifying in writing:
- The identity of the person under examination and investigation.
- The period for which the information is requested.
- The nature of the information requested in the form in which the requesting party will prefer to receive it.
- The tax purpose for which the information is sought.
- The reasons for believing that the information requested is foreseeably relevant to tax administration and enforcement of the requesting party.
- Grounds for believing that the information requested is present in the requested party or is in the possession of or obtainable by a person within the jurisdiction of the requested party.
- To the extent known, the name and address of any person believed to be in possession or able to obtain the information requested.
- A statement that the request conforms with the laws and administrative practices of the requesting party.
- A statement that the requesting party has pursued all means available in its own country to obtain the information.
The relevant authority is required to acknowledge receipt of the request to the competent authority of the other country and must use its best endeavours to obtain the requested information as quickly as possible.
The agreement also envisages the conducting of tax examinations abroad whereby the revenue authority of one country may enter the other country to interview individuals and examine records with the prior consent of the individuals or other persons concerned. Article 5 also allows for the competent authority of the requesting party to permit representatives of the competent authority of the requesting party to attend a tax examination in the territory of the requested party.
It is possible that a request for information may be declined where the request does not comply with the agreement or where the requesting country has not exhausted all means available in its own country to obtain the information or alternatively where the disclosure of information requested will be contrary to the public policy of the requested party.
The agreement recognises information subject to legal privilege and also seeks to protect trade, business, industrial, commercial or professional secrets or trade processes and in such cases the request for information in this regard may be declined. The fact that a taxpayer is disputing an amount of tax does not prevent the tax authority requesting information from the other country.
Article 7 of the agreement seeks to preserve the confidentiality of the information disclosed by one country to the other and it is provided that the information may be used only for the purposes set out in the agreement. Article 8 of the agreement provides that generally, indirect costs incurred in providing assistance shall be borne by the country from which the information is requested and direct costs incurred in providing assistance shall be carried by the country requesting assistance.
Article 10 regulates the manner in which the agreement concluded with San Marino shall come into force and it is provided that the agreement shall enter into force 30 days after receipt of written notification by the latter party of completion of all legal formalities required for the agreement to enter into force. Once the agreement enters into force it shall have effect for criminal tax matters on that date, which is stipulated as 28 January 2012. In respect of all other matters covered in article 1 of the agreement it takes effect on 28 January 2012 but in respect of taxable periods beginning on or after that date where there is no taxable period, all taxes arising on or after that date.
The agreement concluded by South Africa and San Marino is based on the OECD’s model agreement for tax information exchange agreements and the other agreements in force are similar to the agreement referred to above. Clearly, the conclusion of the exchange of information agreements for tax purposes extends the reach the Commissioner: South African Revenue Service to obtain information from abroad regarding taxpayers residing in South Africa. It also imposes an obligation on South Africa to provide information to another country where the other contracting state requires information regarding its taxpayers who may have business dealings in South Africa.
As pointed out above, the conclusion of the agreements for the exchange of information in tax matters is required so that South Africa can comply with its international obligations imposed on it as result of its membership with the Global Forum on Transparency and Exchange of Information for Tax Purposes. It will be interesting to see the report published pursuant to the peer review conducted on South Africa and to see the extent to which South Africa has complied with the standards prescribed by Global Forum.
Recently, on 1 April 2012 the Minister of Finance released the South African Revenue Service Compliance Programme which identifies areas of the economy which will be targeted by SARS to ensure compliance with the fiscal laws of the country. One of the target areas identified in the Compliance Programme is high net worth individuals in the country and SARS has indicated that it will seek to obtain information regarding foreign assets and income derived abroad by high net worth individuals in accordance with the tax information exchange agreements concluded by South Africa and various countries.