The Permanent Voluntary Disclosure Programme (“Permanent VDP”) came into force on 1 October 2012, which is when the Tax Administration Act (“TAA”) took effect. The Permanent VDP presents one option for applicants to apply for relief, and does not have a termination date, meaning that it will exist so long as the provisions are contained in the TAA.
To qualify for relief under the Permanent VDP, a person may apply, whether in a personal, representative, withholding or other capacity, for VDP relief unless he or she is aware of a pending audit or investigation into the affairs of the person seeking relief or an investigation or audit that has commenced but has not yet been concluded. The law allows for the South African Revenue Service (“SARS”) to direct that even though a person may be under an audit or investigation, they may still apply for VDP relief where the default in respect of which a person wishes to apply for VDP relief would not otherwise have been identified during the audit or investigation and the application for voluntary disclosure relief is in the interest of good management of the tax system and the best use of SARS’ resources.
A person is deemed to be aware of a pending audit or investigation if a representative of the prospective applicant or, in the case of a company, an officer or shareholder or member thereof, has become aware of the audit or an investigation, or that the audit or investigation has commenced.
To apply for VDP relief under the TAA, it is essential that the prospective applicant has committed a default that comprises the submission of inaccurate or incomplete information to SARS; has failed to submit information; has adopted a tax position where such submission, non-submission or adoption of a tax position resulted in the taxpayer not being assessed for the correct amount of tax; the correct amount of tax was not paid by the taxpayer; or the taxpayer received a refund that they should not have received.
Section 227 of the TAA specifies the requirements for Permanent VDP relief, which indicate that the disclosure made by the prospective applicant must:
- be voluntary
- involve a default that has not previously been disclosed by the prospective applicant
- be full and complete in all material respects
- involve the potential imposition of an understatement penalty in respect of the default
- not result in a refund due by SARS
- be made in the prescribed form and manner
SARS requires the prospective applicant to make a full and proper disclosure of defaults committed. South Africa migrated to a worldwide or residence tax system with effect from 1 March 2001, with effect from the 2002 tax year. Thus, where a person holds foreign assets and has failed to declare the foreign income derived on those assets, SARS will insist that the income and capital gains relating to those foreign assets are disclosed with effect from 1 March 2001.
The income tax on the previously undisclosed foreign income will always remain payable together with interest thereon, which can become significant, particularly where the default goes back to the 2002 tax year. It must be noted that the Permanent VDP does not contain any cut-off period relieving prospective applicants from making disclosure regarding prior tax years. Thus, prospective applicants cannot only make disclosure for the last five years but are required to make a full and proper disclosure going back to when the default first occurred, which could be as long ago as 1 March 2001.
The advantages of applying for relief under the Permanent VDP and pursuant to the conclusion of a voluntary disclosure agreement are the following:
- no criminal prosecution for any tax offence relating to the default committed by the prospective applicant
- in most cases, the waiver of any understatement penalty that would otherwise have been imposed under the TAA
- 100% relief in respect of an administrative non-compliance penalty that was or may have been imposed under chapter 15 of the TAA, or a penalty imposed under a tax Act, excluding a penalty imposed under that chapter, or in terms of a tax Act for the late submission of a return
Thus, a penalty that would otherwise have been imposed for the late payment of any tax may be waived under the Permanent VDP.
The Permanent VDP contains a mechanism whereby prospective applicants may seek a non-binding private opinion as to whether they qualify for relief under the TAA. Thus, prospective applicants may apply anonymously via the offices of a tax practitioner to ascertain whether the person in question qualifies for VDP relief.
The prospective applicant will be required to be registered for e-filing, as the application form for VDP purposes must be submitted using e-filing. It will be necessary to quantify the amounts of income that previously should have been reflected and a covering letter is normally submitted together with the application motivating why the prospective applicant qualifies for the relief in question.
Once the prospective applicant has filed the VDP application form, they will receive confirmation of receipt from SARS, which will then review the information submitted. Thereafter, SARS will require the taxpayer to complete the so-called VDP tax returns that amend the income tax returns previously submitted by the taxpayer. Once those returns have been submitted, they will be assessed by SARS and those assessments will reflect the income tax and interest payable by the taxpayer pursuant to the VDP arrangement. To conclude the VDP process, the taxpayer and SARS must conclude a voluntary disclosure agreement as envisaged in the TAA. The agreements used by SARS must comply with the provisions of the TAA, setting out the material facts of the default on which the voluntary disclosure relief is based, as well as the amount of tax payable by the person, which must separately reflect the understatement penalty that would otherwise have been payable, as well as arrangements and dates of payment and any other relevant undertakings made by the taxpayer and SARS.
SARS is entitled to withdraw the voluntary disclosure relief if it discovers after conclusion of the voluntary disclosure agreement that the applicant failed to disclose a matter that was material for making a voluntary disclosure under the TAA. In such a case, the relief that was granted under the VDP rules will be withdrawn and any amount paid will constitute part payment of any additional tax debt that may arise in respect of the defaults disclosed and, furthermore, the taxpayer may be pursued criminally. SARS is compelled to issue assessments to give effect to the voluntary disclosure agreement concluded by the taxpayer and SARS.
Written by by Dr Beric Croome, ENSafrica.
This article was first published by ENSafrica (www.ENSafrica.com)
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