South Africans who are moving money and assets offshore must keep in mind that the foreign financial institutions they are investing with are obligated to share the taxpayer’s investment information with the South African Revenue Service (“SARS”).

While taxpayers may transfer as much money as they wish offshore, provided the South Africa Reserve Bank gives its approval, taxpayers are cautioned that offshore assets and earnings remain reportable for tax purposes in South Africa. Gone are the days where offshore holdings are held in secret, as most jurisdictions around the world subscribe to the bi-lateral exchange of information for tax purposes.

Common Reporting Standards

The largest reporting standard in the world is the Common Reporting Standards (CRS) developed by the Organisation for Economic Co-operation and Development. Presently over 100 countries including South Africa subscribe to CRS. Low tax jurisdictions such as the Bahamas, Guernsey and Jersey, which remain popular investment destinations for South Africans, also subscribe to CRS.

Financial institutions subject to these reporting requirements include banks as well as trust companies. CRS dictate that each institution must prepare an annual investment report for each South African taxpayer, which is shared with that country’s tax authority, who then on sends these reports to SARS.

If a SARS official notices something on a CRS report, typically the official will issue the taxpayer with a letter, with the ominous title: “Request for Information: Offshore Holdings”. The letter will inform the taxpayer that SARS has received information through the Automatic Exchange of Information with another jurisdiction regarding their offshore holdings.

The bulk of the letter are questions directed to the taxpayer concerning their offshore holdings, including where the funds originated from and whether the taxpayer is of the belief that they have discharged their South African tax obligations insofar as these holdings.

Looping restrictions lifted

Taxpayers have recently been incentivized by Government’s directive issued in January 2021 which lifted the restriction of loop structures in relation to resident individuals, companies and private equity funds “to encourage inward investments into South Africa”.

A loop structure is a structure where a South African resident invests in an offshore structure which in turn invests in South African assets. The ease on the restriction means more South Africans will explore foreign trust and company structures as holding entities for the taxpayer’s wealth and/or businesses.

South Africans are cautioned that the underlying motivation for government’s relaxing of looping restrictions was government’s trust in the tax laws and SARS’ ability to collect tax from these structures. The effectiveness of CRS means government will not stop the outflow of capital from South Africa, but the tax man will be ever present.

Building your roadmap

Being a top 6 tax practice in terms of tax filing volumes, we are privy to many audits from the Revenue Authority. There is a clear method to these audits and SARS is certainly making good on its promise to make noncompliance costly. Undertaking the process of internationalizing your assets and moving money offshore needs to be done with caution, with a well-planned and thought-through approach.

Our practice engages with wealthy South Africans daily, and we have seen a lack of firm guidance and knowledge received, whether it be from inexperienced advisors, banks, SARS officials or even that friend that gave advice over a braai. From a financial and taxation perspective, this can have a detrimental impact and come back to haunt you in the future – especially with SARS being privy to offshore holdings.

Taxpayers should always consult a tax and exchange control expert before embarking on any material offshore investment and ensure they complete the investment in a secure manner – we firmly believe in a consultative approach and building a roadmap. The cheapest and quickest routes are almost always more costly in the end.

Written by Darren Britz, Head of Tax Legal; and Colleen Kaufmann, Tax Attorney; Tax Consulting SA