South Africans have a long tradition of stashing their cash offshore — aided and abetted by a thriving black market in rands.
In this brisk black market, for a commission of 10% to 15%, you could get your funds deposited into a foreign bank account. This was a small price to pay for those seeking a “bolt hole” in case South Africa’s political transition went awry.
Legalities aside, moving funds offshore was a judicious financial move, as the rand weakened against the world’s major currencies in nine out of the past 10 years. In the early 1980s the rand was on a par with the United States dollar. By 1993 one dollar cost R3,40, and today hovers around R7.
Recent currency strength notwithstanding, this represents a massive loss of international buying power, and even those with no intention of emigrating had a clear incentive to protect their wealth by getting their hands on dollars, pounds and euros.
The steady deterioration in the value of the rand over the past 20 years reflects the scale of capital flight. The quantum of funds illegally spirited out of South Africa is estimated at between R100-billion and R200-billion.
Much has changed in the past 10 years. Exchange controls were relaxed and individuals with the requisite tax clearance can now take out R750 000. At current exchange rates that buys you a little more than $100 000, scarcely enough to put down a deposit on a house in Sydney or Toronto. But that $100 000 converted back into rands buys a decent property in South Africa, a market still considered cheap in international terms.
Those with illegal funds offshore thought they’d probably never be caught, but that’s no longer certain. Foreign banks were happy to vouchsafe the confidence of clients no matter how they arrived at their wealth. The world is a different place today, particularly after 9/11 when many countries passed laws to snuff out funding for terrorists and criminals. Violating exchange controls doesn’t put you in the same league as al-Qaeda, but a widening network of tax treaties between South Africa and its trading partners means better information sharing between national tax authorities and hence a greater likelihood of being caught.
The recently enacted Financial Intelligence Centre Act obliges financial advisers, on pain of severe penalties, to report suspicious transactions and satisfy themselves that clients obtained their funds legally. That means advisers who are aware of their clients’ indiscretions will have to report them to the authorities. In many cases the advisers, and sometimes banks, were party to the breach of exchange controls, though they need not apply for the tax and exchange control amnesty announced in this year’s Budget. The Reserve Bank and the South African Revenue Service (Sars) are not interested in how and when the money was moved offshore, only that it is being legitimised.
The message from financial advisers is to grab the amnesty with both hands. Those who choose to repatriate funds will be obliged to pay a levy of 5%, or 10% if the funds are retained offshore. Any unutilised portion of the R750 000 individual foreign allowance will be offset against the foreign assets.
A further 2% will be deducted if no South African tax was paid on these funds. This levy must be paid within three months of approval from Sars’s tax amnesty unit.
Those who ignore the amnesty face double penalties and double tax if caught, and there’s a fair chance of that given the growing international cooperation between revenue departments.
The government’s decision to launch the amnesty was perfectly timed. The rand is strengthening against major currencies — reason enough for repatriation — and domestic assets are not as richly priced as those in New York or London. The Reserve Bank has eliminated the forward cover book built up in previous years to smooth currency fluctuations and is now running a small surplus.
Many tax experts doubt whether the amnesty will make a huge difference to the fiscus. Most amnesty seekers are likely to keep their funds offshore to maintain portfolio diversification. The amnesty’s real success will be to bring these grey funds to book.
Ricardo Teixeira, specialised wealth manager at m Cubed, believes many South Africans will choose to ignore the amnesty, preferring to emigrate rather than come clean.
The amnesty is seen as a precursor to further relaxation of exchange controls, which may be announced in next year’s Budget. With the firmer rand and strong capital inflows, the government may feel more confident in opening the currency spigot a little wider.
Your secrets are safe with us
One of the primary purposes of the tax amnesty is to broaden the tax net by bringing previously secreted offshore funds on to the South African Revenue Service’s (Sars) books.
The government has been careful to ensure that all information received remains confidential, beyond allowing the Reserve Bank and Sars to update their records and collect their just dues.
In a newsletter to clients, Werksmans Attorneys points out that members of the amnesty unit will be subject to the same secrecy provisions as any Sars official under the Income Tax Act. “Where the amnesty unit or the minister is required to report, the information must be in a form that does not contain details of individuals,” says Werksmans.
The amnesty unit, Sars and the Reserve Bank are prohibited from requesting details from any amnesty seeker on who advised them or how they went about transferring money offshore. — Ciaran Ryan