Offshore investing is a legal way in which entities can put their money onto financial platforms that are created to make money for investors outside of their homes. This is usually done because of the incentives they provide.
Hymne Landman, head of Momentum Wealth, explained that diversification is key and a motivator for offshore investing. She said that South Africa makes less than 2% of global gross domestic product due to its lacklustre economy — and investors usually want to put their money into a booming economy so that they can get more returns. In addition to this, the international investment markets offer many investment opportunities that are not available in the country. These opportunities include exposure to different currencies, geographies, industries and companies.
Landman said that offshore investing “isn’t bad, but you need to know what you are doing”. She added it’s important that information on it is shared upfront so that investors know how their rand investment amounts will be converted into a foreign currency and how they will be reported to the South African Reserve Bank (Sarb). She explained that it may impact their tax returns. South African law allows for every resident over the age of 18 a foreign investment allowance of up to R10-million per calendar year. This can be used for a myriad of things such as investing, buying property and transferring money — but it requires an up-to-date South African Reserve Services tax status.
Landman told the Mail & Guardian that this type of investing is not necessarily only for the uber-rich. People can get access to offshore investment platforms by contributing just R1 000 per month, or R100 000 once off.
But, as with any kind of investing, someone looking to make more money by putting their cash in foreign countries needs to understand their investment goals, risk appetite, needs and time horizon to enable them to make the most optimal investment decisions.
Landman said that one can invest either via a linked investment service provider, which is an independent administration company that offers investors access to collective investment schemes. Another option is to invest by using local companies with investment platforms in offshore jurisdictions.
To further explain these methods of investing, an article published by Allan Gray’s Thandi Skade and Radhesen Naidoo in April 2021 explained the practical ways one can go about investing, which is by getting exposure through local unit trusts. The investment vehicles are allowed to invest up to 30% offshore and an additional 10% in other African countries. “This is in addition to their exposure to locally-listed companies that have offshore operations,” according to the article.
An investor can also invest in a rand denominated offshore unit trust. This means that you invest your money in rands, but your money is put into offshore assets. Perks regarding taking this route is that you can use your asset manager’s offshore investment allowance rather than your own. However, Skade and Naidoo said that while this route saves you on the admin, the possibility remains that these funds may be closed to new investments from time to time, when your asset manager reaches their Sarb-prescribed foreign currency limits.
The last option is investing with offshore managers. You can do this by using your own investment allowance and investing using offshore managers, and there’s a large pool of offshore investment vehicles that one can choose from. Allan Gray said that the process of investing with different foreign managers can be administratively demanding, owing to the complexities of investing in multiple jurisdictions that may carry different regulatory requirements governing how you can access your funds. But the investment service company said that offshore investing platforms can help when it comes to narrowing down the options and dealing with the associated administration. In addition, the minimum investment required is typically lower, and there are benefits from an estate planning and capital gains tax perspective.
The downside in investing offshore is that there are risks involved. Landman said that they include having no guarantee that offshore investments will outperform the South African market; safety considerations; increasing regulatory scrutiny; exchange rate risks; mismatching ZAR-denominated liabilities; and not understanding the tax implications. She adds that on the exchange rate, if the South African rand appreciates unexpectedly, the rand value of the foreign asset may reduce.
Offshore investing usually has a bad reputation because of how people have used it to evade tax. This is why the South African government has rules for when you take money out of the country: you need to report the transaction to Sarb and Sars. The revenue services will be aware that you have taken money out of the country and will also know if you earn money back.
“As a South Africa tax resident, you gave a declaration that states that you will inform the government on all investment returns when you complete your tax returns for each assessment,” Landman said.
She also said that several foreign jurisdictions have exchange of information agreements between their tax authorities. If you are not declaring your transactions, Sars may be and most likely is receiving information about your investments in other countries.
How offshore investing has panned out globally
While this form of investing is perfectly legal, it has however garnered a reputation that is synonymous with the evasion of tax and tax havens. The latter means countries that provide the advantage of little or no tax liability to foreign investors. Some of these tax havens did not share financial information with tax authorities, and this made it hard to work out how much people who invested there were evading in taxes.
In 2016, The Panama Papers, which were 1.5-million files from the database of the world’s fourth-largest offshore law firm, Mossack Fonseca, were leaked. The leak showed various ways in which the rich can exploit secretive offshore tax regimes.
In every country, taxes are important because they make up most of the money that the government uses to run its affairs and provide service delivery. According to a report by the Tax Justice Network, countries are losing a total of over $427-billion in tax each year to international corporate tax abuse and private tax evasion, costing countries altogether the equivalent of nearly 34-million nurses’ annual salaries every year — or one nurse’s annual salary every second.
The report measured “thoroughly” how much every country loses to both corporate tax abuse and private tax evasion. Of the $427-billion in tax lost each year globally to tax havens, it also showed that $245-billion is directly lost to corporate tax abuse by multinational corporations and $182-billion by private tax evasion. South Africa is no exception; the document revealed that the country loses $3.39-billion each year. Fortunately this year, the South African Revenue services said that “it is coming” for citizens who have their money abroad — and high-net-worth individuals who enjoy a “luxurious” lifestyle and demonstrate unexplained wealth when compared to their income.
The Organisation for Economic Co-operation and Development (OECD), which promotes trade and economic growth, said that since the G20 declared an end to bank secrecy in 2009, the international community has made strong and ongoing progress in the fight against offshore tax evasion. This was done through exchange of information which was requested, and through automatic exchange since 2017, it has implemented more than 6 000 bilateral relationships worldwide in 2019. This has resulted in the Swiss federal tax administration (FTA) in 2018 officially starting to exchange bank account data with tax authorities in other countries for the first time.
In 2007, Paolo Ciocca, chair of the OECD’s committee on fiscal affairs and co-chair of the Global Forum said: “No one country or even a small group of countries can address the issue of harmful tax practices on their own. This is a global challenge, which requires a global response. In co-operation with partner financial centres, that is what OECD is seeking to achieve.”
The OECD also said that lack of transparency and a failure to co-operate internationally create conditions that can be exploited by dishonest taxpayers to evade their tax obligations. Last year, the organisation’s secretary-general Angel Gurría said that “automatic exchange of information is a game changer”, and that this system of multilateral exchange created by the OECD and managed by the Global Forum is providing countries around the world with “a wealth of new information, empowering their tax administrations to ensure that offshore accounts are being properly declared. Countries are going to raise much-needed revenue, especially critical now in light of the current Covid-19 crisis, while moving closer to a world where there is nowhere left to hide”.