22 May AIT: Broader Implications of the New SARS Protocols

AIT: Broader Implications of the New SARS Protocols

Earlier this month, SARS unveiled their Approval for International Transfer (AIT) protocols which – as the name suggests – are measures put in place to regulate the transfer of money over South African borders. Or, more specifically, the flow of money out of SA.

It may seem logical for governments to impose some kind of control over cross-border financial flows, but this rose by another name seems very much the same as exchange control.

Rand Rescue takes a look.

Approval for International Transfer: exchange control 2.0

South Africans saw numerous changes to cross-border financial regulation in the past few years. In 2020 the SARB announced the abolishment of the exchange control process and requirement for an MP336(b) application (financial emigration). Other changes were also implemented, such as a reinterpretation of Section 10(1)(o)(ii) of the ITA which provides a tax exemption of R1,25 million per annum on foreign employment income with 45% taxation imposed above this cap.

The regulatory changes which scrapped exchange control came into effect on 1 March 2021 and while SARS tried to position this as a pro, the caveats are endless.

AIT is the latest SARS rollout. The approval for transferring funds out of SA applies to  South African tax residents who want to make use of their foreign investment allowance (FIA), but it will also affect new South African emigrants since everything is facilitated via the e-filing TCS (tax compliance status) process.

In the past, SARS made provision for different TCS pins which clearly distinguished between the different types of users. There was the standard TCS pin used for residents, an Emigration TCS pin for those who have moved abroad, and an FIA TCS pin to utilise one’s capital allowance. With the new process, all TCS pins are combined into one, though different users will need to complete different fields and meet different criteria for tax compliance.

The rule of three-year limbo

Given South Africa’s residence-based tax system, South African emigrants who wanted to transfer the proceeds of their assets offshore could do so via the process of financial emigration. At the time, the SARB stipulated that those who returned within five years may be considered SA tax resident under certain circumstances (which would make them liable for taxes during this period), but such rule was only imposed in highly irregular cases.

Under the new process, South Africans who emigrated from 1 March 2021 would need to prove their commitment to leaving the country by firstly informing SARS of their intent and non-tax residency status when they depart, and remain outside country borders for a period of three consecutive years in order for their non-tax residency to be confirmed retroactively. They are also prohibited from withdrawing lump sum benefits from retirement funds (pension preservation, provident preservation and retirement annuity funds) for offshore transfer during this time.

AIT and the FIA

This three year rule has no impact on South African tax residents, and yet the AIT imposes a novel three-year rule for such individuals if they want to use their FIA.

South Africans are granted three primary allowances for using their money outside country borders:

 – an annual Travel Allowance of R200 000 per calendar year
 – a Single Discretionary Allowance (SDA) of R1 million per calendar year, and
 – a Foreign Investment Allowance (FIA) – also known as a Capital Allowance (CA) – up to R10 million per calendar year.

SDA and FIA may be used for any legal purpose and of the two only the FIA requires confirmation of tax clearance. While this is still the case, the AIT now imposes an extensive vetting process which requires individuals to provide:

 – A statement of assets and liabilities for three years preceding the use of the FIA
 – A breakdown of the financial sources used for the FIA
 – A breakdown of the purpose of the FIA (what it will be used for)

TCS and expats

For South African expats the AIT application functions much like a novel type of exchange control.

Expats are to inform SARS of their intent to emigrate, and complete the process to confirm their tax compliance status when they leave. On completion of the three-year term, they will once more need to complete the process before an authorised dealer is permitted to transfer any funds restricted by the new regulations offshore. It is advisable to confirm tax status for each year to prevent any protractions.

SARS notes that individuals are to complete this process even if they don’t have funds to transfer – failing to do so may deem them South African tax residents.

Other TCS requirements for South African emigrants include:

 – Proof that the taxpayer has ceased to be a resident for tax purposes (including the date that tax residency ceased)
 – A detailed Capital Gains Tax calculation schedule relevant to any tax payable on deemed disposal of assets on the day before tax residency ceased (Section 9(H)(2) of the ITA).
 – Proof of non-tax residency for at least three consecutive years for withdrawal and transfer of financial assets at the end of the term.

Families who’ve emigrated together are required to confirm their TCS individually should they be liable for taxes – the primary breadwinner cannot vouch for or file anything on their family’s behalf.

Expats as well as SA tax residents hoping to access their FIA will also need to provide the following:

 – Indicating whether the applicant is a beneficiary of a local or foreign trust.
 – Confirmation of whether the applicant has an interest of 20% or more in any local or foreign entity (directly or indirectly)
 – Applicable Power of Attorney if a TCS application is submitted by anyone other than the taxpayer.
 – Proof of the applicant’s loans in local or foreign trusts.

The requirement for a full inventory of one’s financial activities would make sense in a scenario where an individual wants to make use of their FIA in the interim period which precedes tax filing for a particular tax season. But it makes less sense when one considers that SARS already has one’s financial details on book, and will have wrapped up the taxes for previous seasons. It could also make sense had this process been required once-off as an overhaul of past processes or scrubbing of data, but it will apply continuously and indefinitely.

One might argue that SARS distrusts their historical data and consider their own tax management unreliable and indefinitely capricious.

In a nutshell – they require that individuals confirm the accuracy and validity of their oversight and decisions retroactively. If they deemed you tax compliant before, this determination is – by their own insinuation – invalid. 

Tax Compliance Status Verification – eFiling

The AIT process has already been implemented on eFiling, which means all users will need to follow the new process to confirm their TCS.

One thing which all South Africans should be aware of is that they cannot simply claim ignorance. The E-filing platform pre-populates information and changing such information will require verifiable proof.

The puzzling part is that you will need to disclose your foreign assets, liabilities and interests for the past three years even if you comply with all other requirements and even if you consider yourself a non-resident for tax purposes.

Source of funds

To use one’s FIA, the source of the funds should be indicated on the TCS platform under the International Transfer Details container. More than one source can be indicated, provided the full amount to be transferred is apportioned correctly and all supporting information provided.

Source types include:

 – Cash/savings
 – Distribution from trusts as a beneficiary
 – Donation
 – Dividends distribution from a company
 – Inheritance
 – Loan
 – Sale of Property
 – Sale of shares and other securities
 – Sale of Crypto assets
 – Transfer of listed securities
 – Other

If different sources are used, the proportional value of each source should be indicated under the source.

Other details which may be required depending on the source type include:

 – Names of entities (whether individual, registered name and/or trading names)
 – ID, Passport or Registration details
 – Account numbers and types
 – Nationality or location of individual or entity
 – Income tax reference numbers
 – Value of assets or shares
 – Purchasing price and sale price
 – Date of sale
 – Value of assets, volume of assets discarded, share codes, etc.
 – CGT amounts applicable to transactions
 – Type of exchange (stock and/or crypto)
 – Currency type(s)

Investment details

Once the source of funds for offshore investment is covered, individuals must complete information regarding the investment.

The following investment types are listed:

 – Cash
 – Crypto assets
 – Exchange traded funds
 – Insurance products
 – Listed equities
 – Listed bonds
 – Property
 – Unit trusts
 – Other

As with the source type, additional information is required depending on the investment type such as:

 – Type of exchange or fund
 – Indication whether the investment purpose is arbitrage trading
 – Country where investment will be made

Assets and liabilities

Now we get to that extensive inventory of assets and liabilities one must complete in order to use your FIA.

Assets and liabilities are each split into two sub-categories, South African and Foreign.

The following fields are included for both SA and Foreign assets (depending on the individual portfolio):

 – Fixed properties and improvements to properties
 – Shares in private companies or member’s interest in close corporations
 – Loan accounts
 – Listed financial interests (shares, unit trusts, etc.)
 – Crypt assets
 – Net capital of businesses, trade, professions or farming
 – Equipment, machinery and implements
 – Motor vehicles, caravans and boats
 – Debtors
 – Stock
 – Livestock
 – Cash on hand (including in bank accounts or similar)
 – Personal effects (jewellery, paintings, furniture, etc.)
 – Other assets
 – Total assets

For both SA and Foreign liabilities, the following fields are listed:

 – Mortgage bonds
 – Loan accounts
 – Creditors
 – Bank overdraft
 – Other liabilities
 – Total liabilities

Shrodinger’s tax residents

The deferred confirmation of tax residency for SA emigrants is clearly a big headache.

Additionally, while the three-year financial asset freeze was previously interpreted as only applicable to the proceeds of retirement monies, it seems that SARS has redefined it as applicable to all funds flowing out of SA.

The big problem is that such individuals are considered non-tax residents from the day they leave and required to behave as such, and yet they are barred access to their South African sourced funds in a way which is not applicable to foreigners.

Emigrants are essentially Shrodinger’s tax residents who are both liable and non-liable – they must confirm that they no longer want any financial dealings in SA by leaving their financial dealings in SA. One cannot help but scratch your head at the metaphysical shenanigans such quantum leaps in logic seek to enkindle. 

Perhaps there is an alternate universe where circular reasoning is synonymous with reason, and perhaps SARS is trying to push South Africa towards such new frontiers. If such a universe has electricity, perhaps that would be a better selling point for compliance than the Gish gallop they’re resorting to.

Confirming tax residency

To date, individuals could use the ‘Disinvestment due to Emigration’ form along with a residency certificate of their new country to take their money offshore.

But of course, individuals will hardly receive a residency certificate on entry to their new home and may need to jump through several hoops to obtain such a certificate.

A knock-on effect for new arrivals abroad is that the new SARS requirements will cast a spotlight on the activities and dealings of such individuals – and this spotlight will be wielded by foreign entities.

Many hopefuls who arrive in a new country may not have all their ducks in a row at the time of arrival – they may not have decided on the area they want to live, some may still be looking for work or change their minds about their jobs, or perhaps the family dynamic changes in the interim. Some hopeful South Africans don’t bag their visa of choice on initial immigration. While such inconvenience may have previously required them to return to SA briefly to wait out the administration process – current regulations may see them forfeit their 3-year stay requirement should such admin be protracted. 

The SARS scrutiny and premature confirmation required by foreign governments regarding individuals’ tax compliance and financial affairs could make foreign entities:

 – concerned about the lack of economic activity by spouses or adult dependants (even if this were temporary)
 – question why individuals’ offshore assets haven’t been transferred (the asset freeze)

Return on investment and double taxation

The most obvious problem with the three-year freeze is clearly the impact on one’s retirement investments. South Africa is not quite the poster-child for affluence or desired location for investment. As one’s savings stews in SA for three years it will undoubtedly accrue interest but this also means that any taxes due on retiring from such funds will invariably be imposed on a greater amount. Interest on savings is certainly not a bad thing, but considering you will have paid less tax and enjoyed far better interest and benefits had you been allowed to expatriate these funds to your new home three years before, it’s all very disheartening.

Additionally, while you will be taxed on withdrawing from your fund in three years as if you’d retired from the fund on the day you left, taxes imposed on such withdrawal are deferred for three years and SARS intends to use the entire value of the retirement fund as at this future date for their tax calculations.

Double taxation agreements exist for this very reason – to protect individuals from taxation by more than one jurisdiction – but the new rules have complicated matters.

Firstly DTA’s stipulate that retirement savings are only taxable by the country of tax residency. If SARS aims to tax the full value of retirement investments after three years with the accrual during the three years, this would undermine the DTA.

Secondly, residency certificates are subject to tax compliance – with many countries taxing individuals on their worldwide income. If South Africa prohibits such taxation or insists on double taxation it would be quite costly for the individual.

Also problematic are fund rules. While preservation funds don’t necessarily require further frequent contributions from individuals, some funds may penalise individuals for prematurely ceasing their frequent fund contributions or claim clawback fees. And yet it would make little sense for individuals to invest their local earnings and currency in their SA retirement policies.

Add to this the Treasury’s declaration in 2020 that they intend to exclude retirement savings from DTAs in future, this means our government aims to tax such investments irrespective of an individual’s tax residency.

Proxy – get Rand Rescue to do it for you

Given the complex nature of the AIT, it makes sense to get experts to help you out. South Africans can authorise a third party to manage their SARS affairs on their behalf.

Such process would require power of attorney to act on your behalf.

Additionally, SARS may require the following:

 – Power of Attorney appointing the tax practitioner to act on their behalf.
 – A copy of a valid identity document, driver’s licence, passport or temporary ID.
 – A letter of secondment from the employer confirming that the individual is outside the country if they are only abroad temporarily (this should be the original letter for individuals visiting a SARS office)
 – A copy of a residency certificate from the country of residence where they are an immigrant
 – Proof of residential address

Leave it to the experts

If you need assistance with your taxes, FIA or any other cross-border financial concern, simply leave your details below and we’ll get back to you!

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Sources:

Citation disclaimer: Rand Rescue tries to provide proper citation and reference to any and all sources used in our content. This has become increasingly difficult as some news networks prohibit access to their citations, authors and publication dates, or obscure referencing of non-critical information behind paywalls which are inaccessible to our readers. We’ve made concessions in the past by manually recording the information gauged from online resources, but going forward we will exclude online references which bar automated citation. We will, however, still cite sources where printed or academic sources are used. If we refer to any individual, event, brand or business in our articles and no reference is provided in our sources, we encourage readers to confirm the information provided.

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