Tax evasion in South Africa

The Income Tax Act does not define “tax evasion,” the South African Revenue Services (SARS) thus uses the Organisation for Economic Cooperation and Development (OECD) definition. The OECD defines “tax evasion” as the use of illegal means to hide or reduce tax liability, thereby allowing a taxpayer to pay less than duly obligated. The overstatement of deductions, the non-disclosure of income and the manipulation of books are examples of tax evasion.

Consequences

(According to the definition of an understatement, tax evasion is an understatement)

Tax evasion is a punishable criminal offence. Individuals may be fined or imprisoned for a period not exceeding 5 years. 

In addition to the punishment, a taxpayer may become liable for an understatement penalty, charged at 150% for standard cases and 200% for repeat cases. 

How do authorities usually find out about tax evasion? 

SARS uses various data from both domestic and international sources for risk profiling and, case selection. These sources include banks, the properties deeds office, companies’ registration and the National Treasury central supplier data base. Using the data from these sources, SARS is able to issue automatic assessments, thereby having information that taxpayers may omit in an attempt to evade taxes. International sources include the automatic exchange of information of South Africans with offshore assets from almost 100 jurisdictions. 

Additionally, SARS encourages public participation by encouraging the public to report suspicious activities on their website or phoning their hotline. 

What are the possibilities to amend tax declarations or declare additional income? 

Taxpayers have an opportunity to amend or declare additional income through a Request for Correction (RFC). The RFC can be filed with SARS to amend an error, or declare additional income made during a tax declaration. The request may only be made within three years from when the initial tax declaration was submitted.

If a tax declaration has already been finalised, taxpayers may make use of the Voluntary Disclosure Programme which is a legislated mechanism that grants taxpayers immunity from criminal prosecution and either full or partial relief from understatement penalties.

What are the conditions for voluntary disclosure of tax evasion? 

For a voluntary disclosure to be a valid, the disclosure must.

1. Be voluntary.
2. Involve the prior submission of inaccurate or incomplete information to SARS, or the failure to submit information. The declaration must not be like any other declaration that has been disclosed within the past five years. 
3. Include all material information relating to the disclosure.
4. There must have been a substantial understatement, a lack of reasonable care in completing a return, gross negligence, or intentional tax evasion. 
5. Not result in a refund payable by SARS
6. Be in the prescribed form and manner. 

What are the consequences of voluntary disclosure of tax evasion? 

Once a taxpayer has submitted a valid voluntary disclosure, SARS is prohibited from pursuing any criminal prosecution for a tax related offence in relation to that submitted disclosure.

Taxpayers are further granted relief in respect of any understatement penalty that relates to a voluntary disclosure. If the disclosure of tax evations is submitted before the commencement of an audit or criminal investigation, the penalty is charged at 10% of the amount payable to SARS. If a disclosure is made after the commencement of an audit or an investigation, the disclosure will only be allowed if what is disclosed would not have been easily detectible during the audit however, a penalty of 75% is charged. If the voluntary disclosure is made on other categories of understatement behaviour, the relief is more generous and in certain circumstances 100% relief is granted on understatement penalties. The onus is on SARS to prove the penalty attributable and thus the behaviour that has been performed.

100% relief is granted to taxpayers in respect of administrative non-compliance penalties, excluding a penalty for late submission.

When is a voluntary disclosure of tax evasion no longer possible? 

A voluntary disclosure of tax evasion is not possible, if a taxpayer is voluntarily disclosing defaults of a similar nature within a five-year period. Furthermore, a taxpayer cannot apply for a voluntary disclosure after the conclusion of an audit or criminal investigation. 

It is important to note that the voluntary disclosure programme by SARS is a permanent programme, taxpayers have access to it until such time that they are compliant. 

What are the main fields in which voluntary disclosure of tax evasion plays a major role? 

• Foreign income: SARS has continuously emphasized closing in on high-net-worth individuals, these individuals normally earn foreign income, making foreign income one of the most significant areas where voluntary disclosure is crucial. 
• Corporate: The VDP plays a major role with regards to SMMEs, these enterprises cannot afford to be audited for tax on account of wanting to upkeep their credibility for current and future clients. Additionally, the high penalties and fines associated with tax evasion are likely to result in a significant negative impact on profit made by SMMEs. 
• Individual compliance: Online trading has seen significant growth in the past decade, with individuals being exposed to foreign markets and trading, they may not be aware of the tax implication that comes with online trading such an income and capital gains tax.

What is often overseen by foreigners but is considered as tax evasion? 

South Africa applies a tax residency system; this means an individual can be a tax resident in RSA and a citizen in another country. 

To determine tax residency the ordinarily residence test is employed, it assesses factors such as the place an individual considers to be their fixed and settled residence, where their investments and properties are located and the place to which they return to from their wanderings, among other factors.

Individuals can still be recognised as tax residents if they spend a significant amount of time in the country. 

The most common mistake then that foreign nationals do, is spend time in South Africa, meet either the physical presence test or the ordinarily residence test and not submit their returns. Once either test is satisfied, foreign nationals are tax residents and are therefore taxed on their worldwide income.

Another common mistake foreign nationals do, is not declare capital gains on disposed permanent establishments in the country. If a foreign national holds shares in a company that mainly deals with immovable property in the Republic, the disposal of such shares triggers a capital gains tax. 

What do you recommend to clients who have committed tax evasion and how do you have to act as a professional in this case? 

If an individual or entity has committed tax evasion, the best cause of action is to seek professional help from a Tax Advisor. A Tax Advisor would be able to determine if a transaction/s would be valid for voluntary disclosure, allowing a quick response time to avoid additional penalties, a fine or imprisonment.

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Graeme Saggers is the Tax Director for Nolands. He holds a BCom (Hons) degree from Rhodes University and an MCom (Tax) degree from the University of Cape Town. Graeme qualified as a Chartered Accountant in 2009 after completing his articles at KPMG. He joined Nolands in 2011 as an Audit Manager and was appointed as a Tax Partner at Nolands in September 2014.