(The following article has been compiled on a bespoke basis by our associate tax expert, Robyn Rogers, for Dynasty clients)
Much has already been written about the surprise change by SARS to the process to transfer funds abroad. This article has been written to provide more detail on the specific requirements under the new process and the differentiation between the disclosures required by residents and non-residents.
The changes are not an attempt to curb Exchange Controls or to prevent the transfer of funds abroad (although, this may be an unintended consequence). Rather, they have been introduced in order to, inter alia, strengthen tax compliance. Reading between the lines, it appears that disclosures provided under the new TCS process will be verified against information provided to SARS by third parties (for example, under the Common Reporting Standard).
Following the changes, individuals can now apply for two types of TCS pins:
- Good standing; and
- Approval for International Transfer.
A TCS is not required for the Single Discretionary Allowance (of R1m per calendar year), although this allowance is not available to non-tax residents.
The ‘Approval for International Transfer’ process applies to both tax residents and non-tax residents. However, it appears that residents are required to provide more information than non-residents.
APPLICATIONS BY NON-RESIDENTS:
If the application is made by a non-tax resident, the applicant needs to provide:
- The date they ceased to be non-tax resident.
- A detailed Capital Gains Tax calculation schedule relating to any tax payable on the deemed disposal of assets on the day before the taxpayer ceased to be tax resident, in accordance with section 9H(2) of the Income Tax Act.
- The country where they will be tax resident.
APPLICATIONS BY RESIDENTS:
Perhaps the biggest changes to the TCS process is that tax resident applicants are now required to disclose whether they:
- are beneficiaries of local and/or foreign trusts;
- have any direct or indirect shareholding in any legal entity (local or foreign) of 20% or more; and
- have any existing loans to a local or foreign trust.
If an applicant is a beneficiary of a trust, the following additional information must be provided:
- Registered name of the trust.
- Trust number.
- Trust tax number (in the case of a local trust).
- The ID number and income tax number of the main trustee/representative taxpayer of the trust (in the case of a local trust).
If the applicant has a direct or indirect shareholding in a local or foreign legal entity, the following details must be provided:
- Whether the entity is local or foreign.
- Registered name of the entity.
- Trading name of the entity.
- In the case of a local entity, the registration number and income tax reference numbers are compulsory.
- Estimated value of current shareholding. This suggests that applicants are expected to provide an estimate of the market value of the shareholding at the time of submission of the TCS application. It remains to be seen whether SARS will request documentary proof in the form of a valuation for the estimate provided.
- Percentage shareholding.
What is not clear is what SARS regards as “indirect shareholding” in an entity. For example, will SARS expect disclosure of indirect shareholding where the applicant is the beneficiary of a trust that holds a 20% interest (or greater) in a legal entity.
Where an applicant has advanced a loan to a local or foreign trust, disclosure of the current loan amount as well as the interest rate applied on the loan, is required. Presumably this is to ensure compliance with section 7C and transfer pricing provisions (in the case of foreign loans) and that the applicant has been paying tax on the loan interest.
DISCLOSURE OF ASSETS AND LIABILITIES:
Both residents and non-residents are required to disclose their local and foreign assets and liabilities (at cost).
SUPPORTING DOCUMENTS REQUIRED FOR INTERNATIONAL TRANSFERS:
Both residents and non-residents are required to submit the following supporting documents:
- Specific documents that demonstrate the source of the capital to be invested.
- A statement of local and foreign assets and liabilities for the previous three tax years (including disclosure of all investments, loan accounts and distributions from local and foreign companies, trusts etc.).
- If the applicant is a non-tax resident, proof that the taxpayer ceased to be tax resident in South Africa. Considering the delays and challenges that clients are experiencing when going through the ‘cessation of tax residency’ process, this requirement will have a “knock-on” delay for those who have already left South Africa but who have not completed the cessation of tax residency process.
The new process is administratively far more onerous than the old approval process and there are clearly some grey areas that still need to be resolved.
Robyn Rogers
B Com (LLB) (LLM, Tax) SAIT Master Tax Practitioner (SA)
4 May 2023