Automatic exchange of information (AEOI) is information required by law to be collected by financial institutions around the world for reporting to tax authorities. Tax authorities will exchange this information under international information exchange agreements to help make sure everyone pays the right amount of tax.
In 2010 the United States in an effort to enhance tax compliance by US citizens in foreign jurisdictions or those with offshore accounts, introduced the Foreign Account Tax Compliance Act (FATCA) for purposes of which it concluded intergovernmental agreements, including with South Africa. The FATCA IGA is an international tax agreement and part of the domestic law of South Africa. It requires qualifying South African Financial Institutions to identify and report specified information with respect to each US reportable account (an account held by a Specified US Person or Passive Entity with Controlling Persons that are Specified US Persons) to the South African Revenue Services (SARS).
Following on FATCA, the Organisation for Economic Cooperation and Development (OECD), working with G20 countries, developed in 2014 the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the Standard), which encompasses the OECD’s Common Reporting Standard (CRS). For this purpose, the CRS Regulations were issued under the TAA. The Standard requires financial institutions located in CRS participating jurisdictions to determine and report financial account information of account holders that may be tax resident in a foreign jurisdiction (other than the US, as this is regulated by FATCA) to their tax authority. This information is then automatically exchanged between CRS exchange partners on an annual basis, if or when there is an information exchange agreement in place.
South Africa is an early adopter of the new international standards for AEOI which include both FATCA and the CRS.
The information must be reported to SARS in the data format prescribed by the applicable AEOI Business Requirement Specification (BRS). The reporting periods are aligned with tax years, i.e. commencing 1 March until the end of February of the subsequent year. The closing date for the AEOI Third Party Data returns for the 2016 period was 31 May 2017. For subsequent reporting periods the submission date will also be at the end of May each year.
What is done with the financial account information reported by Reporting Financial Institutions?
SARS must collect and exchange this information with the relevant foreign jurisdictions with which South Africa has a bilateral or multilateral international agreement in place. Under the legislation (the FATCA IGA and CRS Regulations) and the international AEOI agreements, SARS is required to effectively enforce compliance of FATCA and CRS reporting. This includes imposing sanctions for non-compliance with these laws.
What are the sanctions for AEOI non-compliance?
Reporting financial institutions (RFI) submitting AEOI Third Party returns have the following statutory obligations under section 26 of the TAA:
Submit the returns in the prescribed form and manner and containing the information prescribed by the AEOI BRS and the FATCA IGA & CRS Regulations
Ensure that the return is a complete and correct return
For purposes of providing the information required in the return, comply with the due diligence requirements prescribed in a tax Act, an international tax agreement (such as the FATCA IGA), an international tax standard (such as the CRS) or by the Commissioner in a public notice consistent with the international tax agreement or the international tax standard.
The account holders or clients of Reporting financial institutions (RFI) and other persons have the following statutory obligations under section 26 of the TAA:
If, in order to submit a return under section 26 and to comply with the requirements of this section, an RFI requires information or a document from another person (including an account holder or client), that person must provide the information or document required within a reasonable time.
For CRS purposes, where an RFI has no foreign reportable account holders to report, it is required to submit a nil return. The sanctions for non-compliance with these statutory obligations include the imposition of fixed amount administrative penalties under Chapter 15 of the TAA, for the incidences of non-compliance specified in Public Notice 597 (FATCA) and Public Notice 193 (CRS).
What are the incidences of non-compliance subject to administrative penalties?
The incidences of non-compliance with the FATCA IGA as specified in Public Notice 597 that are subject to administrative penalties are the following:
Failure by an RFI to submit a return by the later of 10 July 2015 (the date of Public Notice 597) or the dates for submitting the returns under Public Notice 509, i.e. 30 June 2015 (for the first reporting period of 1 July 2014 to 28 February 2015) and 31 May for subsequent years (every reporting period after the first reporting period.
Failure to remedy the partial or non-implementation of a due diligence requirement under the FATCA IGA within 60 days of the notification by SARS of the partial or non-implementation of the requirement.
Failure to remedy a minor error or an incidence of significant non-compliance referred to in Article 5 of the FATCA IGA within 60 days of the notification by SARS of the minor error or non-compliance.
The incidences of non-compliance with the CRS Regulations as specified in Public Notice 193 that are subject to administrative penalties are the following:
Failure by an RFI to submit a return as required by a public notice issued under section 26 of the TAA
Failure by an RFI to remedy the partial or non-implementation of a due diligence requirement under the CRS Regulations within 60 days
Failure by an RFI to remedy the non-compliance with any obligation under the CRS Regulations within 60 days of the notification by SARS of the non-compliance
Failure by an RFI to, within 60 days of notification by SARS, provide the prescribed details of:
a reportable person that is an account holder;
if the reportable person is an entity, any controlling person of that entity;
any other person; or
any class of the above persons,
5. Failure by:
a reportable person that is an account holder;
if the reportable person is an entity, any controlling person of that entity; or
any other person, listed by an RFI in response to a notice contemplated in paragraph 3, to comply with the person’s obligations under section 26(4) of the TAA.
How does it work?
South African financial institutions must determine if they are Reporting Financial Institutions for purposes of the FATCA IGA with South Africa and the CRS Regulations by having comprehensive regard to these laws. If financial institutions are unsure if they are RFIs, they must approach their advisors for this purpose or contact SARS by emailing Bus_Sys_CDSupport@sars.gov.za. Generally, in terms of the FATCA IGA, financial institutions located in South Africa that are FATCA RFIs, include South African banks and custodians, brokers, asset managers, private equity funds, certain investment vehicles, long-term insurers and other participants in the financial system. Generally, for purposes of the CRS, financial institutions resident in SA that are CRS RFIs, include any Financial Entity (whether a legal entity or legal arrangement such as a trust or partnership) that is a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.
How is the penalty calculated?
The AEOI administrative penalty is calculated based on the fixed amount penalty table reflected below. The Administrative penalty table is in accordance with the table in section 211(1) of the TAA. The calculation for penalties is per incidence of non-compliance. The amount of the penalty is structured to be proportionate to the size of the non-compliant person based on that person’s assessed loss or taxable income for the preceding year.
Fixed amount penalty table:
Item
Assessed loss or taxable income for ‘preceding year’
’Penalty’
(i)
Assessed loss
R250
(ii)
R0 – R250 000
R250
(iii)
R250 001 – R500 000
R500
(iv)
R500 001 – R1 000 000
R1 000
(v)
R1 000 001 – R5 000 000
R2 000
(vi)
R5 000 001 – R10 000 000
R4 000
(vii)
R10 000 001 – R50 000 000
R8 000
(viii)
Above R50 000 000
R16 000
Top tip: The administrative penalty will be escalated by the same amount for each month up to 36 months as long as the non-compliance is not remedied.
Other incidences of non-compliance by RFIs or account holders, clients etc.: Remedy the non-compliance by complying with the relevant obligation.
If you fail to remedy the non-compliance the penalty escalation will continue.
Step 2: Pay the penalty
If you have no reasonable basis for the non-compliance or there are no exceptional circumstances that rendered you incapable to comply, pay the penalty failing which SARS will institute recovery proceedings.
Step 3: Request for Remittance of Admin Penalty
If you have a reasonable basis for the non-compliance (and this is your first non-compliance penalty) or there are exceptional circumstances that rendered you incapable to comply, request SARS to remit the penalty by following these procedures:
Provide the grounds for your non-compliance, demonstrating a reasonable basis for the non-compliance or that there are exceptional circumstances that caused your non-compliance.
You can submit the AEOI Penalty Remittance form at the nearest SARS Branch or by post. In the case of Large Business clients only, the completed remittance form can be emailed to AEOIDisputesLBC@sars.gov.za.
If SARS does not remit your penalty, you can object and appeal SARS’s decision not to remit the penalty by following the dispute process set-out below: Note: Prior to lodging a remittance / dispute to SARS, ensure that you have remedied all incidences of non-compliance that resulted in the imposition of the penalties to avoid the remittance / dispute being rejected by SARS.
Step 4: Lodge an objection if the penalty is not remitted
If the penalty is not remitted under Step 3 and you believe SARS’s decision not to remit is wrong, you may object and appeal the decision not to remit.
An appeal should only be submitted where a Notice of Objection has been disallowed or selectively allowed.
You can either submit the dispute form at the nearest SARS Branch or by post.
In the case of Large Business clients only, the completed remittance form can be emailed to AEOIDisputesLBC@sars.gov.za.
Please Note: It is imperative that each option within the dispute process is concluded before proceeding to the next option else SARS will invalidate the dispute application in cases where the dispute process explained above is not followed.
What about criminal sanctions?
Yes, criminal proceedings may be instituted under section 235 of the TAA if a person wilfully and without just cause:
fails or neglects to submit a return or document to SARS or issue a document to a person as required under a tax Act, such as the TAA, which Act includes any regulation such as the CRS Regulations or public notice issued thereunder, as well as an international tax agreement such as the FATCA IGA, entered into in accordance with a tax Act;
fails or neglects to retain records as required under the TAA (including any regulation or public notice issued thereunder);
submits a false certificate or statement under Chapter 4 of the TAA;
issues an erroneous, incomplete or false document required to be issued under a tax Act to another person (for example, a false self-certification of tax residency required from an account holder by an RFI);
refuses or neglects to furnish, produce or make available any information, document or thing as and when required in terms of the TAA;
fails to comply with a directive or instruction issued by SARS to the person under a tax Act;
fails or neglects to disclose to SARS any material facts which should have been disclosed under this Act or to notify SARS of anything which the person is required to so notify SARS under a tax Act.
Upon conviction, the person is subject to a fine or to imprisonment for a period not exceeding two years. Also, a person who intent to evade or to assist another person to evade tax by using fraudulent means may be guilty of tax evasion under section 235 of the TAA or the common law offence of fraud.
