News analysis: new legislation means south african investors must declare foreign-held assets or risk prosecution
South African intermediaries with clients holding offshore money could not only be faced with criminal penalties under new income tax and money-laundering legislation, but also may suffer a loss of clients due to it.
Two new pieces of legislation have been introduced that could potentially make life difficult for intermediaries.
Under the Taxation Laws Amendment Act 2002, South African investors from the beginning of 2003 must declare all foreign-held assets ' or face tax or even criminal penalties.
Subsequently, intermediaries may also face criminal penalties from the beginning of 2003 under the Financial Intelligence Centre Act 2001 if an investor goes to them for advice and they do not report it to the authorities.
The problem arises as there is no amnesty period for the introduction of the new laws.
With no amnesty period it is not likely investors will disclose any offshore assets that have been illegally acquired over the years, due to the fear of reprisals.
There are many industry concerns surrounding the new laws.
Marcel Bradshaw, the national manager of offshore distribution at Old Mutual International said the problem is that it is difficult for an intermediary to give any advice to a client if there is no amnesty period as they are uncertain what the repercussions will be.
If the client does not come forward, then obviously there is the possibility of a prosecution for both the investor and their adviser.
However, if the investor does come forward, there is still a chance the authorities could decide to prosecute.
No one is sure what the consequences will be. For example, since 1997 it has been obligatory for income tax purposes to declare income from foreign bank accounts.
If a South African investor goes to an intermediary for advice in respect of funds where they have not done this, then they risk being reported to the Financial Intelligence Centre.
The fear is that the authorities would want two or three high-profile cases to make examples of South Africans who declare their offshore assets.
Mark Alexander, divisional director compliance at South African intermediary company Liberty Life, has said investors should seek legal advice if they are unsure.
For intermediaries, these changes could also mean a loss of business. As Sonnenberg Hoffman Galombik point out, there are concerns that individuals who hold money illegally offshore will now seek their advice from offshore intermediaries. The reputable advisory companies may lose out.
Exchange controls in South Africa are not a new concept: intermediaries have been required to keep tabs on the money that enters and leaves the country for some time. The extra vigilance will mean additional record keeping administrative procedures. Sonnenberg Hoffman Galombik has warned this may introduce an extra cost to companies.
However, it is generally agreed that the legislation is necessary for the South African economy. Tax reform is needed for South Africa to be able to grow economically.
There are only a small number of tax-payers as the unemployment rate is around 40%.
According to finance minister, Trevor Manuel, in a recent speech, by maximising the revenue raising instruments for the government and by restructuring government expenditure towards social services, the government will contribute to a better life for all South Africans and put in place a macroeconomic framework conducive to investment and economic growth.
The legislation also comes in line with money laundering and tax legislation worldwide.
It is important South Africa complies with the standards set by the Financial Action Task Force on Money Laundering and the Basel Committee, which are becoming increasingly global. Complying with these standards will encourage investment in the country.
Failure to comply can only lead to a reluctance on the part of the investment community to invest in South Africa.
Sonnenberg Hoffman Galom-bik estimates that more than $19bn of dirty money is laundered in South Africa each year.
With the current crackdown on terrorism globally, the introduction of money-laundering legislation in South Africa co-incides with a new Terrorism Bill and these two pieces of legislation will complement each other.
It will provide a legislative framework for combating terrorism and the means by which it is financed.
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