By Michael Dryden (Group Director)
The recent leak of confidential information from a prominent legal firm in Panama has created quite a stir in the media and the tax fraternity. There have been many headlines that give the impression that anyone who had utilized structures in these ‘tax havens’ are in big trouble with the tax authorities – this is quite misleading, and therefore we wish to shed some light on the subject, in a layman manner as we always do.
Firstly, what are the ‘Panama Papers’ that has hit the media so hard? Basically, it relates to a large international law firm based in Panama called Mossack Fonseca. Mossack Fonseca has been setting up company/Trust structures in Panama and other ‘tax havens’ for clients around the globe for decades, and it is alleged that these structures were created mainly to hide wealth and avoid tax. The ‘leak’ which has been dubbed the ‘Panama Papers’ by the media, refers to the electronic documents of Mossack Fonseca being made available to the media, and ultimately to the public at large. Such documents included confidential information such as those that a client would sign to setup a structure with Mossack Fonseca – 11.5million confidential documents were ‘leaked’.
Secondly, is it illegal to utilize such off-shore structures? This is where a lot of confusion was created as the result of the media and lack of information. The use of off-shore structures to hold one’s wealth is perfectly legal – in fact, it is encouraged by many professionals of late due to the political roller-coaster ride we have endured in SA over the last couple of months. The continued decline in the value of the rand also acts as a catalyst for people to move their wealth off-shore.
Thirdly, will SARS be punishing those who use such off-shore structures? This really comes down to whether taxable income was earned abroad, but was not declared in SA. We (South African Taxpayers) are taxed on our ‘worldwide’ income, therefore income earned locally and abroad are to be declared and therefore potentially taxed. Those who have wealth abroad, and do not declare it locally for tax purposes, could find themselves in some trouble with the tax authorities. However, when using off-shore ‘structures’, it is not as cut and dry. Depending on the make-up of the off-shore structure (country/company/trust/directors/trustees etc), income earned therein could possibly fall outside the SA tax net and therefore is not taxable in SA. However, there are many different structures, in many different countries, and therefore each structure is unique and could either result in tax free status in SA, or not. Specialist tax advice is required in order to ensure you remain on the right side of the tax authorities.
For more information on the ‘Panama Paper’ debacle, visit Wikipedia’s page at https://en.wikipedia.org/wiki/Panama_Papers