Lifting the veil of secrecy - South Africa introduces new disclosure requirements and the OECD and SARS together develop international tools to tackle illicit financial flows

Published Date
Dec 12, 2023
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South Africa’s highly publicised grey-listing by the Financial Action Task Force (FATF) in February 2023, following the 2021 Mutual Evaluation Report of South Africa meant the government had to act quickly. This article considers the introduction of the "beneficial ownership" concept into the Tax Administration Act, 2011 (TAA) as part of the ongoing steps taken by the South African government to address deficiencies identified in the 2021 report and the potential impact of these changes.

New beneficial ownership disclosure requirements

Following the 2021 report, the South African Parliament adopted legislative changes in the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, 2022 (the GLA Act) to give effect to the national strategy on South Africa’s Anti-Money Laundering, Countering Terrorism Financing and Countering the Financing of Proliferation (AML/CTF/CFP) regime.

Part of the changes made by the GLA Act included, inter alia, the introduction of the concept of beneficial ownership into the Companies Act 71 of 2008 and the Trust Property Control Act, 1988. This will require the disclosure of beneficial ownership by companies and trusts to the Companies and Intellectual Property Commission (CIPC) and Master of the High Court (Master), respectively. This is to ensure that (i) the identity of ultimate beneficial owners of registered entities is known and (ii) abuse of corporate vehicles as a means of facilitating money laundering and terrorism financing is reduced and mitigated.

In order to align with the national strategy on AML/CTF/CFP, the South African National Treasury (Treasury) has also proposed the following amendments to the TAA through the Tax Administration Laws Amendment Bill:

  • inclusion of a definition of beneficial ownership in the TAA; and
  • amendment of section 70 of the TAA to allow the disclosure of beneficial ownership information of a taxpayer by the South African Revenue Service (SARS) to the CIPC, the Master and the Directorate for Non-profit Organisations (DNPO).

In addition to the above, during 2023, SARS released additional requirements for reporting on the 2023 annual trust tax returns that require trusts to disclose details of their beneficial owners.

What does this mean in practice?

The Treasury has said that identifying beneficial ownership is crucial in tax administration as it helps ensure transparency and accountability in financial transactions.

By identifying the ultimate beneficiaries of certain assets, income, companies, trusts and partnerships SARS will be able to (i) accurately determine taxpayers’ liabilities and (ii) cooperate with other jurisdictions with regards to the exchange of tax-related information, both of which will help prevent tax evasion. Without this information, the Treasury believes that people can hide their assets or income behind complex legal structures, making it difficult for SARS to assess and collect tax accurately.

The amendment of section 70 of the TAA will allow for the cross verification of beneficial owner information between SARS, the CIPC, the Master and the DNPO. This means that SARS can use the information gathered by these institutions to determine companies and trusts which are not tax compliant. For example, by having access to information provided by companies to the CIPC, SARS will be able to identify companies that are non-compliant for VAT purposes where the legislative turnover threshold for mandatory VAT registration has been met.

The impact of the proposed reforms will result in the increased scrutiny of beneficial ownership and greater transparency of taxpayer information. This means that individuals will no longer be able to hide behind complicated legal structures as a means to evade tax. Further, companies and trusts will need to stay up to date on the identity of their beneficial owners for tax-compliance purposes.

The inclusion of the beneficial ownership concept in the TAA supports South Africa’s strategy on AML/CTF/CFP in developing a national integrated, interoperable and harmonised beneficial ownership framework. Beneficial ownership registries and other sources will ensure law enforcement and other competent authorities have timely access to adequate and accurate information on beneficial ownership and control in line with the FATF recommendations.

An international view

Addressing the impact of illicit financial flows (IFFs) on countries’ economic and social wellbeing, undermining of the rule of law and eroding the tax base is a key global issue at the moment.

The Organisation for Economic Cooperation and Development’s (OECD) Task Force on Tax Crimes and Other Financial Crimes (TFTC) is dedicated to combatting IFFs by supporting countries’ implementation of the Recommendation of the Council on the Ten Global Principles for Fighting Tax Crime (TGPs). At a high level, the TGPs set out ten essential legal, institutional, administrative, and operational frameworks necessary to enforce and recover the proceeds of tax and other financial crimes, with one of the central recommendations of the TGPs being the adoption of a whole-of-government approach. Cross-country experiences, however, have shown mixed success in implementing this whole-of-government approach even where the appropriate legal and procedural frameworks are in place, with inter-agency trust often being cited as an underlying issue.

To address this challenge, the TFTC, in collaboration with SARS, has developed two new tools to assist jurisdictions in assessing and improving their level of maturity as regards inter-agency trust and whole government approaches. The tools are the:

  • Inter-Agency Trust Maturity Model – which is a tool for jurisdictions to self-assess the level of maturity of their practices and processes for achieving and maintaining inter-agency trust; and
  • Inter-Agency Trust Perception Survey – this is a tool intended to help tax and other financial crime authorities understand how they perceive each other and whether they need to work further to improve perceptions and trust.

These tools are discussed in detail in a report published by the TFTC and SARS on 8 December 2023 – “Enhancing Inter-Agency Trust Between Tax and Other Financial Crime Authorities”. The OECD states that, in addition to being available to any jurisdiction to use as it sees fit, this publication will be used as part of the OECD/UNDP Tax Inspectors without Borders for Criminal Investigation programmes.

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This content was originally published by Allen & Overy before the A&O Shearman merger