The United States enacted the Foreign Account Tax Compliance Act (FATCA) in 2010 to combat offshore tax evasion by encouraging transparency and obtaining information on accounts held by U.S. citizens in other countries. FATCA calls for foreign financial institutions to provide the U.S. Internal Revenue Service (IRS) with information about U.S. account holders annually. Failing that, a 30 percent withholding tax will be imposed on the foreign financial institution with regard to certain U.S. source payments, such as interest. The withholding tax is, however, waived if foreign financial institutions enter into disclosure compliance agreements with the US Treasury.
In July 2012, the United States introduced the option of a country entering into an intergovernmental agreement which would alleviate the need for financial institutions to enter directly into an agreement with the United States. The Agreement to Improve International Tax Compliance and to Implement the Foreign Account Tax Compliance Act between the United States and South Africa is a reciprocal agreement, which ensures that financial institutions in South Africa will report information about U.S. account holders to the South African Revenue Service (SARS). SARS will in turn relay that information, by means of automatic exchange of information (AEOI), to the IRS, under the Double Taxation Convention in force between the United States and South Africa. Reciprocally, the IRS will provide similar information about South African account holders in the United States to SARS.
Finance Minister Nene said “South Africa is committed to automatic exchange of information for tax purposes and to thereby make the world a more transparent place from a tax perspective. This commitment has been expressed through South Africa’s role in both the G20 and the Global Forum on Transparency and Exchange of Information for Tax Purposes. Implementing FATCA is South Africa’s first step in AEOI and will lay a sound foundation in extending AEOI to other treaty partners.”
Ambassador Gaspard, who signed on behalf of the United States, stated, “The signing of these agreements is an important step forward in the collaboration between the United States and South Africa to combat tax evasion. When taxpayers overseas avoid paying what they owe, other taxpayers have to bear a disproportionate share of the tax burden. The intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA is an important part of the U.S. government’s effort to address that issue.”