South Africa’s Addition to FATF Gray List Causes Unforeseen Repercussions on Tax Law Implementation

Tax Consulting SA’s report has revealed that greylisting has caused disquietude surrounding cross-border remittances due to money laundering concerns.

The global watchdog Financial Action Task Force (FATF) on 24 February 2023 added South Africa to its grey list. Even so, the addition to the FATF was widely anticipated since the organisation found loopholes in existing regulations designed to eradicate terrorist financing and money laundering. Despite the greylisting, Tax Consulting SA reports that cross-border transactions were scrutinised more closely because concerns were expressed about the country’s anti-money laundering efforts.

To assist international businesses in removing themselves from greylisting, SARS implemented the “Approval International Transfer (AIT)” or “Tax Compliance Status (TCS)” process. Before remitting money out of South Africa, relevant individuals have to get approval from SARS, and not getting it can lead to fines, penalties, or even jail time.

The tax consulting company said, “By introducing the new approval process, SARS is demonstrating a commitment to preventing financial crime. The AIT process potentially reduces the risk of the more detrimental blacklisting, which follows from failure to cooperate. The new processes’ impact extends beyond individuals and may even affect businesses. Individuals and businesses involved in cross-border transactions, including property transactions with foreign investors, will be held to stringent exchange control requirements for clearance.”

Tax Consulting SA stated, “These requirements will include the accurate completion of the AIT process, where required, to legitimise the transfer of funds in each case.”

The new AIT process requires that investors provide documentation indicating where the capital comes from as well as a statement of assets and liabilities for the prior three tax years, including information concerning investments, loans, distributions from local and foreign firms. The application for tax compliance status must be submitted by someone else with a power of attorney.

People need to confirm their residency status before transferring money overseas. Non-residents who transfer capital cross-border can use this process, no matter how big the deal is. Therefore, even small transactions, like sending money to family or moving retirement fund assets abroad, need SARS’ approval.

To get SARS AIT approval, recipients must provide detailed information regarding the transaction, including the recipient’s identity and the source of money. Afterward, SARS will review the information and may ask for more information.

Tax Consulting SA stated, “A noteworthy point to remember is that individuals who have already gone through the financial emigration process with SARB and their authorised dealer (their bank), using the MP336(b) form, will need to provide a Non-Resident Confirmation Letter from SARS. It is crucial not to erroneously apply as a tax resident if a prior declaration of non-residency has been made to SARS.”

In addition to the banking sector, the impact of SARS-AIT extends to all types of businesses. The AIT approval rules impact several business sectors, including banking, real estate, and financial services. This is particularly true for companies that engage in cross-border trade with foreign entities and associated transactions. Money can only be remitted out of South Africa with approval from SARS for property transactions involving foreign investors.

A new level of protection against financial crimes is now being enforced by South African banks by the South African Reserve Bank (SARB). According to Tax Consulting SA, SARB has become much more stringent in implementing BoP requirements because of SARS’ alignment with international standards. SA’s greylisting status may lead to additional administrative and precautionary requirements. According to tax experts, SARS-AIT and BoP requirements are essential for South Africa to adhere to AML/CFT standards and maintain the integrity of cross-border transactions.

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