South Africa’s taxman takes AI-backed aim at tax-dodging crypto owners

The South African Revenue Service (SARS), the country’s tax collecting authority, is doubling down on its efforts to bring about more compliance among crypto traders and investors. 

In a bit of a stern warning issued to the local public today, the taxman said it is rolling out a plan to rein crypto assets into its compliance programs, with intent to chase tax-dodging owners. Backed by AI and machine learning, it seeks to track down individuals failing to declare their crypto transactions. This is part of a broader aim at ensuring all taxpayers, including crypto traders, meet their obligations.

From the look of things, SARS is not going on this exercise in isolation. It is now teaming with the Financial Sector Conduct Authority (FSCA), the nation’s financial institutions market conduct regulator, to obtain in-depth information from registered crypto asset service providers (CASPs). 

It is also getting data directly from local crypto exchanges, allowing it to monitor transactions and cross-reference them against tax filings to pick out discrepancies. The exchange of data is not limited to local actors. Through multilateral agreements, SARS shares info with international tax authorities, tightening the net around taxpayers holding offshore crypto accounts.

The clampdown comes when crypto ownership has surged. Per SARS' estimates, more than 5.8 million South Africans currently hold a crypto asset. Southern Africa has one of the highest Bitcoin adoption rates globally, making the region a hotspot for crypto-related activities. 

The tax authority's latest efforts align with its broader objective fostering a culture of voluntary compliance among taxpayers. SARS believes most taxpayers and traders are honest and willing to fulfill their legal obligations if given clear guidance and support. However, for those who are willfully non-compliant, it wants to make it increasingly difficult, even costly, to evade taxes. 

For reinforcement, SARS is expanding the capacity of its audit teams, now specifically tasked with monitoring crypto investments and trades. Added to human oversight, it is leveraging tech; using AI, machine learning, etc., has become central, allowing it to process vast amounts of data efficiently.

As part of its audit process, SARS has begun issuing query letters to taxpayers who have been identified as holding or trading crypto assets. These letters are designed to gain insight into taxpayers' crypto investments and trading activities, enabling SARS to assess their compliance with tax regulations.

The use of advanced technology is not unique to South Africa, but SARS using AI to track crypto transactions is noteworthy. It allows it to identify patterns of non-compliance more effectively, providing it with tools to pursue evaders with precision. The full extent of AI use is unclear, but failing to declare attracts penalties of up to 150% of owed tax, depending on severity of non-compliance.

SARS' voluntary disclosure program (VDP) offers a lifeline. Taxpayers who wish to come clean about their dealings, under the VDP, can disclose without facing the penalties attached to non-compliance. However, it comes with strict conditions. A key requirement is taxpayers must approach SARS before identifying for an audit. Once flagged for an audit, they are no longer eligible to participate in the VDP. 

SARS Commissioner Edward Kieswetter has been vocal about compliance across the board. He emphasized that evasion not only undermines the integrity of the tax system but also places an unfair burden on those who do comply. Kieswetter said it “limits the government's ability to provide critical services, including social grants, which are essential to supporting South Africa's most vulnerable citizens”. 

South Africa's regulatory stance on crypto has evolved over the past few years. In 2022, the country became one of the first in Africa to grant it legal status. This paved way for a regulatory framework. As a result, 138 crypto companies have received operating licenses, bringing them under the purview of financial regulators. However, compliance remains a major issue; many investors still fail to declare profits.

Crypto assets are classified as financial instruments under the Income Tax Act, meaning they are subject to capital gains and income taxes. In some cases, value-added tax (VAT) equally applies. Any sale, exchange, or disposal of crypto is considered taxable. This applies to both individuals and companies, rates as high as 45% for individuals and 27% for corporations. The misconception that profits are not taxable has led to widespread non-compliance.

As SARS ramps up efforts to enforce compliance, taxpayers are persuaded to take action. Combining increased audit capacity, advanced technology, and international cooperation means that it could be increasingly difficult for crypto holders to hide their activities. For those yet to declare, the window for voluntary disclosure is narrowing.