A CRITICAL ANALYSIS OF EXCHANGE CONTROL IN A SOUTH AFRICAN CONTEXT By Rushika Valodia A research report submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, Johannesburg, in partial fulfilment of the requirements for the degree of Master of Commerce (specialising in Taxation) Date: 28 March 2019 Student number: 1763763 Supervisor: Roy Blumenthal ii ABSTRACT Since the implementation of exchange control, it continues to play a pivotal role in South Africa. In South Africa, exchange control has evolved, specifically there has been a gradual liberalisation in the related rules and regulations. To this extent, it is crucial to consider the relevance of exchange control in South Africa and the potential consequences of repealing the regulations, including the implications on the collection of taxes by the South African Revenue Service (SARS). This research report seeks to explore this. While there have been countries that have maintained its exchange control regulations, there have also been others which have abolished the regulations. The evolution of South Africa’s exchange control will be compared to Mozambique, Iceland and Venezuela. These countries have been selected based on their economic climates, current exchange control limitations and to gauge an understanding of potential challenges and consequences these countries have experienced and those that South Africa will likely face as a result of repealing its exchange control regulations. The South African Reserve Bank (SARB) monitors the imposition of exchange control as the current regulations have control over South African’s foreign currency reserves, accruals and the spending thereof1. SARS and SARB jointly ensure that taxpayers are compliant and that there are no contravention of exchange control regulations2. A key finding arising from the research is the potential effect that the abolishment of exchange control will have in South Africa. The risks and rewards associated with abolishing exchange control regulations has gone unasked and unanswered in academic literature. Finally, as part of the critical analysis of exchange control in South Africa this research report aims to provide a recommendation on the continued liberalisation or potential retraction of exchange control regulations in South Africa, and the mitigations against adverse effects on the parties to exchange control. 1 SARB, 2016, ‘Exchange control legislation’. 2 National Treasury Republic of South Africa, 2016, ‘Special Voluntary Disclosure Programme in respect of offshore assets and income’. iii Key words Authorised Dealer, Authorised Dealer Manual, Common Monetary Area, CMA, Exchange Control, Financial Surveillance Department, FSD, Organisation for Economic Co-operation and Development, OECD, South African Development Community, SADC, South African Revenue Service, SARS, South African Reserve Bank, SARB. iv DECLARATION I declare that this research report is my own unaided work. It is submitted for the degree of Master of Commerce at the University of the Witwatersrand, Johannesburg. It has not been submitted before for any other degree or examination at any other university. ________________________________ Rushika Valodia 28 March 2019 v TABLE OF CONTENTS ABSTRACT .......................................................................................................................................... II DECLARATION ................................................................................................................................ IV LIST OF ABBREVIATIONS AND ACRONYMS .............................................................................. 1 CHAPTER 1: INTRODUCTION ........................................................................................................ 2 1.1 EXCHANGE CONTROL RATIONALE ................................................................................................ 2 1.2 PROBLEM STATEMENT ................................................................................................................. 7 1.2.1 THE RESEARCH PROBLEM ............................................................................................................ 7 1.2.2 THE SUB PROBLEM ....................................................................................................................... 8 1.3 RESEARCH METHODOLOGY .......................................................................................................... 9 1.4 CHAPTER OUTLINE ....................................................................................................................... 9 CHAPTER 2: OVERVIEW OF EXCHANGE CONTROL .............................................................. 12 2.1 INTRODUCTION .......................................................................................................................... 12 2.2 EXCHANGE CONTROL RESIDENCE AND THE PRACTICAL IMPLICATIONS ...................................... 12 2.3 TAX AND EXCHANGE CONTROL .................................................................................................. 16 2.3.1 Influential exchange control case law in South Africa ......................................................... 20 2.3.1.1 The Shuttleworth cases ......................................................................................................... 20 2.3.1.2 Oilwell v Protec .................................................................................................................... 21 2.3.1.3 Krok v CSARS ....................................................................................................................... 22 2.4 SUMMARY REMARKS ................................................................................................................. 23 CHAPTER 3: THE EVOLUTION OF EXCHANGE CONTROL ................................................... 25 3.1 INTRODUCTION .......................................................................................................................... 25 3.2 SOUTH AFRICA COMPARED TO THE SADC ................................................................................ 25 3.3 SOUTH AFRICA COMPARED TO ICELAND .................................................................................... 30 3.4 SOUTH AFRICA’S HOLISTIC MOVEMENT IN EXCHANGE CONTROL ............................................... 33 3.5 JOINT TAX AND EXCHANGE CONTROL AMNESTY ........................................................................ 37 3.6 SUMMARY REMARKS ................................................................................................................. 42 CHAPTER 4: INDICATIORS OF THE LIBERALISATION OF EXCHANGE CONTROL IN SOUTH AFRICA ............................................................................................................................... 43 4.1 INTRODUCTION .......................................................................................................................... 43 4.2 INDICATORS OF LIBERALISATION ............................................................................................... 43 4.3 SUMMARY REMARKS ................................................................................................................. 50 CHAPTER 5: CONSEQUENCES OF ABOLISHING EXCHANGE CONTROL IN SOUTH AFRICA .............................................................................................................................................. 51 5.1 INTRODUCTION .......................................................................................................................... 51 5.2 ANALYSIS OF REPEALING EXCHANGE CONTROL IN VENEZUELA ............................................... 51 5.3 POTENTIAL CONSIDERATIONS IN SOUTH AFRICA ....................................................................... 55 5.3.1 POTENTIAL RISKS ....................................................................................................................... 57 5.3.2 POTENTIAL REWARDS ................................................................................................................ 64 5.4 SUMMARY REMARKS ................................................................................................................. 71 CHAPTER 6: CONCLUSION ........................................................................................................... 74 vi 6.1 INTRODUCTION .......................................................................................................................... 74 6.2 OVERALL SUMMARY REMARKS AND CONCLUSION ..................................................................... 74 REFERENCES ................................................................................................................................... 77 APPENDICES .................................................................................................................................... 88 APPENDIX ‘A’ ......................................................................................................................................... 88 APPENDIX ‘B’ ......................................................................................................................................... 89 APPENDIX ‘C’ ......................................................................................................................................... 90 1 LIST OF ABBREVIATIONS AND ACRONYMS BEPS Base Erosion Profit Shifting CFC Controlled Foreign Companies CGT Capital Gains Tax CMA Common Monetary Area CRS Common Reporting Standards DTA Double Tax Agreement DTI Department of Trade and Industry EOIR Exchange of information on request FICA Financial Intelligence Centre Act FSD Financial Surveillance Department IFWG FinTech Working Group IMF International Monetary Fund IN30 Interpretation Note 30 (Issue 3) ISK Icelandic Króna JSE Johannesburg Stock Exchange MCAA Multilateral Competent Authority Agreement MZN Mozambican metical NEP No Exchange Provided OECD Organisation for Economic Co-operation and Development SADC South African Development Community SAEFITM Standard for Automatic Exchange of Financial Information in Tax Matters SARB South African Reserve Bank SARS South African Revenue Service SVDP Special Voluntary Disclosure Programme TAA Tax Administration Act VAT Value-Added Tax 2 CHAPTER 1: INTRODUCTION 1.1 Exchange control rationale The Minister of Finance has delegated the Treasury’s powers, duties and functions, in terms of the foreign exchange regulations, to the governor of the SARB3. Exchange Control represents exchange operations undertaken by the SARB, specifically the Financial Surveillance Department (FSD) of the SARB, who delegates authority to the Authorised Dealers. The FSD’s role is to view contraventions of the exchange control regulations. Further, to circumvent the conditions specified in two manuals, namely: the Currency and Exchange Control Manual for Authorised Dealers in Foreign Exchange (Authorised Dealers Manual) and the Currency and Exchanges Manual for Authorised Dealers in foreign exchange with limited authority (ADLA Manual). Any request made to the FSD must be channelled through an Authorised Dealer4. The Authorised Dealers are not agents of the FSD, however they act on behalf of their customers5. Under the circumstances that the Authorised Dealer is not authorised to lend currency in terms of the Authorised Dealers Manual, an official application must be submitted to the FSD6. The illustration below displays the organisational structure of the exchange control operations. 3 PKF, 2018, ‘Understanding the history and rationale for exchange control’. 4 SARB, 2018, ‘Currency and Exchanges guidelines for individuals’, p. 3 – 9. 5 PKF, 2018, ‘Understanding the history and rationale for exchange control’. 6 SARB, 2018, ‘Currency and Exchanges Manual for Authorised Dealers’, p. 13. Treasury SARB Authorised Dealers FSD 3 The authorities in South Africa were concerned with the diminishment of direct foreign investment and capital flight outside of the country, therefore measures were sought to prevent a total economic collapse in South Africa7. In essence exchange control regulations were implemented in South Africa in order to protect foreign reserves and exchange rate fluctuations.8 The exchange control regulations were introduced in 19339. The exchange control regulations are an instrument that was designed to achieve effective monetary policy, to again protect the foreign reserves and exchange rate in South Africa.10 Exchange control is viewed to be a synonym for exchange restrictions as it is the duty of the Central Bank to maintain external stability of the national currency11. Exchange control was viewed to be a form of ‘emergency finance’ in terms of the Emergency Finance Regulations which was first introduced in South Africa at the outset of World War II in 193912. A financial emergency is a situation in which a financial crisis may arise, this may be a fiscal and financial problem for which there is no reasonable prospect of resolution13. The exchange control regulations were introduced in 193314. In practice, exchange control poses restrictions on individuals, including taxpayers, and various companies in remitting funds offshore, whilst also affecting the flow of funds into South Africa. Specifically, in terms of regulation 10(1)(c) of the South African exchange control regulations: no person shall, except with permission granted by Treasury and in accordance with such conditions as the Treasury may impose enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic. There was uncertainty around the meaning of ‘capital’ as stated in the regulations, which was clarified in Oilwell v Protec15. 7 PKF, 2018, ‘Understanding the history and rationale for exchange control’. 8 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 42. 9 PKF, 2018, ‘Understanding the history and rationale for exchange control’. 10 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 42. 11 Einzig, P., 1934, ‘Exchange Control’, p. 9 & 10. 12 Chait, A., 2018, ‘The Exchange Control Regulations in South Africa’. 13 South African Department of Finance, n.d., ‘Policy Framework for municipal borrowing and financial emergencies’, p. 32 14 PKF, 2018, ‘Understanding the history and rationale for exchange control’. 15 (295/10) [2011] ZASCA 29 (18 March 2011) 4 This transfer of funds in and out of South Africa requires any person to obtain approval from exchange control authorities, collectively referred to Authorised Dealers for purposes of this research report.16 The current exchange control regulations are issued in terms of the Currency and Exchanges Act, No 9 of 1933, as amended and promulgated by Government Notices. Initially, Central Banks directly or indirectly aimed at controlling the exchange rates. The measures undertaken are collectively known as general monetary policy, bank rate policy, open market policy and foreign exchange policy. These are viewed to be the normal practices of a Central Bank. While, in later times other factors influencing exchange control were explored by the Central Banks, collectively known to be the intervention, exchange restrictions, gold policy, exchange clearing, import restrictions, encouragement of exports, barter and embargo on foreign loans.17 During 1960, the Sharpeville shootings caused an increased concern for an economic recession and capital flight from South Africa. The application of exchange control was more stringent during apartheid, specifically during 1985. The factors which affected the economy were disinvestment campaigns, withdrawal of loan funding, international sanctions and trade boycotts. At this stage, any transfer of funds with the exception of normal trade-related transactions, required prior approval from the Authorised Dealers.18 The financial rand was an alternative currency which was used in conjunction with the commercial rand. It was first introduced in the 1960s and later abolished with effect from 13 March 1995. The financial rand was a currency which was available to foreigners (in other words South African non-residents), which would arise from the sale of their assets and for purposes of investment into South Africa. Accordingly, the financial rand was only available for use by foreigners. A characteristic of the financial rand is that it was viewed as a discounted commercial rand.19 16 Chait, A., 2018,‘The Exchange Control Regulations in South Africa’. 17 Einzig, P., 1934, ‘Exchange Control’, p. 9 & 10. 18 Department of Justice and Constitutional Development, n.d., ‘Final report of the Commission of Inquiry into the Rapid Depreciation of the Rand and Related Matters’, p. 50. 19 SOHO, 1995, ‘South African abolishes financial Rand’. 5 During 1992, the political affairs in South Africa deteriorated, which caused the financial rand rate to weaken and gave rise to increased volatility in the financial rand rate. Consequently, there was greater pressure placed on individuals and companies to withdraw investments from South Africa. This also caused reluctance in investors to hold on-going investments in South African companies, such as shareholding.20 Accordingly, new exchange control measures were implemented during December 1992. The Authorised Dealer Manual must be read in conjunction with the exchange control regulations. The Authorised Dealer Manual comprises of the conditions and permissions which are applicable to foreign exchange transactions. In terms of exchange control regulation 2(2), the related exchange may be undertaken by Authorised Dealers on behalf of clients. This regulation also explains the administrative responsibilities and the reporting requirements as stipulated by the FSD. Provided that the Authorised Dealer Manuel permits the execution of certain transactions by the Authorised Dealers then the FSD’s involvement is not required.21 Since then exchange control has evolved in South Africa. Following the democratic elections in South Africa in 1994, there has been a gradual liberalisation in exchange control practices, in order to simplify and streamline exchange control regulations22. Furthermore, the relaxation is shown through its less stringent ways which includes the numerous updates made to the Currency and Exchange guidelines, and during 2016 the Exchange Control Rulings were replaced with The Currency and Exchanges Manual for Authorised Dealers23. It was decided that exchange control should be maintained as it acts as a cushion in the event of a sudden flight of capital offshore24. As a result of the increased direct foreign investments made by South African companies, the financial rand rate fell by more than 40 per cent during 199225. During 2003 the joint tax and exchange control amnesty was introduced. The introduction was to place confidence in the South African economy in times of unfavourable international economic climate. The purpose of the amnesty would allow the regularisation of individual’s 20 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 131. 21 SARB, n.d., ‘Currency and Exchanges documents’. 22 Visser, A., 2017, ‘#Budget2017: Are exchange controls an issue?’. 23 Chait, A., 2018, ‘The Exchange Control Regulations in South Africa’. 24SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 127. 25 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 130. 6 affairs in relation to their foreign assets. The amnesty proved to be necessary as many South African’s had the desire to repatriate their funds offshore due to international co-operation in tax compliance. International tax co-operation involves the offering of lower tax rates with an objective of attracting foreign direct investment.26 International tax co-operation also relates to the transparency and co-operation relating to tax matters. In this regard, the Organisation for Economic Co-operation and Development (OECD) provides key indicators and outcomes of countries which tie in with exchange of information for tax purposes (in other words exchange of information on request (EOIR)) and an inclusive framework of Base Erosion Profit Shifting (BEPS).27 Further, South African’s had an interest in repatriating funds to tax havens. Tax havens are typically offshore countries or jurisdictions that impose a minimal tax liability on foreign businesses and/or individuals. These individuals are not required to be a tax resident in the applicable country and the businesses are not required to operate in the country.28 During 2014 and 2015, two cases arose, namely: South African Reserve Bank and Another v Shuttleworth and Another29, and Shuttleworth v South African Reserve Bank30. These cases are collectively referred to as the Shuttleworth cases for purposes of this research report. In the Shuttleworth cases, it was established that Exchange Control is not a tax raising mechanism, in other words not a form of taxation in terms of the South African Income Tax Act (Income Tax Act)31. Instead it was regarded as a regulatory mechanism to prevent the remittance of capital offshore by imposing an exit charge.32 If foreign assets or funds were not declared or accounted for in the taxpayers South African income tax return, in terms of the Financial Intelligence Centre Act, 38 of 2001 (FICA), SARS had the power to impose income tax on a calculated amount of foreign-held assets or funds.33 26 FitzGerald, V., 2012, ‘International Tax Cooperation and Innovative Development Finance’, p. 1. 27 OECD, n.d., ‘International tax co-operation: Key indicators and outcomes’. 28 CFI Education Inc., n.d., ‘What is a tax haven?’. 29 [2015] ZACC 17. 30 (864/2013) [2014] ZASCA 157 (1 October 2014). 31 No. 58 of 1962. 32 Evans, S., 2015, ‘Shuttleworth loses R250m exit charge case in ConCourt’, Mail&Gaurdian. 33 Botha, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 4. 7 In later years, electronic foreign exchange (eForex) was introduced and approved by the SARB. This posed challenges to the ordinary Exchange Control processes, which resulted in an inclusion of eForex into the normal exchange control rulings and regulations. Currently, uncertainty exists relating to the tax and Exchange Control implications arising from Cryptocurrency transactions, such as Bitcoin34. This virtual currency has been defined by the European Central Bank as follows: a digital representation of value that is neither issued by a Central Bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.35 A Position Paper on Virtual Currencies was issued by the SARB stating that cryptocurrencies are: a digital representation of value that can be digitally traded and functions as a medium of exchange, a unit of account and/or a store of value, but does not have legal tender status [underlining added for emphasis].36 Therefore, in itself, cryptocurrencies are not subject to regulation by the SARB. Careful consideration should still be made by South Africans when dealing in cryptocurrencies. The SARB has indicated that it intends on releasing a new position paper on the approach to cryptocurrencies.37 Accordingly, South Africa continues to apply exchange control regulations and requires the prior approval from Authorised Dealers to remit funds offshore. 1.2 Problem statement 1.2.1 The research problem The main research problem is a critical analysis of exchange control in a South African context. This involves understanding its history (in other words the reason it was initially implemented), its evolution since this and as a result, the liberalisation of regulations over 34 Gad, R. et al., 2018, ‘The tax and exchange control implications of cryptocurrency transactions’. 35 European Union, 2016, ‘Opinion of the European Union of 12 October 2016 on a proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC’. 36 SARB, 2014, ‘Position Paper on Virtual Currencies’. 37 Gad, R. et al., 2018, ‘The tax and exchange control implications of cryptocurrency transactions’. 8 time. The aim is to conclude on the role of exchange control in South Africa, the continued relevance of exchange control in South Africa and the consequences that may arise post abolishment of the same regulations. The authors aim is to contribute to global knowledge, by compiling exchange control considerations in association with practical implications and taxation matters, specifically in a South African context. 1.2.2 The sub problem This research report aims to analyse the exchange control regulations in South Africa and in order to address the main research problem, specified above, the sub-questions set out below will be addressed as part of this research report. i. The implications exchange control has had on taxpayers and the SARS. Following this, the potential consequences that may arise from repealing the exchange control regulations in South Africa, for example, the extent of tax collection by the SARS. ii. The current exchange control regulations in South Africa compared to Mozambique and Iceland. The purpose is to gauge an understanding of the scope of Exchange Control’s movement in South Africa compared to these jurisdictions. As a result, the implications of exchange control in these jurisdictions compared to South Africa and its progress will be considered. iii. Since Exchange Control was brought into effect, its rationale, change and evolution to date will be analysed. In assessing the aforementioned, the change in the exchange control policy, all indicators of South Africa repealing exchange control, and its gradual liberation will be reflected upon. In addition, the implications this liberalisation has had on the South African tax base, if any, will be accessed. iv. The potential consequences of repealing exchange control in South Africa will be discussed by understanding the consequences another jurisdiction has faced, 9 namely: Venezuela. This will be applied to a South African context, in discussing the effect on foreign direct investment, expansion of South African companies on a global basis and tax matters. v. Finally, the reasons South Africa should or should not abolish the exchange control regulations will be explored. Accordingly, addressing the prevalence of exchange control in South Africa will be considered. 1.3 Research methodology The research method adopted is of a qualitative, interpretive nature, bases on a detailed interpretation and analysis of amongst other things, case law. An extensive literature review and analysis will be undertaken that includes numerous sources, namely: books, cases, electronic databases, electronic resources – internet, journals, magazine articles, publications, and statutes. 1.4 Chapter outline The purpose and overview of each of the Chapters going forward in this research report is presented below. Chapter 1: Introduction Chapter 1 provides an overview of exchange control and its history which includes what exchange control is, the structure of exchange control reporting, when and why it was introduced, its purpose and what it was designed to prevent. In a South African context, the structure of exchange control and its evolution since it came into effect has been provided. This chapter also explains the research problem and the sub-problems which sets out the premise for the research report. Chapter 2: Overview of exchange control Chapter 2 of this report provides a brief overview is provided of exchange control residence and the practical implications of being an exchange control resident. It also presents a general overview of the tax-related matters which are considered as part of exchange control in South 10 Africa. It addresses South Africa’s tax collection by the SARS, which also considers the multiple parties; namely: the SARS, the SARB and a taxpayer. Furthermore within a South African context, it is considered whether exchange control acts a tax or regulatory mechanism, as discussed in the Shuttleworth cases. The impact and outcomes of other influential case law in the exchange control and tax space will be considered, namely: Oilwell v Protec [2011] and Krok v CSARS [2015]. Accordingly, these cases support the view that exchange control and tax are interlinked. Chapter 3: The evolution of exchange control Chapter 3 analyses the chosen jurisdictions exchange control regulation and compares this to the South African regulation. The jurisdictions for consideration include Mozambique and Iceland. Mozambique is a part of the Southern African Development Community (SADC), which lead to this being chosen. The access to information and the extent of information available also played a role in the selection Mozambique, as opposed to another SADC country. Further, Iceland, a European country, is in the process of liberalising capital controls, which lead to the selection of this comparative jurisdiction. The Bahamas is also in the process of liberalising exchange control regulations, however this research report has been limited to analysing one other jurisdiction, namely: Iceland. This chapter aims to identify differences between South Africa and the respective jurisdictions, the scope of its movement compared to that of South Africa and assessing South Africa’s exchange control. The joint tax and exchange control amnesty is also considered in the evolution of exchange control. Chapter 4: Indicators of the liberalisation of exchange control in South Africa Chapter 4 provides further analysis of the indicators of South Africa doing away with exchange control, the gradual liberation and progression of the exchange control policy. This includes exploring SARB’s indicators of the ‘fairness’ of enforcing exchange control in today’s time and the practice of Authorised Dealers. For example, the name change from exchange control department to FSD which is indicative of SARB’s relaxing intention38. 38 Bridge, N., 2010, ‘SARB Exchange control changes name’. 11 Chapter 5: Consequences of abolishing exchange control in South Africa Chapter 5 sets out the consequences of doing away with exchange control, specifically considering foreign direct investment, offshore expansion by South African companies, the cost to the country, economic and tax matters. Venezuela has been selected as a jurisdiction which has repealed portion of its exchange control regulations. The reasons that brought about the repeal will be discussed and the consequences thereof will be addressed. Further, reasons why South Africa should or should not abolish the regulations will be explored. Accordingly, the aforementioned addresses the prevalence of exchange control in South Africa. Chapter 6: Conclusion Chapter 6 is the final chapter which sets out the conclusion or resolution of the research problem which is drawn from the analysis in the preceding chapters. Maintaining focus on the relevance of exchange control in South Africa and the potential consequences of retracting the regulations. Further, recommendations will be provided on the timing, process and mitigation of adverse effects in abolishing exchange control in South Africa. 12 CHAPTER 2: OVERVIEW OF EXCHANGE CONTROL 2.1 Introduction This chapter explores exchange control residency and its applicability in South Africa. It also addresses some of the practical considerations of establishing exchange control residence in South Africa and the related supporting document which is typically required by Authorised Dealers in providing exchange control approval. Further, in this chapter more focus is placed on considering exchange control in the South African tax region. This takes into account the viewpoint of the SARS, a taxpayer and the SARB. A further review of influential case law in South Africa has been conducted and the precedence these cases have set in the exchange control environment is discussed. 2.2 Exchange control residence and the practical implications A non-resident is defined by the exchange control regulations as a person whose normal place of residence, domicile or registration is outside of the Common Monetary Area (CMA) being South Africa, Lesotho, Namibia, and Eswatini. An exchange control resident is a person who has taken up permanent residence, domicile or has been registered in South Africa. A non- resident who is also temporarily resident in South Africa is a foreign national for exchange control purposes. Until such time that the SARB provides an official emigration approval, an individual will sustain his/her title of a South Africa resident for exchange control purposes. This will imply that until a declaration has been submitted to SARS ceasing an individual’s South African residency, that individual will continue to be regarded as a South African exchange control resident during the year of assessment in question. Hence, we can conclude within a South African context that numerous actions are required as part of the emigration process, specifically to successfully initiate and achieve emigration. This entails both tax and exchange control considerations, in conjunction both of which attribute to the emigration process.39 39 La Grange, H., 2017, ‘Relocating from South Africa’. 13 The author’s view is submitted for the remainder of Chapter 2.2, based on exposure to exchange control in practice and communications with Authorised Dealers, with focus on the practical implications of the exchange control process. Upon residing in South Africa, a foreign national is required to declare in writing to an Authorised Dealer, as proof of the foreign assets which are held by the same foreign national. In the instance that the foreign national owns foreign assets, they are required to provide an undertaking that they will not dispose of those foreign assets to a third party who is a South African exchange control resident. The foreign nationals will also be required to provide an undertaking that they have not applied for similar facilities, to dispose of foreign assets, through another Authorised Dealer. After making the declaration and undertakings, a foreign national may conduct his/her affairs on the basis set out below. i. The ability for a foreign national to dispose of foreign assets without interference from SARB’s FSD. ii. A foreign national may utilise the banking services in South Africa as an exchange control resident. iii. A foreign national may hold non-resident rand accounts or foreign currency accounts with an Authorised Dealer. iv. A foreign national may re-transfer capital offshore, provided that he/she can substantiate the original introduction of such funds into South Africa. This may be done by providing proof or supporting documentation. v. A foreign national may transfer lump sum amounts and monthly pensions offshore, provided that related supporting documents are provided to an Authorised Dealer prior to the transfer of any such funds. Based on practice, it is the understanding that the SARB is considering changing its position relating to individuals who have permanent residence in South Africa or individuals who have been present in South Africa for more than a specified period of time, to which the exact 14 period of time has not been communicated yet. It is understood that SARB intends to treat permanent residents or those present for more than a specified period of time in South Africa as South African exchange control resident even if they do not consider themselves domiciled in South Africa. In terms of the effective date of these proposed new rules, it is undetermined, however it is advised that a circular will be issued by SARB, to which Authorised Dealers will be obliged to comply with. South African exchange control residents are subject to certain restrictions on foreign exchange transactions, some of which are set out below, this is not a conclusive list. i. An annual discretionary allowance has been allocated to each South African exchange control resident, amounting to ZAR1 million. ii. An annual foreign capital allowance has been allocated to each South African exchange control resident, amounting to ZAR10 million. This can be approved and utilised through an Authorised Dealer, without the intervention of the SARB and its approval. iii. A South African exchange control resident must provide the Authorised Dealer with a South Africa Tax Clearance Certificate, when attempting to attain the foreign capital allowance and utilising the benefit of the ZAR10 million allowance. iv. South African residents are not permitted to participate in offshore structures. Specifically, structures which re-invest funds into South Africa by acquiring shares, loan accounts or some other interest in a South African asset or resident company. These types of structures are typically referred to as loop structures. Upon placing more focus on a company perspective relating to exchange control, there are supporting documents which are required to be submitted to an Authorised Dealer prior to remitting funds from South Africa. The information that is required by an Authorised Dealer from an exchange control perspective, relating to an agreement that has been concluded between companies, such as a management fees agreement between two group companies, has been set out below. 15 i. Related party agreements require prior approval from SARB. ii. The application should include a background explanation of the South African company’s nature of business and this company’s related shareholding it has in other companies. iii. In terms of the concluded agreement, the management fees must be charged at arm’s length and must be market related. If the fees are percentage-based, then the fees charged must be regarded as ‘normal’ for the trade concerned. Should this not be the case, a supporting motivation must be attached to the application submitted to the Authorised Dealer. iv. A detailed description is to be provided relating to the exact services which are to be rendered relating to the management fees. It should be explained what the benefits will be, arising from the services rendered by the said party. v. All parties relevant to the agreement should be specified and incorporated into the relative agreement, by providing full details such as name, company registration number and location. vi. The Authorised Dealers require a full business motivation of the rationale behind the management fees, such as the assistance with increased turnover of the company and improving business efficiencies. This is required as a recommendation to the application, which will be provided to the SARB. vii. The rationale is provided to the Authorised Dealers regarding the reason behind the signed agreements being concluded by the specified companies, however if applicable, if the payment is being made by a different company within the group then the reason behind this must be substantiated. The agreement should be signed between parties making the payment and the one receiving the payment. As advised by the Authorised Dealer, tax efficiencies from an exchange control perspective will not suffice as a motivation and will not be considered. 16 viii. All agreements are to be provided to the Authorised Dealers, the copies of all management fees / consultancy fees / assignment fees will be reviewed. ix. Confirmation must be provided to the Authorised Dealer that the invoices will provide a full description and/or breakdown of the exact services being invoiced. The requests which are made by South African residents in order to make royalty and/or management fee payments to offshore related parties, these requests should be made to the FSD for its consideration. A related party is defined as a party to a transaction that has a direct or indirect interest in the other party and has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Alternatively, both parties are under common control. In terms of the Authorised Dealer Manual, this includes transactions between parties that belong to the same group of companies such as parent, subsidiary, fellow subsidiary and/or an associate company. 2.3 Tax and exchange control The concept of exchange control was challenged when applying the Constitution as it is thought to be an infringement of human rights. Exchange Control was inherently known as discrimination in nature and beneficial to the rich, however in terms of the Constitution, all individuals were deemed to be equal in a non-discriminatory society. In this regard, it was established that once all taxes are paid by individuals, it is argued that all their commitments have been fulfilled and he/she should have the right to transfer money or repatriate their funds as and when they desire.40 This view is further explained as part of the Shuttleworth case analysis below. Under the circumstances that exchange control was not affected in South Africa, individuals and/or companies would more likely than not exploited the government and taxation in South Africa.41 40 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 157. 41 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 150. 17 The tax collected by the SARS from taxpayers were in actual fact used to fund the initial capital outlay for the SARB to operate. Therefore, the taxpayer’s money was vital for furtherance of SARB’s services.42 As an alternative to exchange control, the tightening of fiscal policy was a strategy used to prevent capital inflows to South Africa. During the national budget in March 1997, the business cycle was struggling, therefore it was challenging to further decrease the budget deficit. In addition, the restriction of the fiscal policy caused the domestic rates to decrease and the budget deficits to also decline. A downside to adapting the fiscal policy was that it was time-intensive to implement changes to taxes. As a result, this was not a sustainable tool in resolving the fleeting inflows of capital into South Africa.43 The movement of funds overseas continues to be a favourable thought in the minds of individuals and/or companies due to the crime, political uncertainties, the currency weakness and high tax rates in South Africa.44 With effect from 1 July 1997, taxpayers over 18 years of age were permitted to invest a maximum of ZAR200,000 offshore, provided that the taxpayer was classified to be in good standing with SARS45. In order to be regarded as compliant with the National Treasury, a Good Standing Tax Clearance Certificate must be obtained to be viewed as tax compliant.46 With effect during 1998, provided the taxpayer was regarded to be in good standing, these individuals were permitted to invest in foreign assets valued at a maximum of ZAR400,000. The budget speech during February 1999, increased this maximum to ZAR500,000 and further to ZAR750,000 during the February 2000 budget. Since the permission came into effect from 1 July 1997 to 1 February 1998, these taxpayers, in other words private investors, repatriated capital amounting to ZAR793 million. This is considered a low amount, therefore the lack of reaction from individuals allowed the South African authorities to lift the restrictions and allowed the free outflows of capital from South Africa to offshore jurisdictions subject to certain restrictions. 47 42 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 92. 43 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 173. 44 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 156. 45 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 177 - 178. 46 SARS, n.d., ‘frequently asked questions’. 47 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 177 - 178. 18 A downside of holding foreign currency deposits and/or investments through a South African bank was the related bank charges for this particular service. This further decreased the likelihood of individuals making foreign investments, coupled with the related South African taxation imposed on this income earned from the investment. If SARS was of the idea that the intention of the taxpayer was to obtain capital gains, the depreciation in the rand compared to foreign currencies which resulted in capital gains, this is then subject to Capital Gain Tax in South Africa, in terms of the Eighth Schedule to the Income Tax Act. The portion subject to capital gains is the amount by which the investment increased (in other words the appreciation in the investment), in other the words the difference between the amount the investment was sold for less the initial cost of the investment. 48 Since 1994, South Africa expanded its Double Tax Agreement (DTA) network, which allowed for better exchange of information internationally49. As such, this assisted in liberalising exchange control measures as information was easily exchangeable and transparent between South Africa and numerous other countries. In Article 6 of Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the automatic exchange of information is allowed. Included in this convention is the Multilateral Competent Authority Agreement (MCAA) is a framework which discusses the automatic exchange of information. In this regard, this complies with the Standard for Automatic Exchange of Financial Information in Tax Matters (SAEFITM). In considering exchange control in South Africa, this displays the readily available information as a result of these agreements which are standardised and efficient. Accordingly, there is little need for several bilateral agreements. The MCAA may be tailored such that the signatories have control over the exchange relationship, to which they both agree on what is permitted in this regard. This exchange of information allows for confidentiality and data protection. 50 South African taxpayers were concerned that they would face large sums of tax penalties. This would have taken place should SARS have discovered that the respective taxpayer illegally held foreign assets51. The promulgation of the FICA increased the risk of holding 48 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 177 – 178. 49 Botha, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 4. 50 OECD, n.d., ‘What is the Multilateral Competent Authority Agreement’. 51 Botha, L and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 4. 19 illegal foreign-held assets. FICA stipulated that SARS had the power to impose income tax on foreign-held assets or funds that were not declared. SARS calculated an amount to be imposed based on their knowledge of the assets or funds which were unaccounted for. This right was provided for the 2003 tax year, ending 28 February 2003, and subsequent tax years. There was a rise in the intolerance of tax haven jurisdictions, particularly relating to exchange of information, which resulted in South Africa enforcing exchange control to prevent illegal money laundering.52 The joint tax and exchange control amnesty is fundamental to evolution of exchange control, which is discussed in detail in Chapter 3 below. Specific to Value-Added Tax (VAT), the SARS Interpretation Note 30 (IN30) deals with the supply of movable goods in terms of section 11(1)(a)(i) read with paragraph (a) of the Value- Added Tax Act, 89 of 1991 (VAT Act) of the definition of ‘exported’ and the corresponding documentary proof53. The supply of movable goods that are going to be exported, may be zero-rated (in other words VAT charged at a rate of 0%). In order for this to apply, documentary proof is required. The vendor is required to procure certain documentary proof within 90 days from the date on which the movable goods are exported from South Africa. In terms of the aforementioned, Authorised Dealer or SARB exchange control approval is a form of documentary proof that is required. As such, the vendor must enter into a valid written contract detailing the recipient of the payment, for the consideration of supply, which is made after a period exceeding 6 months but less than 12 months, accompanied by the proof of exchange control approval. Similarly, if the supply is made after 12 months, the relevant exchange control approval is still required.54 The author submits that this is an administrative intensive process which has to be complied with. The exchange control administrative considerations are discussed in detail in Chapter 5 below. Based on the above, the author submits that exchange control and tax in South Africa works hand-in-hand and should be considered in conjunction when reviewing exchange control’s relevance in today’s time. 52 Botha, L. and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 4. 53 SARS Interpretation Note 30 (Issue 3), p. 1. 54 SARS Interpretation Note 30 (Issue 3), p. 10 - 11. 20 2.3.1 Influential exchange control case law in South Africa 2.3.1.1 The Shuttleworth cases The Shuttleworth cases were influential cases in the exchange control and tax sphere in South Africa; namely: South African Reserve Bank and Another v Shuttleworth and Another55, and Shuttleworth v South African Reserve Bank56. Mr Shuttleworth had challenged the imposition of a 10% exit charge, from a constitutional point of view, specifically his view was that the exchange control system was unconstitutional in nature, in terms of section 195.57 The reason for this thought is that the general public needs to consult the Authorized Dealers, in order to provide permission for transfers, which contradicts the obligations in terms of public administration. In addition to section 195 of the Constitution, it was also seen to be a contravention of section 1 of the Constitution on the basis of foundational values of accountability, responsiveness and openness. Upon consideration of the matters relating to the Constitution, the court concluded that the ‘closed door policy’ was in line with the constitution and was lawful. This was brought about based on the point that the SARB only considered a fraction of the total exchange control applications received. Specifically, during 2010, SARB received 54,000 application from a total of 10,147,090 applications. It was agreed that SARBs’ intervention is only required if it is beyond the scope of Authorised Dealers.58 Typically, the 10% exit charge is payable by all South African citizens who are moving amounts in excess of ZAR750,000 offshore59. Therefore, based on the courts view that the transaction was constitutional and did not contravene the exchange control circulars, this was a valid transaction on which the 10% exit levy is chargeable. As a result, Mr Shuttleworth was not able to receive a refund of the 10% exit levy which he paid. The court further accepted that the exit levy was imposed to ensure that capital remained in South Africa and this was a method of preventing the export of capital from South Africa to offshore jurisdictions, of which this is valid in terms of the Constitution.60 55 [2015] ZACC 17. 56 (864/2013) [2014] ZASCA 157 (1 October 2014). 57 Evans, S., 2015, ‘Shuttleworth loses R250m exit charge case in ConCourt’. 58 Croome, B., 2013, ‘Exchange control and the Shuttleworth decision’. 59 Evans, S., 2015, ‘Shuttleworth loses R250m exit charge case in ConCourt’. 60 Croome, B., 2013, Exchange control and the Shuttleworth decision. 21 The jurisdiction of implementing any tax regulation lies with the Minister of Finance and not with the SARB, therefore the Minister of Finance was responsible for implementing the 10% exit levy. An argument raised by Mr Shuttleworth was that the imposition of the 10% levy was not reviewed and approved by the parliament. This argument was rejected on the grounds that in terms of section 9(4) of the Currency and Exchanges Act, the promulgation of the same regulation and Act was not implemented with the intention to increase revenue or raises tax in. Instead, the reason for implementing the 10% levy was to protect the South African currency.61 Mr Shuttleworth applied to the SARB to move ZAR2,5 billion offshore, on which an exit charge of 10% was imposed, amounting to ZAR250 million. In this regard, the crux of the case is that Shuttleworth argued that the exit charge was a form of taxation, while the government argued that the charge was not a tax. The government regarded the exit charge as a disincentive for wealthy individuals to move the inheritance or fortunes offshore. The SARB argued that the exit charge was not a revenue or tax raising mechanism, in other words tax, instead it is a regulatory mechanism. This mechanism was tailored to prevent the moving of capital offshore. The Supreme Court of Appeal agreed with the National Treasury that the exit charge was a regulatory mechanism, not a revenue raising mechanism.62 2.3.1.2 Oilwell v Protec There was uncertainty around the meaning of ‘capital’ as stated in regulations 10(1)(c) of the exchange control regulations, which was clarified in Oilwell v Protec [2011]63. This case clarifies that the National Treasury does not have the power to prohibit the export of intellectual property overseas. The National Treasury amended the exchange control regulations to include intellectual property as part of ‘capital’ as defined, in order to exercise control over capital-related matters.64 The Court came to the verdict that the validity of the 1998 assignment was apparent and that Oilwell had no claim to the trademark, this was mainly in conjunction to regulation 10(1)(c) 61 Croome, B., 2013, ‘Exchange control and the Shuttleworth decision’. 62 Evans, S., 2015, ‘Shuttleworth loses R250m exit charge case in ConCourt’. 63 Strauss, B., 2011, ‘Tax Alert: "Oilwell” that ends well: exchange control and export on capital’, p. 1. 64 Strauss, B., 2017, ‘Tax and exchange control alert: relaxation of exchange controls relating to intellectual property and foreign investment’, p. 2. 22 which states that trademarks cannot be ‘exported’. A further acknowledgement from the court was that trademarks, just like any other intellectual property rights are jurisdictional and similar to the nature of immovables. The Treasury is focused on preventing the export of intellectual property, similarly The Treasury also sets out to prevent the export of copyrights and trademarks. As a result of the Oilwell case, it has been established that The Treasury however has no jurisdiction on putting a hold to offshore assignments relating to intellectual property. In this regard, The Treasury is able to amend the regulations such that the transfer of intellectual property is not allowed. This amendment would potentially be viewed to be contradictory in nature, as according to the state policy of the Treasury, there has been a gradual relaxation of exchange controls over numerous years and limiting the transfer of intellectual property would not be a reflection of this intention.65 2.3.1.3 Krok v CSARS Another influential case focused on exchange control and tax is Krok v CSARS [2015], which is discussed in detail below. During 2002, Mr Krok made the decision to emigrate from South Africa to Australia. A trust was previously established for the benefit of Mr Krok, through which assets were granted to him. Accordingly, Capital Gains Tax (CGT) arose in his hands as the beneficiary. The assets were distributed to Mr Krok as it was considered to be tax efficient. In other words, the asset would have been taxed at a lower rate in his hands compared to the high tax rate in the trust. This would also be to his advantage as he has ceased to be a South African tax resident and as such, if the assets are held in his name, the assets will not be subject to CGT. Thereafter he had been directed to a view point that it was less complex for income to be remitted to him under the exchange control rules if the assets were in his name compared to holding the assets in the South African trust. The DTA concluded between Australia and South Africa was affected on and after 21 December 1999. The DTA, specifically Article 25, initially addressed the exchange of information, however did not contain an Article for the gathering of taxes by the revenue authorities. 66 65 Strauss, B., 2011, ‘Tax Alert: "Oilwell” that ends well: exchange control and export on capital’, p. 2 - 3. 66 Mazansky, E., 2016, ‘South African Supreme Court of Appeal Confirms Application of Protocol to a Tax Treaty to a Period before Signature Date’. 23 The decision brought about in the Krok and Another case urges the SARS to apply a wide translation to the Mutual Administrative Assistance in Tax Matters. South African courts are therefore liable to adopt a liberal strategy in light of the Krok and Another case, in sanctioning aid under the Multilateral Convention with regards to the taxes applying to years going before its date in which it came into effect. The SARS could look to depend on these decisions to convince offshore jurisdictions to aid with gathering charges owed by South African citizens, where they have recognized funds which were offshore and would have given rise to a tax obligation before the Multilateral Convention came into effect.67 2.4 Summary remarks This chapter illustrates the how exchange control and tax are not mutually exclusive. Exchange control has played a fundamental role in South Africa’s tax collection by the SARS. It is apparent that the exchange of information amongst the South African authorities; namely the SARB and SARS, have improved and this communication limits illegal activity. It is also vital for taxpayers to remain compliant with the SARS in order to be regarded as an exchange control resident in South Africa and to obtain exchange control approval since the Tax Clearance Certificate is a part of the exchange control approval process. Accordingly, the exchange control regulations and transparency with regards to the exchange of information, assists the SARS in its tax collection. It is important to establish the difference between tax residency and exchange control residency. A South African exchange control resident may re-transfer capital offshore more freely conduct his/her affairs through a South African bank or Authorised Dealer. Exchange control residents are still required to obtain prior approval for specific transactions. Therefore, the approval attaches the rights to effecting certain transactions. In support of the view that exchange control and tax are linked, there are numerous influential case law that arose which addresses both exchange control and tax matters in South Africa. These cases provide clarity on the capital as defined (such as the inclusion of intellectual property), the removal of capital from South Africa, the collection of tax by the SARS from individuals who should have been liable for tax in South Africa. 67 Mazansky, E., 2016, ‘South African Supreme Court of Appeal Confirms Application of Protocol to a Tax Treaty to a Period before Signature Date’. 24 Consequently, the liberalisation and abolishment of exchange control regulations will likely affect tax in South Africa and potentially affect the tax base and related collection of tax by the SARS. 25 CHAPTER 3: THE EVOLUTION OF EXCHANGE CONTROL 3.1 Introduction The progression of exchange control in South Africa is demonstrated by establishing the differences and similarities of exchange control in South Africa against comparative jurisdictions, namely: Mozambique and Iceland. The purpose of this chapter is to assess the movement of exchange control in South Africa compared to an African country and a European country. A fundamental element to the evolution of exchange control is the joint tax and exchange control amnesty, which gave individuals and entities the opportunity to declare any illegal transfer of funds. This chapter explores the joint tax and exchange control amnesty and the contribution it had to exchange control. 3.2 South Africa compared to the SADC As discussed previously, individual taxpayers who were in good standing with SARS and over the age of 18, were permitted to move capital offshore, limited to ZAR750,000 during February 2000. In conjunction with this, individuals were allowed to invest in fixed properties, such as farms and holiday homes, in any Southern African Development Community (SADC) country.68 The SADC was established in 1992. The purpose is a platform to assist in regional integration and poverty eradication in Southern Africa. A means of eradication is through economic developments and establishing peace and security. The regional economic community comprises of 16 states namely; Angola, Botswana, Comoros, Democratic Republic of Congo, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia and Zimbabwe.69 Mozambique is a part of the SADC. It has been observed that the liberalisation of exchange control matters has progressed more in other SADC countries compared to South Africa, as such there has been slow progress in South Africa in this regard. Consequently, some SADC members have put pressure on South 68 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 169. 69 SADC, n.d., ‘About SADC’. 26 Africa to further liberalise its exchange control regulations. Focus has been placed on improving investments made by South African residents in the respective SADC member countries. In this way, the SADC members will be assisting in improving its platform and growth for regional integration and poverty eradication in Southern Africa. Accordingly, the SADC showed strong arguments in favour of its proposal that South Africa builds on its investments into the SADC member countries, in which portfolio investments should be made by South African investors into the SADC. The liberalisation of South Africa’s exchange control regulations was insinuated by a public relations triumph that the SADC members were focused and dedicated to achieve financial and economic co-operation amongst the SADC member countries.70 There was a suggestion to maintain unrestricted capital mobility in the SADC, however a common wall of exchange and capital control among the SADC countries will still remain. As a result, the common currency is not subjected to international capital mobility, this would also be the situation with the CMA rand zone.71 As defined in the SARB currency and exchanges guidelines, the CMA includes Lesotho, Namibia, South Africa and Eswatini. This being said, prior to any liberalisation of the exchange control regulations in South Africa, the members of the CMA must be considered and consulted, as these jurisdictions shared similar exchange control measures. 72 The exchange control measures focused on capital accounts have been liberalised in countries where the domestic savings rate is low, as this will promote the inflow of funds into the SADC member country. The liberalisation of exchange controls also assists in the spread of risks, because the economic climate differs across different countries. Therefore, the cycle differs and the diversification of one’s investment portfolio reduces the risk of volatility in their personal inflow of funds. As such, there are great benefits to be reaped from diversifying investments between the local and international markets since the risk the shares are faced are different and take place at different times. This also encourages welfare and improved technology. Please see Appendix ‘A’ attached hereto for a tabular summary illustration of these costs and benefits associated with liberalising capital account. 73 70SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 164 71 Ellyne, M., and Chater, R., ‘A new index for measuring SADC exchange control restrictiveness’, p. 139 - 140. 72 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 165. 73 Ellyne, M., and Chater, R., ‘A new index for measuring SADC exchange control restrictiveness’, p. 141 - 142. 27 Specific to the SADC jurisdictions, the relaxation of exchange control measures relating to the restrictions placed on current accounts will give rise to a positive reflection of the relevant country’s policies and economic governance. Accordingly, investors are motivated to invest within the SADC member countries, therefore there will be an increase in the inflow of funds (in other words increased trade) and less outflows of capital in comparison. With a specific focus on service accounts, the prime reason for maintaining exchange control measures is to prevent illegal capital outflow of funds. To the contrary, the liberalisation of current accounts may increase competition and uncontrollable exchange rate fluctuations. Please see Appendix ‘B’ attached hereto for a tabular summary illustration of these costs and benefits associated with liberalising current account. 74 The relaxation of both the capital and current account is an indication of the country’s commitment to improving economic matters and that country is committed to all- encompassing future management. 75 Similarly, to South Africa, in Mozambique pre-approval is required from the Central Bank prior to remitting funds to an offshore jurisdiction. The proof of the relevant agreements is required by the Central Bank for their perusal, after which approval is provided. This process is required for every offshore payment that is made, in other words each payment requires pre-approval by the Central Bank to remit the funds. In addition, specific to a company, the company’s commercial bank is required to disclose to the Central Bank the company’s financial capacity to make a payment of the related magnitude. 76 The Mozambique revenue authority requires proof of withholding tax compliance that may apply.77 The fundamental goal of the new regulation in Mozambique, discussed below, is to enable the Central Bank to police the ‘Exchange Control Authority by the Mozambique Central Bank’ as put forward under the Constitution of the Republic of Mozambique. 78 74 Ellyne, M., and Chater, R., ‘A new index for measuring SADC exchange control restrictiveness’, p.141 - 142. 75 Ellyne, M., and Chater, R., ‘A new index for measuring SADC exchange control restrictiveness’, p.141 - 142. 76 Harding, C., 2010, ‘African exchange controls – almost everywhere you go’. 77 Harding, C., 2010, ‘African exchange controls – almost everywhere you go’. 78 EY, 2017b, ‘Mozambique approves new exchange control regulations’. 28 In Mozambique, an infringement of trade controls regulations is viewed as a criminal offense, which as a result attracts concomitant penalties. On 15 August 2017, Mozambique's Council of Ministers scrapped the exchange control regulations that existed at the time and endorsed the new regulations under the Exchange Control Law. As a result, the Central Bank now regulates the process and sets the terms and conditions that need to be met in order to attain exchange control approval.79 It is normal that the Central Bank will supply increasingly versatile and vigorous exchange rules, to be balanced every now and then, as it showcases the market’s pre-requisites. The main changes to the regulations have been set out below. i. Pre-approval by the Central Bank is required for a rundown of transactions. ii. The inflow and outflow of foreign currency will be liable to conditions and confinements, which are dictated by the Central Bank. iii. The remittance of fare profits of products, ventures and investment income created abroad will be liable to the terms and conditions which are characterised by the Central Bank.80 On 11 December 2017, the Central Bank Issued Notice No. 20/GBM/2017, which has come into effect on its publication as part of the Official Gazette. The changes that arose have been briefly set out below. i. The sale of goods or services and the revenue arising from offshore investments are no longer subject to an apportioned local currency, namely Mozambican metical (MZN), conversion of 50%, instead the funds are fully held in the foreign currency. The foreign denominated currency is used to fund any cross-border transactions, while only the funds used for local payments is converted to the local currency. This is known as the repatriation of export earnings regime. 79 EY, 2017b, ‘Mozambique approves new exchange control regulations’. 80 EY, 2017b, ‘Mozambique approves new exchange control regulations’. 29 ii. The foreign direct investment is only required to be registered with the local bank within 90 days of the entrance of funds, as a result this allows flexibility when there is an inflow of capital into Mozambique. iii. Subject to certain requirements, the investments through loans or credit received from related entities received from a non-Mozambique resident no longer require prior approval from the Central Bank and is only subject to the local bank’s approval. 81 In considering the above, the changes are mainly focused on the Bank of Mozambique, as an exchange control authority, as more power has been placed in its hands as it has been allocated its own regulatory power. The reason for this change is the influx of transactions and movement of funds between Mozambique and foreign jurisdictions. Other than this, there has not been a substantial change in the fundamentals of the exchange control regime in Mozambique.82 Similarly, to South Africa, Mozambique has liberalised its exchange control regulations. Factors which display this relaxation is the increased flexibility, reduced bureaucracy, the reduced administrative burden on the respective Central Banks and the positive impact on business activity.83 Particularly from a South African perspective, it was essential that the relaxation of exchange control does not defeat the essence of the purpose of the regulations and that the remaining regulations were still sufficient and executed. As an example, SARB has provided the following: If South African investors were allowed to buy shares on the Botswana Stock Exchange, specifically in Gaborone, it is vital to ensure that these investors do not subsequently sell the shares listed on the Botswana Stock Exchange to foreign investors (for example from London).84 As such, the author submits that both South Africa and Mozambique have taken the initiative to liberalise exchange control regulations in South Africa and Mozambique. Neither South Africa nor Mozambique are ahead of one another, 81 PwC, n.d., ‘Revision of the Exchange Control Regulation – Notice No. 20/GBM/2017’, p. 1. 82 Neves, L., 2018, ‘Mozambique’s new rules on foreign exchange control’. 83 PwC, n.d., ‘Revision of the Exchange Control Regulation – Notice No. 20/GBM/2017’, p. 1. 84 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 165. 30 instead both have taken the necessary steps in tailoring the exchange control liberalisation to the circumstances apparent in their respective jurisdictions. 3.3 South Africa compared to Iceland Iceland, a European country, experienced a crisis in which investors needing liquidity, through the form of cash, had tried to remove all their cash reserves out of Iceland. As a result, Iceland experienced a major influx of capital, exploiting the high interest rates paid by the banks, while individuals in Iceland loaned from foreign jurisdictions at a lower interest rate. The currency in Iceland is Icelandic Króna (ISK), and this caused the ISK to deteriorate and collapse. In addition, the banks in Iceland too collapsed. Subsequently, Iceland secured a rescue package from the International Monetary Fund (IMF). In terms of the exchange control regime, investors who held offshore ISK-denominated accounts that yielded high returns, were restricted from bringing the funds back into Iceland. During 2015, the Central Bank of Iceland announced that the exchange controls would be revoked and in this regard, investors had the ability to bring the funds back into Iceland. This was either done by buying ISK currency, which was purchased at a discounted official exchange rate. Alternatively investors had the option to purchase government bonds in Iceland, which is a long-term investment. A significant penalty will be imposed if the long-term investments are sold early, therefore if the government bonds are attained the investors are indirectly ‘locked-in’.85 From 14 March 2017, new Rules on Foreign Exchange came into effect. In this regard, a prominent portion of the restrictions have been removed for the flow of foreign exchange transactions, particularly in relation to the movement of local and foreign currencies inflow and outflow from Iceland. These changes have largely impacted households and businesses and have had a significant impact since it was first introduced in 2008. The foreign exchange act no longer applied restrictions to households and businesses relating to foreign investment, foreign exchange transactions, hedging and lending activity.86 85 Kenton, W., n.d.,’ Exchange Control’. 86 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 1. 31 Previously certain transactions were subject to exemptions, however these transactions which were not authorised, have now become authorised transactions, such as foreign investments made by pension funds or collective investment schemes (known as UCITS). 87 Cross-border transactions which are denominated in ISK are now authorised to be undertaken. These transactions may be in the form of funds denominated in ISK and financial instruments which have been issued in Iceland in ISK. Accordingly, the transactions may be in an inflow into or outflow outside Iceland. Despite the change in the aforementioned, where the requirements are met in terms of the restrictions detailed in the Treatment of ISK- Denominated Assets Subject to Special Restrictions Act no, 37/2016, known as the offshore ISK assets, there rules remain the same and these assets denominated in ISK require authorisation. In addition, no changes have been made to specified investments, relating to the inflow of foreign currency into Iceland, therefore the special reserve requirements still exist and remain unchanged.88 In terms of the Iceland Foreign Exchange Act no. 87/1992, the rules provide for a general exemption on all the limitations, with the exception of the following on which has the restrictions will still be maintained in terms of the rules: i. derivatives trading which are held for purposes other than hedging; ii. foreign exchange transactions that are carried out between residents and non- residents, without the input of a financial undertaking; and iii. foreign-denominated loans made by residents to non-residents, which are assessed based on the specific circumstances. The Central Bank of Iceland released guidelines which explain the restrictions placed on trade, in relation to the Rules on Special Reserve Requirements on New Foreign Currency Inflows, no. 490/2016. This shows the relaxation of exchange control regulations, in terms of the Foreign Exchange Act, to which a further amendment was made. These changes ensure that there is no undesirable inflow of capital funds into Iceland. These amendments to the 87 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 1. 88 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 1. 32 rules are subjected to special restrictions in terms of the Treatment of ISK-Denominated Assets Subject to Special Restrictions Act no. 37/2016, in which ISK-denominated assets held offshore are not affected. Most of the exchange control measures have been removed from businesses and households, therefore the relevance of exchange control is questionable. The intention of further liberalising exchange control is to focus on offshore ISK- denominated assets. A consideration for Iceland in how to resolve the release of these assets. Any movement of capital funds still require the Central Bank of Iceland to oversee the transactions. As such, approval is no longer required, however foreign exchange transactions that were previously required to be approved, now it merely needs to be disclosed to the bank (in other words a disclosure requirement). The focal point is to reduce administrative burden and simplifying disclosure requirements. As a result, the Central Bank of Iceland will be able to pay attention to the balance of payments and the financial system. The reason for placing focus on the balance of payments is because there instability here could have adverse effects, such as monetary, exchange rate and financial instability. 89 The Iceland Foreign Exchange Act was liberalised as the maximum amount of transfers were no longer in effect. As a result, no limitations were placed on individuals and companies in respect of capital transfers. Previously, limitations were placed on the amount of capital transfers that were allowed to take place, as this affected the movement of capital across borders and the foreign exchange market. As mentioned, this maximum was later removed. Subsequently, the Central Bank of Iceland’s foreign exchange reserves largely increased, to approximately ISK800 billion. The goal is to maintain the surplus on current accounts, to reduce foreign liabilities and to retain Iceland’s related net external position. The aforementioned promotes a stable market. Accordingly, Iceland is in the position where exchange control liberalisation of the capital measures will positively impact its economy, as the conditions of global economy too are favourable. 90 89 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 2. 90 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 2. 33 Lastly, the Central Bank of Iceland faces lower risk in the long-run when considering the acquisition of offshore ISK-denominated assets from the dominant owners. This will likely enable the abolishment of exchange control.91 As discussed above the author submits that, Iceland, similarly to South Africa, is in the process of liberalising exchange control measures, with the view of eventually abolishing exchange control regulations. The economic conditions present in South Africa compared to Iceland differ, therefore the mechanisms in which they liberalise exchange control differ. Iceland has experienced positive results from the removal of the cap on the outflow of capital from the country. This is not an aspect that South Africa adopted as there is a limitation in the outflow of capital from the country. Consequently, South Africa is able to consider the liberalisation of its exchange control measures by removing this limitation as this may improve its economy, competitive advantage and be in line with global conditions. Both South Africa and Iceland are on similar paths as they have both released further guidelines with the intention of further liberalising exchange control, and they consider all risk and rewards present in the economic environment prior to making a drastic removal of exchange controls. 3.4 South Africa’s holistic movement in exchange control In the instance that the macroeconomic and financial policies were more favourable in South Africa, the conversion of capital or capital flight would have been easier to manage. Ideally, these policies should incorporate the conditions of the domestic and international financial markets. South Africa specifically needs to incentivise individuals and/or entities to not move funds offshore by displaying the favourable conditions South Africa has to offer. The reason is that there would be less capital flight if South Africa was marketed as an attractive place for financial investment (in other words making money). As such, South Africa would typically need to limit the levying of tax on financial income, wealth and transactions. The attention of foreign investors was caught based on South Africa’s economic conditions which promoted the inflow of capital into South Africa. It was vital that Exchange Control remains in the context of South Africa’s economic conditions and policies. South Africa would need 91 EY, 2017a, ‘Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency’, p. 2. 34 to build on its domestic financial system and a reduction in the inflation rate would also be beneficial prior to the removal of exchange control.92 As explained above, within the SARB, the exchange control department are the successors of the FSD. The objective of establishing the FSD is to ensure the rand is at all times protected to ensure that the South African economy is balanced and sustainable into the future. The powers allocated to the FSD is granted in terms of the legislature, in which it states that its main purpose is to govern the inflow and outflow of capital. Another layer to the FSD lies an investigation division. This division is responsible for to investigating alleged contraventions of the exchange control regulations and to ensure the losses are recovered and the same losses are recouped to the country’s foreign currency reserves.93 During 1995, South Africa received large inflows of foreign capital. This assisted South Africa with its integration with the international financial market and hugely beneficial to South Africa since numerous years of huge outflows of capital from South Africa. An increase in the net foreign reserves was facilitated by these inflows of capital, which was more than enough to finance the South African deficit on the current account of the balance of payments. In conjunction, this caused difficulties relating to the management of the South African money market.94 The FSD announced amendments to the Authorised Dealer Manual and other guidance documents on 20 April 2017. These amendments granted additional powers to the Authorised Dealers, which resulted in a decrease of the FSD’s involvement and the need for approval. This is regarded to be positive progress as conducting business in South Africa and abroad became easier. Examples of the amendments which resulted in a decline in the FSD’s involvement and in shifting the responsibility to Authorised Dealers, are the setting up of foreign bank accounts, the approval solely by the Department of Trade and Industry (DTI) of licence agreements involving the local manufacture of goods and miscellaneous transfers such as refunds which now required approval from the Authorised Dealers.95 92 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 153 93 Croome, B., 2013, ‘Exchange control and the Shuttleworth decision’. 94SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 172. 95 Botha, L. and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 2-3. 35 SARB issued Exchange Control Circular No. 7/2017 and the Currency and Exchanges Manual for Authorised Dealers, which explained that individuals and companies no longer required SARB approval for intellectual property transactions, provided that these transactions were at fair market value and were at arms-length. These changes allowed the Authorised Dealers to provide approval and approval was no longer required from the SARB. This change came with conditions such as the Authorised Dealers are required to review the sale or transfer agreements and the basis of calculation of royalty or licence fee through an auditors letter or the intellectual property valuation certificate. This transfer was required to take place 30 days from approval by the Authorised Dealers and the transfer of the license back to South Africa was not allowed. The transfer of intellectual property is subject to the appropriate tax implications.96 The exercise of obtaining an auditor’s letter and intellectual property valuation is time-consuming and cost-intensive97. Since South Africa is still subject to exchange control regulations, individuals and/or companies should diversify their savings abroad. As South Africa has become import intensive, this influences the changes in the rand, inflation, credit ratings and interest rates. Therefore, it is vital not to be isolated to South Africa as local income may stagnate while offshore income rises.98 A contributing factor to the lack of outflows of capital was high share prices internationally, this hindered foreign investments, and the high interest rates which were imposed in South Africa. Foreign investments made by individuals continued to be low as a result of high indebtedness. In conjunction with this, the income to savings ratio in South Africa was low, which further did not promote foreign investments.99 Collectively, this attributed to the lack of increased capital outflows from South Africa to offshore jurisdictions100. Currently, if the total value of your baggage exceeds ZAR50 000, you are, for the purposes of exchange control, required to get a No Exchange Provided (NEP) form at any commercial bank before your departure from South Africa.101 96 Strauss, B., 2017, ‘Tax and exchange control alert: relaxation of exchange controls relating to intellectual property and foreign investment’, p. 2. 97 Strauss, B., 2017, ‘Tax and exchange control alert: relaxation of exchange controls relating to intellectual property and foreign investment’, p. 3. 98 Smith, C., 2018, ‘Managing foreign exchange volatility’. 99 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 177 – 178. 100 SARB, 2011, ‘South African Reserve Bank monetary policy in the decade 1989 to 1999’, p. 169, 177 – 178. 101 Network migration, 2018, ‘SARS notice to people leaving South Africa - May 2018’. 36 In terms of exchange control residence, a natural person will constitute a resident who has established permanent residence or is domiciled in South Africa. The formal emigration process and approval must be obtained from the SARB, which can be obtained through an Authorised Dealer. Thereafter the individual will be viewed as an emigrant in South Africa. With regards to formal emigration, it is not required to forego South African citizenship, submission of one’s passport, or disposing of any immovable property in South Africa.102 The emigration application will incorporate a form, titled the MP336(b). Coupled with this form, a Tax Clearance Certificate must be obtained from SARS. This can be generated through the SARS e-filing system. So as to be viewed as an emigrant person of South Africa, a formal migration endorsement must be secured from the SARB through the approved Authorised Dealer at the person's South African commercial bank. The South African authorities also look for the individual’s net financial position in South Africa. In other words, the individuals are required to compile a statement of assets and liabilities for the authorities to review. This is required for any spouse who is also emigrating alongside the individual. This is not a conclusive list and the authorities may require further detailed information, which will be requested at their discretion. In terms of exchange control facilities, a foreign capital allowance of ZAR20 million per family unit or ZAR10 million for each individual may be utilised by emigrants during the period of emigration. The process of emigration is a lengthy process, which may take place over a period of 12 months, if not more, prior to the finalisation of the emigration process. This period will depend on the nature of the assets and liabilities and the furnishing of supporting documents which may not be easily accessible.103 It is clear that exchange control regulations in South Africa have experienced considerable movement and has not remained unchanged. The author submits that this is of importance as it depicts that with the changing economic environments, exchange control regulations too has evolved. A focal point of liberalisation has been the delegation of powers, specifically that South Africa has placed less focus on the FSD and has allocated a degree of exchange control approval authority to the Authorised Dealers. 102 La Grange, H., 2017, ‘Relocating from South Africa’. 103 La Grange, H., 2017, ‘Relocating from South Africa’. 37 Based on the above analysis is noted that the exchange control approval process, specifically the emigration process, is still a lengthily process which is both administrative cost-intensive. This indicates that the exchange control process is not necessarily efficient and may in fact hinder economic growth if transactions and emigration are time consuming. 3.5 Joint tax and exchange control amnesty The Minister of Finance, Trevor Manuel, announced the introduction of the joint tax and exchange control amnesty on 15 May 2003. He explained that this was a chance to prevail unfavourable economic climate by placing confidence in the South African economy, by allowing individuals to declare their contravention of the Exchange Control Regulations and the South African Tax Acts. 104 The introduction of the joint tax and exchange control amnesty is viewed to be an interesting mechanism in achieving the relaxation of exchange control. The reason for this is that amnesties more likely than not erode government credibility and is known to be ‘deeply destructive of sound public finance’. The reason for considering the tax amnesty was as a result of international success. Specifically applicable to South Africa is the intention to regularise the assets which are held offshore and to correctly include this amount in the South African tax base, this is titled the ‘regularisation of undisclosed offshore investments’.105 The application of the same amnesty would attain the regularisation, in terms of exchange control and tax, of their affairs in respect of foreign assets held. The timing thereof was also appropriate as there was an increased desire amongst South Africans to voluntarily regularise their personal affairs to attain international co-operation, specifically in relation to tax compliance.106 In terms of the exchange control regulations, the non-disclosure of foreign-held assets or funds resulted in criminal prosecution. Therefore, South Africans were reluctant to disclose any funds which were illegally held for tax purposes as there was a fear of criminal 104 Botha, L. and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 1, 4. 105 Farrell, G.N. and Todani, K.R., 2004, ‘Capital flows, exchange control regulations and exchange rate policy: The South African experience’, p. 28 – 30. 106 Botha, L. and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 1, 4. 38 prosecution.107 Despite the fact the fund arising from these investments were legally and legitimately acquired, the issue lies with the way in which these funds were repatriated offshore. This manner in which the funds were transferred puts it into the illegal and criminal bracket.108 South Africa applies the residence-based tax system, therefore since the investments of the funds offshore were not reported to the SARB, the funds remained outside of the tax system109. The joint tax amnesty entailed an opportunity to rectify matters which were not previously disclosed. This provided an equitable treatment for previous transgressions. The reason for implementing the tax amnesty was to regularise these transfers of funds by bringing them into the South African tax net, putting it on SARS’ radar, and removing the chances of any criminal prosecution.110 This also paved the path for the disclosure of future foreign income earnings or the acquisition of foreign assets. Accordingly, this allowed individuals to retain their offshore assets and allowed for the repatriation of assets.111 The key to the success of the joint tax and exchange control amnesty was that with it comes credibility. This relates to credibility with SARS, as taxpayers understand that the investment market will continue to be favourable. A further point of credibility was the government’s commitment to de-criminalise the previous non-disclosure of repatriating funds and that no future amnesties will be applied, in other words it’s now or never as there is a deadline for submission. 112 In order to obtain the benefits of the joint amnesty, an application needed to be submitted between 1 May 2003 and 31 October 2003.113 107 Botha, L. and Brunton, L., 2017, ‘Tax and Exchange Control Alert: More exchange, less control – further amendments made to the Currency and Exchanges Manual for Authorised Dealers’, Cliffe Dekker Hofmeyr, p. 4. 108 Farrell, G.N. and Todani, K.R., 2004, ‘Capital flows, exchange control regulations