South Africa’s Ambiguous Exchange Control Climate

by | Oct 4, 2023 | BTCLQ, BTCLQ V14 I3

South Africa’s Ambiguous Exchange Control Climate

Author: Robyn Berger & Esther Geldenhuys

ISSN: 2219-1585
Affiliations: Tax Executive, Bowmans Attorneys; Senior Associate, Bowmans Attorneys
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 3, 2023, p. 15 – 22

Abstract

Although the South African Minister of Finance announced in the 2020 Budget speech that sweeping reforms would be enacted to relax the South African exchange control system, it is now three years later, and no meaningful relaxation of exchange control has occurred. Rather, investment into South Africa remains plagued by exchange control laws, which result in costly and time-consuming processes for foreign investors. In January 2021, a long-awaited change to the exchange control rules was enacted, with the relaxation of the so-called ‘loop structure’ rules. Many investors jumped at the opportunity to take advantage of this relaxation and restructured their existing South African assets so that they would be owned by approved foreign structures. The relevant parties then, in line with the prescribed rules, reported the transactions to the Financial Surveillance Department of the South African Reserve Bank (FinSurv), via their Authorised Dealers. The FinSurv did not simply acknowledge receipt of the reported information as expected under the law. Rather, the FinSurv elected to reject applications submitted under the respective circular, without withdrawing the circular, leading to much uncertainty in the market, especially for those investors who have already restructured their assets, triggered taxes on the restructure and paid the taxes. Further, it appears that South Africa’s negative rating and greylisting, by the Financial Action Task Force (FATF), has triggered a stricter application of the existing exchange control regime, with more frequent application of the penalty regime by the FinSurv to identified contraventions. In the past, South African corporates were able to regularise an exchange control contravention with the FinSurv without difficulty. The process was relatively straight forward. However, lately, the responses received from the FinSurv to requests for regularisation (including to standard commercial transactions) are vague with the result that the matter does not seem to reach finalisation. The responses provided suggest that the applicant may still be subject to further investigation and ultimately may be subject to financial penalties. This is only one of the challenges such applicants face.

Protecting the Public Purse with Moral Tax Administration

by | Oct 4, 2023 | BTCLQ, BTCLQ V14 I3

Protecting the Public Purse with Moral Tax Administration

Author: Fareed Moosa

ISSN: 2219-1585
Affiliations: Associate Professor: Department of Mercantile & Labour Law, Faculty of Law, University of the Western Cape
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 3, 2023, p. 23 – 29

Abstract

This article engages with the scourge of tax immorality, an unsavoury practice adversely affecting state resources which puts South Africa’s democracy and its social transformation programme at risk. This article argues that tax immorality must be combatted head-on. To this end, it is contended that the bilateral and multi-lateral co-operation agreements concluded by the government of South Africa with their counterparts in Africa and beyond are insufficient to effectively combat tax non-compliance in all their manifestations. This is because there is no single reason for taxpayers acting in breach of their duty to the fiscus. As a result, it is argued by the author that a multi-pronged approach is needed which demands of tax administrators that they be innovative in their thinking and creative in their strategies. The nub of the thesis advanced is that, in practice, there is a correlation between, on the one hand, failure by tax authorities to fulfil their tax administration obligations with integrity and, on the other, failure by some taxpayers to comply with their tax related duties. It is further argued that conduct un-associated with a dignified tax administrator, and which may well contribute to tax immorality, includes hostility towards taxpayers, disrespect for the law and the rule of law, abuse of power, coercion, partiality, bias, threats, unethical behaviour, maladministration, and corruption. Conduct of this nature is antithetical to the final Constitution, 1996 and its democratic values and principles, all of which apply in the realm of tax administration being a facet of public administration governed by the Constitution. Finally, the author concludes that the South African Revenue Service can promote tax compliance by ensuring that it operates efficiently as an institution and that its officials act in accordance with the law and without favour, and with fairness, honour, dignity, decency, responsiveness to taxpayers’ needs, and open-mindedness.

Foreign Pension Schemes: There be dragons, and some confusion — Part 1

by | Oct 4, 2023 | BTCLQ, BTCLQ V14 I3

Foreign Pension Schemes: There be dragons, and some confusion — Part 1

Author: Des Kruger

ISSN: 2219-1585
Affiliations: Consultant, Webber Wentzel, Adjunct Professor, University of Cape Town
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 3, 2023, p. 30 – 49

Abstract

Given South Africa’s present political and economic position, a significant number of wealthy taxpayers are either engaged in making contributions to foreign pension schemes or are contemplating doing so. As the heading to this article suggests, the South African tax implications that arise when a South African resident taxpayer embarks on this journey are complex and confusing. Whilst SARS has provided some guidance in terms of a binding class ruling, this guidance is limited to the position where the South African participants participate in the foreign pension scheme as vested beneficiaries — not the general position. The ruling nevertheless provides some indication of SARS’ views as regards the application of the law in these circumstances. However, SARS neatly side-stepped the real issue, namely that a strict application of the law results in double taxation in certain instances by declining to rule on the application of section 25B of, and paragraph 80 of the Eighth Schedule to, the Income Tax Act, 1962. This article explores the South African tax implications that are triggered for South African residents in consequence of their participation as discretionary beneficiaries in these foreign pension schemes. The next article will explore the position of South African residents that participate under a vested beneficiary regime — the situation addressed in SARS’ binding class ruling. The South African implications that arise are wholly dependent on the rights and obligations that are established under the foreign pension scheme rules. However, as a general proposition it may be said that under a discretionary scenario the South African participants are required to make regular contributions to the foreign pension scheme, although lump sum contributions are allowed in certain instances. The contributions are then accounted for in a bespoke account, as is any accretion in value. When the time comes for payment of the retirement benefits, the trustees have a discretion as to the nature and value of the payments — but the participant has a right to request the trustees to exercise their discretion in a specific manner. The article concludes in the first instance that the contributions made by the South African participants do not constitute a donation that is subject to donations tax. As regards accretions in value in the bespoke account, the article argues that until the trustees exercise their discretion to make payment of the retirement benefits, no amounts can be said to have been received or accrued to the South African participants. Once the trustees exercise their discretion to pay the South African participants either an annuity or a lump sum, South African income tax or capital gains tax is triggered. A possible double taxation conundrum arises should any income or capital derived by the foreign pension scheme have previously vested in the South African participant. On death, it is strongly arguable that the amount standing to the credit of the South African does not form part of the deceased South African participant’s estate for estate duty purposes, or an asset for capital gains tax purposes.

How Foreign is Your Business Establishment?

by | Jul 2, 2023 | BTCLQ, BTCLQ V14 I2

How Foreign is Your Business Establishment?

Author: David Clegg

ISSN: 2219-1585
Affiliations: Tax Consultant, Cape Town
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 2, 2023, p. 1 – 7

Abstract

The introduction of full residence-based taxation in 2001 brought with it the concept of a ‘Controlled Foreign Company’ (CFC), whose profits (calculated on SA income tax principles) would be attributed to qualifying South African shareholders (‘participants’) as taxable income. Exempted from attribution were those profits of a CFC which arose from a ‘business establishment’, a term which was tightly defined and relied in part upon the establishment displaying the hallmarks of a real operating business in the foreign country and not having been set up for the purpose of tax avoidance. Since those early days, the definition of what is now a ‘foreign business establishment’ (FBE) has undergone detail change. Today, and central to the definition, is the requirement that in order to qualify there must be a ‘fixed place of business’ located in the foreign country and ‘used for the carrying on of the business of the CFC , … where that fixed place of business is (inter alia) … suitably staffed with on-site managerial and operational employees … who conduct the primary operations of that business …’. Over the years there has been much comment in the tax specialist press dealing with the extent to which the operations of an FBE can be outsourced, before it is no longer ‘suitably staffed’ for conducting its primary operations. Silke and Income Tax South Africa took slightly different positions on this issue and now the SCA has handed down judgement in Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd 2023 JDR 0295 (SCA), which sets out that court’s view on the point. In Volume 14, Issue 1 of this journal Wally Horak criticised elements of this judgment and in this edition David Clegg raises some additional concerns. These are whether the court was correct in its identification of the ‘primary operations’, and in finding that a ‘primary operation’ cannot, in principle, be outsourced. Clegg also addresses what he sees as a fundamental mistake made by the taxpayer, in setting up his foreign business.

Can Directors in a Private Company have Weighted Voting Rights at Board Meetings?

by | Jul 2, 2023 | BTCLQ, BTCLQ V14 I2

Can Directors in a Private Company have Weighted Voting Rights at Board Meetings?

Author: Matthew Blumberg SC

ISSN: 2219-1585
Affiliations: N/A
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 2, 2023, p. 8 – 12

Abstract

The Companies Act implicitly permits the memorandum of incorporation of a company to depart from the default or general position of ‘one director, one vote’. But, as I have endeavoured to set out, the freedom to do so is not unlimited. A regime for directors’ voting rights that weights votes in proportion to the shareholding of the shareholder that appointed the director in question should in my view withstand court scrutiny. It is simply another means by which to confer majority control over the board (in the sense explained below) — which is in line with the company law principle of majoritarianism, and in my view unobjectionable. That the weighting of directors’ voting rights results in a situation in which individual directors have equal responsibilities, but unequal ‘rights’, is in my view not in itself problematic. Duties are imposed on individual directors in order to ensure the effective governance of companies (not because those duties are commensurate with the director’s ‘rights’). Thus, the diminution of a director’s ‘rights’ need not bring about a commensurate reduction in his or her responsibilities.

Unlocking the Beneficial Interest and Beneficial Ownership Quagmire

by | Jul 2, 2023 | BTCLQ, BTCLQ V14 I2

Unlocking the Beneficial Interest and Beneficial Ownership Quagmire

Author: Julie Oppenheim

ISSN: 2219-1585
Affiliations: Partner, M&A, Bowmans
Source: Business Tax & Company Law Quarterly, Volume 14 Issue 2, 2023, p. 13 – 18

Abstract

The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 (GLAA) was introduced in 2022 and amends the Companies Act 71 of 2008 (Companies Act) by (i) providing for a comprehensive mechanism through which the Companies and Intellectual Property Commission can keep accurate and up-to-date beneficial ownership information; (ii) requiring a company, which is not an ‘affected company’ for purposes of the Companies Act, to keep, and fi le with CIPC, a record of the ’beneficial owners’ of a company, and by providing for specified timelines within which a company must record any changes in this information; (iii) requiring a company, which is an ‘affected company’ for purposes of the Companies Act, to establish and maintain a register of the persons who hold beneficial interests equal to or in excess of 5% of the total number of securities of that class issued by the company, together with the extent of those beneficial interests; and (iv) specifying that persons who are convicted of offences relating to money laundering, terrorist financing, or proliferation financing activities or are subject to a resolution of the UN Security Council are prohibited from registering as company directors. Key to the amendments is the distinction between a company which falls within the definition of an ’affected company‘ for purposes of the Companies Act, on the one hand, and a company which does not fall within the definition of an ;affected company; for purposes of the Companies Act, on the other hand. Also key is the definition of ‘beneficial owner’ and the manner in which it will be interpreted — which remains to be seen. Time will tell as to how beneficial these provisions are and whether they can assist in having South Africa removed as a grey list country. Enforcement may be more effective if the sanction for non-compliance is a criminal sanction (in addition to a financial sanction) — as is the case in Mauritius, which managed to convince the Financial Action Task Force to remove it from the grey list.