During the South African budget speech earlier in 2020, the National Treasury proposed a complete overhaul of exchange control systems. This was intended to modernize and reduce some of the cumbersome and unnecessary administrative approval processes by implementing a new capital flow management system.
The National Treasury has since released the Tax Law Amendment Bill, 2020 on July 31, 2020 for comment, which includes tax proposals related to the implementation of the new capital flow management system. At this point, the National Treasury has indicated that changes to the exchange control systems will likely take place in 2021.
Reform proposals for exchange control systems
The overhaul of the exchange control system will involve a change from the current negative list framework. By default, all currency control actions are prohibited unless specifically approved in a positive list framework, under which all cross-border transactions will be allowed (other than those subject to flow measures. capital or present a high risk in relation to illegitimate transactions). This is a fundamental change that will be implemented over the next 12 months.
Features of the new framework for managing capital flows will include:
- A shift from exchange controls to capital flow management measures to regulate cross-border capital flows;
- A more modern, transparent and risk-based approval framework;
- Stricter measures to combat illegitimate cross-border financial flows and tax evasion;
- Strengthened cooperation between the Financial Intelligence Center, the Reserve Bank, the South African Tax Service and other law enforcement agencies; and
- Strengthening of cross-border reporting requirements.
To implement the new capital flow management system, new legislation in the form of “new capital flow management regulations” needs to be drafted as well as the implementation of the relevant tax changes. As noted above, it is expected that this will likely only be implemented during 2021.
What will be the impact of these changes?
While the new system should ultimately alleviate compliance costs and administrative processes for many companies, which are subject to exchange controls, based on guidance provided by the Reserve Bank on the new framework management of capital flows, it looks like very little will change initially. In particular, it has become clear that cross-border foreign exchange activities will continue to be carried out through brokers licensed and regulated by the Reserve Bank. In addition, it appears that many of the current policies applicable to related party transactions will continue to be applied for the time being. For example:
- Incoming foreign loans must be approved subject to certain defined criteria;
- The transfer of South African intellectual property to a related non-resident party in any form is prohibited except with special approval by the Reserve Bank;
- The loop policy for companies and individuals (up to 40%) will be maintained, pending changes in tax legislation; and
- Foreign direct investment (“IDE”) By South African companies will always require the approval of a licensed broker or reserve bank and auction limits will be retained. Further loans from South African companies to its FDI will be authorized, but loans to third-party companies will be subject to the approval of the Reserve Bank.
It is important to note that at this point no specific guidance has been provided regarding inbound license and service agreements and it is not clear whether these types of agreements will still require the same strict consents when it comes to licensing. exchange control.
It is also important to note that the proposed new capital flow management system will require the drafting and implementation of new regulations as well as the implementation of related tax changes to combat illegitimate transactions or transactions that present a risk. high risk of illegal crossing. border flows.
For example, the Reserve Bank proposes that people who transfer more than ZAR 10 million overseas be subjected to a risk management test that will include certification of tax status and source of funds, and confirmation that the person complies with the anti-money laundering rules and the fight against the financing of terrorism requirements prescribed by the 2001 law on financial intelligence centers.
In addition, current cooperative practices in the form of automatic sharing of information between tax authorities on financial accounts and private investments will remain in place to ensure that South African tax residents who have income and investments in the l foreigners pay the appropriate level of tax.