National Treasury proposes modernising the foreign exchange system, that is, the Excon regime. Over the next 12 months, a new capital flow management system will be put in place. All foreign-currency transactions will be allowed, except for a risk-based list of capital flow measures. This change will increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty. The risk-based list of capital flow measures, includes the following:
- South African corporates will not be allowed to shift their primary domicile, except under exceptional circumstances approved by the Minister.
- Approval conditions granted by the Minister for corporates with a primary listing offshore, including dual-listed structures, will be aligned to the current foreign direct investment criteria and/or conditions to level the playing field.
- Cross-border foreign-exchange activities will continue to be conducted through dealers authorised and regulated by the SARB.
- Prudential limits on South African banks and institutional investors will remain, but the limits will be reviewed regularly.
- Banks’ unhedged foreign-currency exposures will remain limited to 10% of liabilities (known as the net open foreign exchange position) and will remain regulated by the Prudential Authority of the SARB.
- The domestic treasury management company policy, which allows South African companies to establish one subsidiary as a holding company for African and offshore operations without being subject to exchange control restrictions, will remain in place, as will the international headquarter company regime.
- The export of intellectual property for fair value to non-related parties will not be subject to approval.
- The current policy of certain loop structures, which relates to the acquisition by private individuals of equity and/or voting rights in a foreign company, will remain until tax amendments are implemented to address the risks. The proposed tax amendments in this regard are discussed in an earlier article in our Budget Alert.
There are also proposed changes regarding the Excon rules applicable to individuals. Following reforms to the income tax treatment of South African tax residents who receive remuneration abroad (see amendments to section 10(1)(o) of the Income Tax Act), government proposes to remove the rules regarding the Excon treatment for individuals. Rather, it aims to strengthen the rules regarding tax treatment. The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with SARS. Individuals who transfer more than R10 million offshore, which is what is currently allowed under the foreign investment allowance, will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and the source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021.
Furthermore, under the new system natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants, such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts are being repealed. The concept of emigration as recognised by the SARB will be phased out and replaced by a verification process. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Act.
The proposed modernisation will likely be welcomed by South Africans living both locally and abroad as well as by the South African business community. It is likely that in the coming days, weeks and months, the SARB will issue further circulars and provide further information dealing with the various changes.