Taxpayers can no longer just send R10 million overseas per year on a no-questions-asked basis.
Complicated application processes now await such requests for money to leave South Africa.
In an unexpected move, the National Treasury recently introduced a new regime for South African residents who are either considering financially emigrating or just making use of the R10 million allowance for investment purposes. The authorities now consider the two scenarios the same thing.
Exchange Control has a long history in South Africa. We started with the Currency and Exchanges Act, of 1933, which was amended with the addition of the Regulations in 1961, which was only amended on June 8, 2012. Exchange controls have been loosened over the years, so the sudden change in policy is an opposite tact.
Exchange controls are measures put in place by governments to regulate the flow of capital in and out of a country. They can include restrictions on the amount of money that can be transferred across borders, limits on the conversion of one currency into another, and regulations on the ownership and transfer of foreign assets. Even cross-border transfer of intellectual property is subject to exchange control.
This means people need to make an application to an authorised dealer, as defined in the regulations and must furnish the required information before any financial assets can be transferred from and to our shores, including physical cash that crosses our physical borders or is at brought in from any sea or airports.
But the limitations are not always enforced in equal measure. The Phala Phala scandal and recent reports of United Arab Emirates President Sheikh Mohamed bin Zayed al Nahyan landing on a private airstrip in the Eastern Cape come to mind.
Citizens bear the brunt of the new, more onerous and impractical, foreign exchange requirements. For instance, The South African Revenue Service now requires proof of a citizen’s worldwide assets, at cost, which industry players warned is an extremely difficult requirement to meet.
Restrictions on exchange controls can have positive and negative effects on the economy of a country. On the positive side, they can help stabilise the currency, prevent excessive outflows of capital, and protect the domestic economy from external shocks. On the negative side, they can impede international trade and investment, discourage foreign investment, and limit the flow of modern technology and ideas into the country.
In this case, it is unclear what authorities are trying to achieve. But it seems the government has become desperate to keep capital in the country, as political uncertainty and the energy crisis have seen more money run for the international hills, and less foreign direct investment coming in.
President Cyril Ramaphosa's fifth South Africa Investment Conference was in Johannesburg in April this year, and the reluctance of international corporations to commit to the country’s developing agenda was pretty apparent, with unknown brands and mostly, renewable energy operations dominating the list. But the ink on the conference commitments, to attract investment of at least R1.2 trillion over five years to the country, was barely dry when the Treasury made its shock announcement. Not a word of it was mentioned in the State of the Nation address or the Budget Speech. Clearly, public consultation was lacking. And the aggressive policy stance will also not inspire investors, instead, it will be surprising if new investments will head our way, or if some of the investment conference capital commitments, will be withdrawn. There is much uncertainty around the repatriation of capital and the tax treatment of interest, royalties and dividends.
Since the South African Reserve Bank delegated (nearly all) responsibility for managing exchange controls surrounding IP to authorised dealers at banks, the application of our exchange control provisions has become so inconsistent that it is difficult to write extensively on the topic. About six years ago, the exchange control rules surrounding IP were clear, some legal specialists told Personal Finance, but now, one hears of approvals being given that cut across the previously clear rules. It seems that each practitioner draws their own line in the sand, and few practitioners' lines overlap.
Worldwide, in general, there has been a trend towards liberalising exchange controls in recent years, as governments recognise the benefits of greater openness and integration with the global economy. However, in times of economic instability or crisis, governments may impose stricter controls to protect their economies. And that seems to be the case here.
The decision to impose or lift exchange controls is a complex one that depends on a range of economic, political, and social factors. Our government needs to carefully consider the costs and benefits of the measures and strike a balance between the need for economic stability and the desire for openness and growth. The recent downgrading of South Africa by the rating agencies and the additional pressure arising from the grey-listing have come to haunt us. Commentators appear sceptical and are expecting worse news to come.
The People want to know if there are things that we are not aware of that could have led to the sudden change. One thing we are all concerned about is the 2024 elections and the uncertain outcome.
* Kruger is an independent analyst
PERSONAL FINANCE
* * The views expressed do not necessarily reflect the views of IOL or its sister titles.