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Should I care about the changes to Exchange Control?

South Africa moves towards new capital flow system

1 February 2021

Introduction 

In the 2020 budget speech, the South African government announced that the current exchange control regime would be replaced by a new capital flow system. In what appeared to be fairly clear language, it was also stated that most cross-border transactions would no longer require approval, with approvals being phased out over time.  

We are not to get carte blanche however. There will still be controls in place in terms of which residents will have to prove source of funds and comply with other anti-money laundering requirements; but the sense was that having to ask whether or not a transaction could go ahead was to be a thing of the past. 

There was some commentary that it appeared to be an odd time to remove exchange control: in the midst of an economic crisis, although it was announced pre-Covid. Others also suggested that the advent of the Corona Virus would affect the removal of exchange controls.

However, the commitment to these changes was confirmed when the Taxation Laws Amendment Bill 2020 was released, and thereafter, in the medium-term budget in October last year.

From a tax perspective, section 9K was introduced into the Income Tax Act (the Act) and, the rules regarding withdrawal of pension funds were also amended to deal with the relaxation of this regime. Section 9K deals with a change in listing locations; it’s not wildly exciting. The changes to the pension rules, which potentially extends the period before which pensions can be withdrawn, is very relevant to emigrants.

But, the exciting part is we are seeing progress towards the dismantling of the exchange control regime, with the most recent development being the relaxation of the rules regarding of loop structures as announced by the Reserve Bank earlier this month.

Is this change important? 

Some may say that exchange controls ceased to be of relevance for most residents given the large allowances for offshoring of funds which had been introduced. In fact, these additional changes are crucially important: in the first place, people should be allowed to make decisions as to where and how they deploy their capital. Secondly, where exchange control exists, there is no doubt that, with a declining Rand, people will move their funds either using the offshore investment allowance and other allowances available (11 million in aggregate per annum per person) or, illegally. 

South Africans will now have substantially more freedom to plan their estates and to be part of the global economic community. It will avoid expensive duplication of estate planning structures which many South Africans had where entities such as trusts were replicated both in South Africa and offshore. 

And the change is ultimately designed to encourage inward investment. How will it do that?

Simply stated, people are unlikely to deploy capital if it can become “trapped” somewhere. So, it is a sensible step in encouraging investors that we are indeed open for business and that investors can plan their affairs with relative certainty.

But these changes will only assist making the regulatory  climate more sensible; if we are to meaningfully encourage inward investment, we will also have to address the economic impediments that face us, think electricity supply, corruption and so forth.

And why should the government be so focused on foreign investment?

The circulation of money within South Africa is not helping to grow the economy. We're simply moving our money from one pocket to the other. We need new capital; fresh capital brought in from abroad to help stimulate growth in the economy. This will have the knock-on effect of truly assisting with unemployment, healthcare and growing infrastructure in a meaningful way, other than through declining tax spend. It really is the key to extricating ourselves from the current financial crisis that we find ourselves in for the long term. 

The courage to step away from the false comfort of exchange control is to be lauded: the next step is to govern with a single, coherent policy formulation aimed at increasing foreign investment, growing the tax base and using the wins we can make from such policies more wisely than we have in the past.
 

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