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South Africa Explains Investment Promotion Reforms

by Lorys Charalambous, LawAndTax-News.com, Cyprus

01 November 2011


Further information has now been given on the several investment and prudential reforms announced by the Minister of Finance, Pravin Gordhan, during his Medium Term Budget Policy Statement on October 25, 2011, which are aimed at promoting investment into South Africa by encouraging the development of its capital markets.

A statement issued by the National Treasury said that the approach is “aimed at further improving market efficiencies, whilst at the same time managing potential risks from foreign exposure and the volatile international environment.”

For example, with the purpose of improving South Africa’s position as a financial gateway into Africa and facilitating cross-border transactions, and following public comments received on the ‘Prudential Regulation of Foreign Exposure for Institutional Investors’ discussion document, Gordhan announced that all listed shares on the Johannesburg Stock Exchange (JSE), traded and settled in rand shall be classified as ‘domestic assets’, for the purpose of trading on the JSE and inclusion in its indices.

In a further note subsequently issued by the JSE, it welcomed the indication that local investors will be able to trade in foreign domiciled companies where they were previously restricted by prudential limits and that the exchange will be able to include these companies in domestic indices.

In the past, the amount of local activity in the foreign companies on the JSE was limited, and this, it was said, limited the JSE's ability to position itself as an investment destination. “Once effect has been given to today’s policy direction,” the JSE added, “South African asset managers will be able to invest more freely in these companies, using the JSE to do so.”

“We very much appreciate the thoughtful and careful manner in which the National Treasury and the Financial Services Board have engaged on this issue, which clearly has an important impact on the markets," says JSE Chief Executive Officer, Russell Loubser. “The positive move provides a further boost for the reputation of the country’s markets, by enabling the JSE to more aggressively pursue a wider range of investment possibilities.”

Details on the revision of indices will be provided by the JSE in due course as it “will take time to work through the practical steps to implement this,” and the National Treasury also confirmed that further work is in progress to modernise the foreign direct investment framework.

The National Treasury also announced that steps will be taken to simplify procedures and reduce the cost of cross-border money remittances, particularly to neighbouring countries and the rest of Africa. Ownership restrictions on international participation in foreign exchange bureaus, will be removed, and the requirement for money remittance agencies to partner existing authorised dealers in order to do remittance business will no longer be obligatory.

Barriers to trade are also eased by allowing corporates to cover forward (using forward exchange contracts) up to 75% of budgeted import commitments or export accruals in respect of the forthcoming financial year without an application to the SARB. Advance payments for capital goods will now be allowed for up to 50% of ex-factory cost of goods to be imported, from the current 33.3%. Furthermore, regulations to enable more modern cross-border payments will also be implemented (for example, on internet payments).

However, in order to balance between capital market growth and development and the objective of managing exposure to foreign risk, prudential institutions will still be required to report their foreign exposure to regulatory authorities, subject to criteria that will be developed by the National Treasury, the South African Reserve Bank (SARB) and the Financial Services Board.

In addition, in order to cut red-tape, simplify and reduce the administrative costs of doing business, corporates will be able to top up capital in their offshore business from South Africa. Criteria will also be relaxed for corporates wishing to invest outside their current line of business.

With regard to individuals, the annual ZAR4m (USD517,800) foreign investment allowance plus the ZAR1m current single discretionary allowance will be consolidated into one ZAR5m foreign investment allowance per year.

Furthermore, in order to eliminate the bias against residents compared to non-residents, the SARB will consider investments by residents (and estates) for applications in excess of the ZAR5m allowance, subject to strict criteria related to appropriate disclosure requirements (on foreign assets and income), tax compliance and market conditions.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp
TAGS: individuals | South Africa | compliance | tax | investment | business | foreign direct investment (FDI) | law | capital markets | equity investment | budget | offshore | stock exchanges | regulation | Africa

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