Regulations and Exchange Controls
Introduction to Exchange Controls
Exchange controls are implemented by a country to limit and control the outflow and inflow of capital. The level of official reserves of foreign currency is the key to the value of the Rand currency and indirectly to the level of interest rates and economic growth. During the apartheid era when South Africa was viewed negatively and the price of gold declined, South Africa's exchange controls became increasingly restrictive to protect the rand from further devaluation. As South Africa re-integrates into the global economy, complying with world norms and standards, it will attain the international credibility and recognition required to attract greater confidence by investors, local and foreign, and create the economic environment for the further easing of controls.
Exchange Control Territory
In South Africa, official control is exercised over all transactions involving the receipt and payment of foreign exchange into and out of the Common Monetary Area (CMA). The Monetary agreement between South Africa, Namibia, Swaziland and Lesotho provides for the free flow of funds and access to capital markets between the countries.
Note: Lesotho, Namibia and Swaziland have their own exchange control authorities. It follows that authorized dealers are not permitted to enter into foreign currency transactions with customers of banks in other CMA countries. If such requests are received, customers will be referred back to their banks in the CMA country concerned.
Administration of Control
Exchange control is the responsibility of the Treasury, which has largely delegated this authority to the South African Reserve Bank (Reserve Bank). Reserve Bank has, in turn, delegated the execution of official policy to the commercial banks, appointing them as authorized dealers in foreign exchange.
Prescribed Currencies for Control
The prescribed currencies for settlement of transactions with countries outside the Common Monetary Area must be in rand from a local non-resident account, or in any foreign currency as listed in the South African Exchange Control Regulations. However, customers must contact their banks first, to establish which currencies the banks are prepared to negotiate.
Foreign currency means any currency that is not legal tender in the Republic, and includes any bill of exchange, letter of credit, money order, postal order, promissory note, travellers cheque, or any other instrument for the payment of currency.
Declaration Regarding Removal or Export of Goods from Republic of South Africa
F178 and Balance of Payments Reporting System
All South African residents are required to sell foreign currency, regardless of the source to an authorized dealer within thirty days of accrual. The purpose of this control over both visible and invisible exports is to ensure that accruals are indeed received in RSA and that there is no unnecessary delay in the transfer of receipts. The receipt of export proceeds is controlled through the form F178 (merchandise exports) and the Balance of Payments Reporting system. Proceeds from foreign exchange are monitored by comparing the information on the related F178 and subsequent information received via the BoP reporting system.
The F178 is completed by the exporter for every transaction or consignment except for exports to countries within the CMA and exports, irrespective of the origin of the goods involved if the value does not exceed R50 000. The F178 contains a description of the goods and their value. There must be a minimum of three copies. A set bears a unique number. The forms are taken to the exporter's bank where the original is attested (stamped and signed) and returned with a copy. The bank retains a copy for control purposes. Customs require the original F178 as part of the essential export documentation without which goods may not leave the country. Customs subsequently pass the form on to Exchange Control where information is captured in a computer. The use of the F178 is prescribed where the relevant export from South Africa will result in the accrual of foreign exchange to the exporter and to the country.
The Balance of Payments Reporting system was introduced in South Africa on 1 April 2001 to enable authorized dealers to report to the South African Reserve Bank on outward payments and inward receipts of South African residents. It was designed according to international standards for managing BoP data which requires that all transactions are recorded, irrespective of their value. There are separate BoP forms for outward payments and inward payments with detailed fields and categories. Information on how to complete these forms must be obtained from a bank.
It is a requirement of the SARB and the BoP reporting system that banks must capture and process required BoP data at the same time as they capture the underlying financial transaction. Delays in supplying information to the banks will result in delays in processing of transactions.
NEP - No Exchange Proceeds
Where the 'export' will not result in payment from abroad FORM NEP (No Exchange Proceeds) must be completed by the exporter. Banks have authority to attest a Form NEP in certain cases. Companies wanting to export in terms of the Form NEP, must contact their bank to determine whether the relevant goods qualify for this facility or whether the bank needs to make a special application to the Reserve Bank. Banks, for example, may attest a Form NEP which covers:
the export of advertising matter and trade samples on a 'no-charge' basis, provided they are satisfied that the goods are being shipped purely for advertising/promotional purposes;
goods to be shipped in replacement of rejected or defective goods previously shipped or in completion of a previous short shipment, provided they are satisfied that:
the full invoice value of the original shipment has been, or will be, received from consignee;
the exporter is bound by guarantee or trade practice to make good the deficiency without charge and where applicable;
Defective goods already paid for, to be re-exported to the original supplier, provided there is documentary evidence to prove that the foreign supplier has agreed to:
the replaced goods are being destroyed, re-imported or sold abroad for payment in an approved manner.
replace the consignment on a 'no charge' basis with goods of an equivalent value (may require import permit for replacement goods); or "
The temporary export of used equipment to Angola, Botswana, Democratic Republic of Congo, Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zambia and Zimbabwe, irrespective of country of manufacture, for use on construction contracts provided the equipment belongs to the contractor and has not been specifically purchased abroad for re-export. The bank is required to ensure that the equipment is returned to South Africa on completion of the contract. If the equipment is written off and abandoned or sold abroad, full details must be provided to Exchange Control.
to refund the costs of the defective goods in full.
Surrender of Export Proceeds
Unless exemption has been obtained, South African exporters must surrender all foreign exchange proceeds from exports to the Treasury through an authorised dealer. Proceeds are converted to rands at the rate fixed by the exporters forward cover contract, or at the prevailing market rate if the exporter has no forward cover contract. All export proceeds must be received in South Africa within six months of the date of shipment - unless exporters have obtained permission to extend longer credit periods to their foreign buyers (see next paragraph) - and converted within 30 days of the date of collection.
Authorized dealers may, under advice to the Reserve Bank, authorise exporters to grant up to 12 months credit to the importer. In this case, exporters may obtain forward exchange cover for up to 12 months. However, the banks must satisfy themselves that this credit period is necessary to:
the particular trade concerned, particularly in the case of capital goods;
protect an existing export market; or
Where an exporter wishes to provide a foreign customer with export credit of more than 12 months duration, the bankers will have to make special application to the Exchange Control Department of the Reserve Bank on the exporter's behalf.
capture a new export market.
Off-Setting Imports against Exports through Customer Foreign Currency Accounts
Companies which import and export on a regular/daily basis, may apply to an authorized dealer/bank for the cost of imports to be off-set against the proceeds of exports. This means that through special Customer Foreign Currency accounts (CFC), the exporter is not required to convert proceeds to rands, but may utilise export proceeds to pay for relative imports. Export proceeds and/or proceeds from services may be retained in CFC accounts for up to 180 days from the date which such funds were first credited to a CFC account; thereafter, it must be offered for sale to a bank.
Companies must contact their bank to determine whether their transactions are sufficient to qualify for the facility. Once a company qualifies for the facility, the authorised dealer, for set-off purposes will open CFC's, which are maintained in foreign currency, for those corporates which are actively engaged in export and import transactions or, where applicable, existing CFC's, may be used. Note: import and export transactions are required to be housed in separate accounts.
Off-Shore Investments by Residents (Private Individuals)
South African residents (natural persons) who are taxpayers in 'good standing' and over the age of 18, may invest up to R750 000 abroad, to be dealt with freely in any manner. A Tax Clearance Certificate (in respect of foreign investments) must be presented to the bank. These funds can be invested abroad or in a foreign currency account with South African local banks. Individuals who utilise this facility may not enter into any transactions whereby capital or the right to capital will be directly exported from the Republic i.e. may not enter into a foreign commitment with recourse to South Africa.
South African individuals will also be able to apply to invest in fixed property in SADC member countries.
Note: passive income from overseas dividends and interest will be taxed and legislation is in place to this effect.
Off-Shore Investments by South African Companies
South African entities (legal persons) who wish to invest outside the Common Monetary Area require the approval of the Reserve Bank and each application will be considered on its merits. In terms of the Reserve Bank policy, corporate entities wishing to invest outside the Common Monetary Area have to demonstrate the benefits to South Africa e.g. by way of enhanced foreign exchange earnings derived from export of goods and services, job creation etc.
Where the total cost of investment off-shore does not exceed R500 million, consideration will now be given to the funds being transferred from South Africa. Furthermore, in respect of investments into Africa, consideration will be given to transfer funds up to an amount of R750 million per new investment.
Companies with existing approved subsidiaries overseas are allowed to expand such activities without prior approval, provided expansion is financed by foreign borrowings (with no recourse to or guarantee from South Africa), or by the employment of profits earned by that subsidiary, subject to the expansion being in the same line of business and that benefit to South Africa can be demonstrated. The local parent company is required to place their proposal plans for the expansion of the investment on record with the Reserve Bank at an early stage.
The Reserve Bank judges applications on their individual merits and the benefits that will accrue to the Republic, and will also consider those investments made to:
protect existing markets overseas or;
All income accrued from the foreign source must regularly be transferred back to South Africa through normal banking channels in the form of declared dividends in terms of the requirements of Exchange Control Regulations, unless approval has been obtained from the Reserve Bank to retain such profits abroad.
secure a future source of supply.
Foreign Portfolio Investments by South African Institutional Investors
Institutional investors, namely, long term insurers, pension funds and unit trusts, are no longer able to invest abroad. The asset-swap mechanism introduced in 1995 which allowed institutions to invest up to 15% of their assets abroad or for institutions that had not reached the limit to invest 10% of net cash flows outside South Africa, was abolished and is effective from 21 February 2001.
Foreign bank notes and other foreign currency instruments of exchange are allowed to persons who are permanent residents of South Africa within specified limits when proceeding for visits abroad.
A travel allowance may be made available at the respective rate of R140 000 per adult and R45 000 per child under the age of 12 years, per calendar year for one or more visits outside the CMA. In according a person a travel allowance, the foreign exchange made available per applicant may be provided in any form including travellers cheques, foreign bank notes and credit and/or debit cards.
Omnibus Travel Allowances
Companies requiring a travel allowance in excess of the usual limits for frequent travel abroad can apply to an authorised dealer for omnibus travel facilities up to R2 million per calendar year to be allocated at the discretion of the company. In this regard the bank will require:
a budgeted projection of estimated expenses;
the countries to be visited;
the estimated number of visits to be undertaken;
the number, designation and names (if possible) of employees who would undertake the visits;
the turnover of the company during the last three years; and
As omnibus allowances are granted on a calendar year basis, it is advisable in November to submit a request to the bank for the renewal of the facility for the coming year.
the nature of its activities eg. export, import etc
On the renewal request for an omnibus allowance, the Exchange Control Department requires full details of the usage of the previous authority, viz.
the amount of exchange utilised by each individual and subsequently sold;
the duration of each visit;
the name and designations of each representative involved;
When an omnibus allowance is not applicable and an individual requires an additional business allowance, special application must be made to the exchange control authorities via the bank.
an indication of the success of visits.
The South African tax system has changed from a source-based to a residence-based system with effect from the 1 January 2001, in keeping with international trends. This means that South African residents will be taxed on their world-wide income. Non-South African residents will still be taxed on income from South African sources, subject to the double taxation agreements with the different countries. The principle taxes imposed in South Africa are direct and indirect taxes, as follows:
Direct Taxes include income tax, secondary tax on companies (STC), capital gains tax (CGT) and donations tax.
Indirect Taxes include value-added tax (VAT), estate, stamp and transfer duties, the latter on real estate, customs & excise duties, marketable security taxes, skills development levies, municipal taxes on owners of real estate, airport taxes and fuel levies.
For more information on taxation, please visit www.sars.gov.za.
Competition and Regulatory Policy
South African authorities embarked on a major overhaul of competition policy, which led to the formulation of a new policy, the Competition Act, No. 89 of 1998, which seeks to achieve the following objectives:
To promote the efficiency, adaptability and development of the economy;
To provide consumers with competitive prices and product choices;
To promote employment and advance the social and economic welfare of South Africans;
To expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic;
To ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and
In meeting these objectives, it is focused on restricting anti-competitive practices, eliminating abuse of dominant positions and strengthening merger control.
To promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons (HDIs).
Three institutions are created in terms of the Act to achieve the above objectives:
For more information on the Competition Commission, please visit:www.compcom.co.za
The Competition Commission, which is independent but whose decisions may be appealed to the Competition Tribunal and the Competition Appeal Court;
The Competition Tribunal, which has jurisdiction throughout South Africa and is independent from the competition institutions; and
The Competition Appeal Court, which has status similar to that of a High Court and jurisdiction throughout South Africa.
For more information on the Competition Tribunal, please visit: www.comptrib.co.za
For more information on the Competition Appeal Court, please visit:www.compcom.co.za/aboutus/aboutus_competition_appeal_court.asp
Industrial Development Zones
The Industrial Development Zone (IDZ) programme is one of many incentives offered by the dti to encourage international competitiveness of the South African-based manufacturing sector.
IDZs are purpose-built industrial estates linked to an international port or airport, in which quality infrastructure and expedited customs procedures are coupled with unique duty-free operating environments suited to export-oriented production.
The IDZ will provide, inter-alia, the following benefits to IDZ / CCA enterprises:
A Customs Controlled Area (CCA) with dedicated South African Revenue Service (SARS) customs officials to provide support with customs and excise requirements;
Duty-free on imports of production-related raw materials, including machinery and assets to be used in production - with the aim of exporting the finished products;
Zero-rating on value-added tax (VAT) for supplies procured in South Africa;
Accessibility to most government incentives that will contribute to lowering the cost of production;
A one-stop shop centre for all the necessary regulatory and documentation preparations required by an investor; and
Government will license operators to develop and run the IDZs, provide enterprise support measures, minimize red tape and provide efficient services to enterprises within an IDZ. There are currently four IDZ in the country i.e.:
World-class infrastructure that offers international best practice environment.
Coega IDZ Port Elizabeth (Eastern Cape) www.coega.co.za
East London IDZ, East London (Eastern Cape) www.elidz.co.za
Richard's Bay IDZ, Richard's Bay (KZN) www.richardsbayidz.co.za
Johannesburg International Airport IDZ, Kempton Park (Gauteng) www.blueiq.co.za
Intellectual Property Rights
South Africa has a developed system of intellectual property law covering patents, industrial designs, copyright and trademarks. It is also a signatory to most of the international conventions in this field.
For more information on these topics, please visit: www.cipro.co.za.
In terms of Section 24 of the Constitution and the National Environmental Management Act (NEMA), the Department of Trade and Industry (the dti) is to take care that a sound balance is maintained between environmental and socio-economic aspects in all policies, plans, programs and decisions, including the encouragement of investment, granting of incentives and all other interventions.
The Department of Trade and Industry encourages existing industries to implement Cleaner Production (CP) as an internationally adopted tool that incurs savings, increases competitiveness and elevates companies to higher levels of resource and energy efficiency.
The Department of Trade and Industry at the 2002 World Summit on Sustainable Development established the National Cleaner Production Centre (NCPC), which implements CP in priority sectors, focusing on textiles, agro-processing and chemicals. NCPC sector projects are conducted in terms of Trade and Investment South Africa (TISA) Customised Sector Programmes (CSP).
Details on labour regulations can be accessed at the following web address:www.labour.gov.za.
For more information on Financial Regulations, please visit: www.fsb.co.za.
Disclaimer: A portion of the information contained above consists of extracts from the SARB Exchange Control Regulations manual. Due to the gradual elimination of exchange controls, this document is subject to change and exporters must consult their bank/authorised dealer and/or South African Reserve Bank.