Exchange Control Amnesty & Draft Taxation Laws Amendment Bill: response to submissions

Meeting report

FINANCE PORTFOLIO & SELECT COMMITTEES: JOINT MEETING
13 May 2003
EXCHANGE CONTROL AMNESTY & DRAFT TAXATION LAWS AMENDMENT BILL: RESPONSE TO SUBMISSIONS

Chairperson: Ms B Hogan (ANC)

Documents handed out:
Exchange Control Amnesty and Amendment of Taxation Laws Bill [B26-2003]
Responses by SARS, SARB, and the National Treasury to Comments by Organisations and Individuals
Application Form -Exchange Control Amnesty And Accompanying Tax Relief [Please see Page 34 in this document for application form ]
Committee Programme
Association of Trust Companies in South Africa (Appendix 1)
The Banking Council - Comments on Chapter 1 of Bill (Appendix 2)
The Banking Council - Comments on Chapter 2 of Bill (Appendix 3)
Anonymous submission (Appendix 4)

SUMMARY
Representatives from the South African Revenue Service (SARS), South African Reserve Bank (SARB), and National Treasury presented a joint response document to the public submissions made on the Amnesty Bill.

The difference between an advisor and a facilitator, as well as the protections provided to each group, was clarified. The inclusion of close corporation and trusts into the definition of "applicant" and the exclusion of companies in the same definition was explained. The payment of levy for the repatriation of foreign funds, relief for domestic income, the storing of information obtained during the application process, and constitutional issues were also discussed.

MINUTES
Mr K Louw, General Manager: SARS Legal Administration, presented the document prepared by SARS, the National Treasury and SARB.

Qualifying persons
The Committee discussed the difference between Advisors and Facilitators. It was explained that Advisors were those who gave advice regarding the placement of funds in offshore accounts while the Facilitators were those who actually put the funds offshore. Advisors were further grouped into categories of those who gave advice on how money was taken offshore and those who gave advice on how to use the Amnesty Bill.

Mr F Tomasek, Tax Researcher for SARS, made it clear that if an application for amnesty was unsuccessful, the information would not be passed onto SARS by the Amnesty Unit. A further protection is in clause 27 of the Bill, which states that SARS and SARB would not be able to request any information from anyone applying for amnesty. There are different levels of protection for advisors and a group of facilitators.

Prof Keith Engel (National Treasury Director: Legislative Oversight and Policy Co-ordination) clarified that a facilitator was one who assisted to "accumulate or transfer" funds. In other words the facilitator is the one who actually "fudged" the accounts.

Prof Engel further stated that Mr Tomasek was correct with regard to the information recording requirements. He stated that the idea behind it was for all foreign assets to be declared, but that those declaring their foreign assets would not have to explain where they came from or how they were accumulated.

Ms R Taljaard (DA) asked how a person who acted as an advisor and a facilitator would be treated under the law.

Prof Engel explained that in most cases the advisors were not part of the amnesty agreement. It is not necessary to give amnesty relief to advisors because they have no foreign assets to contribute as consideration for amnesty relief. Furthermore, the advisors are protected because applicants for amnesty relief are not required to reveal the names of those who assisted them and neither SARS nor the Exchange Control Department are allowed to request their details. However, amnesty is available for a small class of facilitators whose anonymity could potentially be compromised by the amnesty despite the protective measure provided for. See the attached document for the specific legal treatment of advisors and facilitators.

Ms Taljaard stated that the situation became complex with applicants, advisors, facilitators, and companies.

Companies
Prof Engel explained that the definition of applicant had been expanded to include close corporations and trusts. Companies were left out of the amnesty agreement because they operated under different regulations. Unlike natural persons, close corporations or trusts, companies can invest in sizeable business projects offshore upon receipt of Exchange Control approval. These companies must repatriate foreign earnings unless they can obtain further Exchange Control approval to retain excess foreign earnings offshore. The granting of exchange control amnesty to companies would result in the unacceptable situation that two pools of assets would have to be regulated and monitored.

Non-resident individuals
Mr Louw continued presenting the document, reviewing the issue of defining a resident, the issue of defining an expatriate and the issue of nominees holding assets.

Nominees holding assets
Prof Engel clarified the definition of "holding" assets. Someone that "holds" an asset is the person who receives direct economic benefit from the asset. He also explained that if the value of the shares of a company derives from an unauthorised asset, amnesty may be applied for. In other words, if you are a shareholder of a company whose shares have been bolstered by illegal holdings, the shares you own are illegal and you may apply for amnesty.

Payment of levy
With regard to payment of levy upon the repatriation of foreign funds, Prof Engel explained that the exchange rate to be used is the ruling spot rate on the date of repatriation of the foreign funds for determination of the 5 per cent levy and date of payment to the authorised dealer in the case of the 10 percent levy. The utilisation of these exchange rates will simplify matters for authorised dealers processing payments of the exchange control amnesty levies. He explained that the idea was to get money back into South Africa.

The Chairperson stated that the government had to be careful so as not to allow people to take illegal money abroad and then grant amnesty for the repatriation of that money. That is similar to condoning illegal activity.

Domestic income
With regard to domestic tax transgressions, i.e. income tax, donations tax, secondary tax on companies and estate duty, which relates to undisclosed foreign assets, provision has been made for further relief. The domestic tax relief is subject to the payment of a 2 per cent domestic tax amnesty levy. The levy is based on amounts not declared to the Commissioner for tax purposes to the extent those amounts were accumulated as or converted to foreign assets.

Targeting of applicants
The Committee moved on to issues of confidentiality and issues regarding the information contained in the application.

Dr G Woods (IFP) stated that investigations should be restricted to foreign funds.

Mr Tomasek explained that SARS or the Exchange Control Department may not request details from an applicant in respect of advisors. Furthermore, the Amnesty Unit is required to submit successful applications and supporting documents to SARS and the Exchange Control Department without reflecting the names of any person other than the applicant or applying facilitator. SARS and the Exchange Control Department will not have access to unsuccessful applications as the documentation will be retained by the Amnesty Unit until termination whereafter it will be transferred to the Auditor General to be held for a period of five years.

Ms Taljaard stated that the housing of documents with the Auditor General would create a sort of legal warehouse.

Mr G Grober (DA) asked how confidentiality can be achieved. There must be a practical method of ensuring confidentiality of all applications.

Mr Louw said that the Amnesty Unit had an obligation to consider the application for amnesty and that an applicant was aware of the risk of applying for amnesty as it was stated up front.

The Chairperson said that the Auditor General should be contacted about his thoughts on the expanded role of the office. In this regard, Ms Taljaard brought up the question of legal mandate.

The Chairperson stated that is what she was inquiring about. She suggested that the Public Protector be contacted as well.

Invalidity of approval
Ms Taljaard stated that clear criteria should be set for withdrawals of approvals.

Mr Tomasek answered that approval granted will only be invalid in a limited number of listed situations, i.e. where the Amnesty Unit has erroneously granted approval, where an applicant has derived any foreign asset or bearer instrument from unlawful activities or on failure to submit a tax return in time in the case of an application for tax relief. Where the approval becomes invalid, any amnesty levies paid will not be refunded.

Mr Tomasek reviewed the provisions for the Amnesty Unit. In terms of records and use of information, he explained that the Amnesty Unit does not have the power to request information from the applicant relating to persons who advised the applicant or assisted an applicant by accumulating foreign assets or transferred funds or assets from South Africa. SARS and SARB, however, are permitted to request information from an applicant with regard to any person who advised the applicant regarding the transgression of the Income Tax Act and the Estate Duty Act.

Constitutional issues
Many submissions suggested that the exclusion of companies, advisors, and attorneys was unconstitutional because it amounted to unfair discrimination.

Mr Tomasek contended that unfair discrimination does not necessarily mean unreasonable discrimination. The discrimination in question cannot be said to impair the fundamental dignity of those who are excluded, nor do they directly or indirectly unfairly discriminate against anyone on any of the listed grounds in the Section 9 of the Constitution. Since there is a rational basis for the exclusion of certain groups, especially companies, the Amnesty Bill should survive constitutional challenge.

Financial Intelligence Centre Act reporting requirements
It was pointed out that an exemption from the reporting requirements was granted by way of regulation by the National Treasury in terms of the Financial Intelligence Centre Act in respect of activities which come to advisors' attention as a result of the amnesty.

The Committee members discussed the definition of "unlawful activities" and whether the scope is too broad. Prof Engel explained that "unlawful activities" has been limited by excluding any offence stemming from a misrepresentation or non-disclosure that was necessary to facilitate an exchange control contravention or failure to comply with the Income Tax Act or the Estate Duty Act. The effect of the change is that a person who committed offences which facilitated an aforementioned contravention or failure to comply will be able to qualify for exchange control or tax amnesty.

The Chairperson noted the changes to the Committee Programme. The Amnesty Bill would be tabled on 15 May, that the debate on the Bill would be on the 21 May, and that the NCOP and House was expected to pass the Bill on 28 May. She reminded members of an oversight tour scheduled for 10-13 June.

The meeting was adjourned.

Appendix 1:
Association of Trust Companies in South Africa

8 May 2003

Ms B A Hogan - Chairperson

Portfolio Committee on Finance

Dear Ms Hogan

 

EXCHANGE CONTROL AMNESTY AND AMENDMENT OF TAXATION LAWS BILL ("the Bill")

Our Association wishes to express its thanks for the opportunity to make written comment on the second draft Bill.

The Association of Trust Companies in South Africa has 17 member companies and as at the end of December 2002 managed investments on behalf of its clients to the value of R185 billion. These investments consist almost entirely of private wealth as opposed to institutional funds.

Our Association fully supports the introduction of this amnesty.

For the sake of convenience comments have been grouped under those considered to be substantive and those to be textual in nature.

 

Substantive

1. The definition of "applicant" is restrictively worded to refer only to section 3(1)(a) (presumably this should read 3(a)) i.e. the reference to who may make application in instances where an exchange control contravention has occurred. This prima facie limits the ambit of the amnesty as instances can be envisaged where no exchange control contravention occurs (such as where foreign earnings are settled on an offshore trust) but the taxpayer fails to account for a tax liability arising from the settlement. Although there are indications in the Bill that may counter this prima facie conclusion, it is preferable to explicitly clarify the ambit of the amnesty.

Furthermore, applicants are restricted to natural persons, close corporations trusts or related party facilitators as defined. It is submitted that there are many instances where other entities such as companies, clubs and other associations should also be included in the class of persons who may apply for amnesty.

2. The restriction in sub-paragraph (b) of the definition of "related party facilitator" may be unnecessarily harsh in certain circumstances. For example, a company with non-family shareholders would be prohibited from applying as a "related party facilitator". Thus, where such a company is a party to, for example, a transfer pricing contravention, it would not qualify to make application as a related party facilitator. As it would also not qualify to make application under sections 3(a) or (b) as it did not hold the foreign assets, such company would effectively not qualify for relief.
3. The effect of the proposed Section 4 is that such trusts will be treated as never having existed. The election in section 4 establishes a deemed ownership. Will the donor be entitled to dispose of the asset held in terms of the deemed ownership to the trust or to the beneficiaries?

It is common for foreign assets to be held indirectly via structures that will invariably include one or more trusts. These structures are usually set up for tax and estate planning purposes. By South African standards, they are usually fairly expensive but if professionally established and managed, are also effective. These structures are usually only cost effective when they are quite substantially funded. We believe that people who have established such structures would be unwilling to, in effect, dismantle them with the attendant tax and estate planning consequences. We believe that these consequences would prove to be a disincentive to such people to seek or to make application for amnesty. It is therefore submitted that structures be left in tact and that the normal rules in terms of the Income Tax Act and the Estate Duty Act as affected by the structures, and as they affect the structures, apply.

4. The reference in section 4(2)(a)(ii) to 28 February 2003 appears to have the effect of extending the income tax amnesty to income tax contraventions in respect of the 2003-year of assessment. This is inconsistent with the previous expressed intention (i.e. that only contraventions up to and including the 2002 year of assessment would be covered) and does not accord with the reference to 28 February 2003 in sections 15 and 17 of the Bill. This prima facie anomaly should be addressed.
5. Where approval has been withdrawn in terms of section 20(1) in relation to the applicant, what is the fate of a related party facilitator? Does he retain his amnesty or is his amnesty also withdrawn?
6. Where an application has been refused the Amnesty unit may not pass that information on to any other person (see section 27(3)). This does not apply where the amnesty has been withdrawn (see section 27(4)). This is particularly harsh in view of the question raised in paragraph 6 relating to the related party facilitator i.e. if the related party facilitator's approval is also withdrawn as a result of a failure by the applicant to pay the levy timeously, this leaves the related party facilitator exposed.
7. Income tax contraventions (for example in the case of transfer pricing) may have resulted in consequential VAT or Customs Duty contraventions. Relief from such contraventions is not currently included in the ambit of the Bill and this may serve as a disincentive to potential applicants/related party facilitators.
8. We note in Section 27(2) of the proposed legislation that neither the South African Revenue Service nor the Exchange Control Department may request details from an applicant with regard to any other person who assisted that applicant in accumulating foreign assets or transferring funds from the Republic. This does not preclude other agencies from making such inquiries from the applicant which could lead to civil or criminal action being brought against such other party. We submit that this prohibition be extended to all agencies of the state.
9. Section 27(2) prevents the South African Revenue Service or the Exchange Control Department from requesting details of third parties from an applicant only in respect of the method of accumulating foreign assets or transferring funds or assets from the Republic. Both these agencies and any other agencies of the state may be permitted to request information from such persons regarding the transgression of the Income Tax Act and the Estate Duty Act. We assume that this is not the intention and suggest that an appropriate amendment be made.
10. Section 15 of the proposed legislation refers only to the Income Tax Act. It is submitted that the Estate Duty Act be included in this section.
11. Circumstances will exist where persons have died either before or during the amnesty period. It is submitted that under these circumstances the executor in the estate of such person be permitted to apply for amnesty and tax relief.
12. Can a person apply for a tax amnesty sans exchange control contravention? In such event would there be a tax amnesty with no levy payable?
13. If there is genuine doubt as to whether or not there has been an exchange control or tax contravention, can an applicant apply for a conditional amnesty eg. "only to an extent that there has been a contravention…". The point is that such an applicant should not suffer the levy if it is found that there has been no contravention.

 

Textual

1. The reference to section 4 in the definition of "application" is perhaps misplaced. Should this reference not be to section 5?
2. The reference to section 3(1)(a) in the definition of "applicant" should presumably read section 3(a).
3. The third sub-paragraph under section 4(1) should presumably read (c) and not (a).
4. A reading of sections 27(2)(a) and (b) do not allow for easy interpretation. If the intention is to prevent the authorities from requesting information from advisors other than joint-applicant related party facilitators, the "or" separating the paragraphs is misplaced and the existing paragraph (b) should probably read as a proviso. If this suggestion accords with the intended meaning, the provision operates particularly harshly in relation to joint-applicant related party facilitators. Similar concerns regarding the previous draft were addressed in the context of the information to be provided in relation to advisors. Would it not be similarly appropriate to exclude the ability to obtain more information regarding the joint-applicant related party facilitators? Failure to address this may operate as a disincentive.

Yours sincerely

 

JD (NIEL) RAUBENHEIMER

Appendix 2:
BANKING COUNCIL OF SOUTH AFRICA RESPONSE TO CHAPTER 1 OF SECOND DRAFT OF BILL

6 May 2003

DRAFT EXCHANGE CONTROL AMNESTY & AMENDMENT OF TAXATION LAWS BILL

Introduction

Thank you for the opportunity to comment on the second draft of the Exchange Control Amnesty and Amendment of Taxation Laws Bill ("the Bill").

This response will deal exclusively with Chapter 1, with a separate response for Chapter 2.

With regard to the "Exchange Control Amnesty and Accompanying Tax Measures", we feel that the second draft has become more complicated than the first, with additional punitive taxes that do not encourage residents to participate in the spirit of Amnesty process.

Section 1 - Definitions

We would suggest that the reference to "related party facilitator" be reduced to "facilitator" to avoid any confusion with the term "related" as may be applied to item (a) "a natural person;" in the definition of "related party facilitator". The alluded confusion may stem from item (b)(ii) of the same regulation where there is a reference to "relatives".

The term "facilitator" would then include financial advisors. We believe that the desired result under the Amnesty process can only be achieved by the committed participation of financial advisors protected under the Draft. The draft should also make provision for Amnesty for the employers of facilitators, such as banks. The reporting requirement under the Financial Intelligence Centre Act ("FICA") has still not been dealt with. We repeat our previous arguments for the sake of completeness.

Financial Intelligence Centre Act

Under the FICA, section 29(1)(b)(iv) imposes a duty on accountable institutions to report certain information relating to an investigation of an evasion or attempted evasion of tax. It would therefore seem that any individual who approaches an accountable institution for advice on the proposed amnesty, or who requests the accountable institution to facilitate the application for amnesty, would trigger a reporting requirement on the accountable institution concerned. In the context of the process of propagating information about the amnesty, advising affected individuals that they should apply, and facilitating the application, any suspicious transaction-reporting requirement would be counter-productive to the amnesty process, as well as creating unnecessary reports in certain circumstances.

It would therefore be preferable for the reporting requirement under section 29(1)(b)(iv) of the FICA, specifically relating to queries, advice or assistance about the amnesty to be suspended, by the Bill under discussion, until the end of the amnesty period (30 November 2003).

Promotion of Access to Information Act

It is unclear as to whether the information held by the amnesty unit could be accessed under the abovementioned legislation. We would encourage the exclusion of this legislation in line with the amnesty provisions.

The definition "resident" does not make specific provision for former residents who may wish to return to South Africa. The Bill is therefore unclear as to their status under the Amnesty.

Section 3 - Persons who may apply for exchange control or tax relief in terms of amnesty

We applaud the broadening of the definition from a natural person to include closed corporations and trusts. We would, however, reiterate our previous position that the categories should be expanded to their broadest possible definition, inclusive of domestic companies to allow individuals to take advantage of the Amnesty process, who may have structured their affairs in a manner not envisaged by the Bill. To this end we would suggest that the definition be simplified to include wording that would encompass "all legal structures of which the applicant has a beneficial interest".

Section 4 - Special rules for donors to discretionary trusts

Should the applicant, be a donor or one of a number of donors of a discretionary trust, and be deemed to hold the foreign assets in the trust, then there may be prejudice to any foreign beneficiaries.

It is unclear what benefit would be obtained should the applicant, who is the donor and not a beneficiary, submit the trusts founding statement. Additional complications may arise should the trustees refuse to give the donor the information on the grounds that the assets no longer belong to the donor.

Section 5 - Period for amnesty application

The Bill makes reference to a prescribed format in which the amnesty application is to be made. The Bill does not provide a copy of the format anticipated for comment and there is concern that the format may be overly burdensome for the applicant.

We would encourage the use of a simple format, following the style of the personal income tax return.

Section 6 - Required information for application by applicant

We believe that the requirement under this section is burdensome to the applicant and may dissuade persons from making applications. We once again refer to the requirement to submit two valuation certificates, by a valuator and a sphere of government.

We once again reiterate that the simplest process is most likely to achieve the desired result.

Section 7 - Statement of foreign assets and liabilities for tax relief

We once again request a definition of "historical cost" for the purposes of interpretation.

Our concluding remarks from Section 6 refer.

Section 8 - Required information for application by related party facilitator

There is a requirement for the related party facilitator to "apply jointly with an applicant on the prescribed form submitted by that applicant;".

The Bill does not take into account circumstances that may make this requirement impossible to comply with. Due cognisance should be taken of the time frame over which the amnesty process covers, and the changing circumstances of applicants that may inevitably result in parties no longer being in contact.

No provision is made for the circumstances in which the related party facilitator is unaware that the applicant has applied for amnesty.

Furthermore detailing dates on which the amounts were accumulated or converted may be impossible to supply and add to the complexity of the process. The facilitation could have been done in the 1970's and still qualify for amnesty.

Section 11 - Imposition of exchange control levy

Clarity is required in the calculation of the leviable amount, to allow the market value of the foreign assets to be reduced by the foreign liabilities attached to the asset. The foreign liability should not be viewed as illegal.

Section 13 - Payment of exchange control amnesty

We once again refer to our previous comments and note that there is still no provision for those applicants who do not have sufficient disposable foreign assets to meet the requirements of this section. The requirement to pay from foreign assets when the asset cannot be used to pledge to raise foreign funds, as required to meet the amnesty levy would effectively exclude these applicants from the process.

Property transactions, a sought after foreign asset, may be one such example. Another example may be where the foreign trustee refuses to pay the funds out of a foreign trust to the donor or another party who may or may not be named beneficiary in the trust deed.

Section 14 - Exchange Control Relief

The wording "excluding any asset which is no longer held as a result of a donation by that applicant or a conversion of that asset by that applicant into a bearer instrument." Implies that the applicant is in contravention of the exchange control regulations, which may affect their approach to the amnesty process.

There is an overriding presumption that the provision "not to have contravened" encompasses all Exchange Control regulations both current and historical, as they would have been applied.

Section 15 - Exemption for undeclared foreign income

We note the same comments as in Section 14 as would be applied to the Income Tax Act.

Section 16 - Imposition and Payment of domestic tax amnesty levy

We believe that this section should be excluded from the Bill as it is an addition to the previous draft, punitive in nature and requires considerable additional effort on the part of the applicant to conform with this requirement. The long-term benefit of a broader tax base may be thwarted by the short-term levy resulting in a less than optimal cash flow.

Section 20 - Withdrawal or invalidity of approval

Section 20(3) where the amnesty unit has the power to withdraw the approval granted at any stage is inconsistent with the stated purpose of the legislation. This power should be limited to circumstances where the applicant has made a material non-disclosure or in some other way deliberately undermined the process in respect of that foreign asset.

Section 27 - Records and use of information

The use of information is a sensitive issue and under sub-section (2) we would contend that the Amnesty Unit should also not have the power to request this information from the applicant.

Furthermore under sub-section (3) it is not clear why this information should additionally be given to the Auditor-General when it is already held by either SARS or SARB.

Conclusion

We would request that this comment be read in conjunction with our previous comment on the first draft.

Furthermore we would encourage the active participation of all individuals and hope that the Bill will enable maximum participation given the diversity of the structures used to facilitate the acquisition of foreign assets.

The addition of the domestic tax levy and the change in the treatment of the information voluntarily provided by applicants, together with the abolishment of certain specific safeguards such as indemnity from criminal prosecution under the first draft, could adversely impact the willingness of applicants to participate. We would implore the amnesty unit to revert to the conciliatory stance taken by the Minister and encourage the maximum participation by ensuring that the Bill is protective of the sensitivities of the applicants. The ultimate goal should still remain the regularisation of the affairs of the applicants and the broadening of the tax base.

We believe that the process should be no more onerous to the applicants under the amnesty provision, than what would be expected under an application for the permissible foreign investment allowance in terms of the Exchange Control Regulations, and the reporting requirement under the Income Tax Act for such individuals had they made the acquisition of their foreign assets during the financial year ending 28 February 2003.

 

Appendix 3
BANKING COUNCIL OF SOUTH AFRICA RESPONSE TO CHAPTER 2 OF SECOND DRAFT OF BILL

6 May 2003

DRAFT EXCHANGE CONTROL AMNESTY & AMENDMENT OF TAXATION LAWS BILL

Introduction

Thank you for the opportunity to comment on the second draft of the Exchange Control Amnesty and Amendment of Taxation Laws Bill ("the Bill").

This response will deal exclusively with Chapter 2, with a separate response for Chapter 1. In particular we wish to address Section 44 of the Bill, relating to the deletion of the definition of "fixed deposit" in Section 1 of the Stamp Duties Act, 1968 and Section 48, the repeal of Item 13 of Schedule 1. We refer to the comments made in our submission of the 7 April 2003 and wish to add the following.

Repeal of Item 13 of Schedule 1

We welcome the repeal of Item 13 of Schedule 1 of the Stamp Duties Act, 1968 ("the Act") in so far as it removes the requirement to stamp "Fixed Deposit Receipts" and would request the Minister's assistance in clarifying the treatment of stamp duty on Negotiable Certificates of Deposits ("NCD's").

The current treatment of stamp duty on NCD's is to stamp such instruments under Item 13 and not under Item 15 as per the exemptions provided for under Item 15.

An NCD is, by its nature, a fixed deposit. The only difference is that the certificate for the fixed deposit has the added benefit of being tradable in the market. The definition of a "fixed deposit" (in Section 1 the Act) is "…a deposit of money for a definite period…" and NCD's comply with this definition as they have a predetermined maturity date on which the deposit is to be repaid.

The reference in the exemptions under Item 15 which make NCD's dutiable under Item 13, reiterate the status of NCD's, as they do not fall in the definition of a "marketable security" as anticipated in the definition provided in Section 1:

"(xiv) 'marketable security' means any security, stock, debenture, share or other interest capable of being sold in a sharemarket or exchange or otherwise, and, where the context so requires, includes the scrip, certificate, warrant, or other instrument by which the ownership of or title to any such security, stock, debenture, share or other interest is presented; (iv)".

In examining the marketable security definition, it is clear that NCD's do not fall in the category of a "security, stock, debenture, share or other interest capable of being sold in a sharemarket…" as they are evidence of public deposits not marketable debt, and furthermore are not traded on a formal exchange.

Pricing Considerations

We are concerned that members of the Banking Council may stamp NCD's under Item 15, which would have significant implications.

Stamping NCD's under Item 13 required a duty of five cents in every one hundred rand, "…for every R200 (or part thereof) of the amount of the fixed deposit and for every period of twelve months (or part thereof) for which the deposit is made¹â€¦", 10 cents.

Should members stamp under Item 15 (2) (b), where a marketable security that has the closest resemblance to NCD's is described as "…if made out to bearer or in any manner so as to be transferable by delivery only: for every R100 or part thereof of the price of issue…", would have a stamp duty requirement of 20 cents, then stamp duty will increase dramatically, four fold to twenty cents in every one hundred rand.

NCD's are a funding instrument for corporate loans in particular short-term working capital facilities. The pricing of the corporate loan takes into consideration the statutory costs of reserving, liquid assets and stamp duty. This cost is then passed through to the corporate borrower in the form of an all-in-price.

The most popular funding period is the three-month area, which on a one million rand deposit would previously have cost R500 or 20 basis points for a 91-day deposit. Should members stamp under Item 15, the cost would quadruple to R2,000 or 80 basis points and the additional cost of 60 basis points would be charged to the corporate borrower effectively relating to a once off general interest rate increase.

The derivative market relies on the three-month cash market for settling Forward Rate Agreements as well as Interest Rate Swaps as the JIBAR rate is the only benchmark rate recognised internationally.

Penalties for non-compliance

Under Item 13, stamp duty was payable within twenty one days of the end of the month in which the NCD's were issued, however under Item 15, stamp duty is payable within twenty one days of issuing the security, which is a significant change to past procedures and may result in certain of our members having to pay penalties.

Our members have approached the Banking Council for clarity, as it is believed that there is no longer a requirement to stamp NCD's with the repeal of Item 13. In order to eliminate this doubt we have request the Commissioners urgent response, and suggest that in the event of NCD's still requiring stamp duties, the Commissioner may be in a position to give some relief on said penalties under Section 8. (3) of the Act.

Conclusion

We conclude that NCD's are fixed deposits and as such are no longer subject to stamp duty with the repeal of Item 13 of Schedule 1 of the Stamp Duties Act, 1968. To this end we would suggest that the exemptions pertaining to NCD's under Item 15 be removed in their entirety to eliminate any misinterpretation.

We have made separate submissions to both the National Treasury and the South African Revenue Services for clarity in this matter, and express concern that any further delay in reaching a decision on this issue may paralyse a critical element of the cash market, or result in a pass through cost that would impact heavily on the South African corporate borrower.

We appeal to the Minister for clarity and an expeditious resolution to this dilemma.

Yours faithfully
Mark Brits

General Manager Financial Markets

Appendix 4:
6 May 2003

Dear Ms Hogan

 

AMNESTY PUBLIC HEARINGS 13 MAY 2003

I would like to begin by highlighting my impartiality with reference to the amnesty issue. The comments which follow are from someone who has nothing to gain whatsoever from the amnesty as I have no assets overseas. My motivation for writing is the financial interests of the country.

It is my understanding that advisers, be they independent financial advisers, attorneys or chartered accountants, who helped their clients move their funds offshore illegally do not receive the amnesty. Presuming this to be correct 'my concern is this: By keeping such advisers out of the amnesty I believe this will definitely lead to fewer applications from their clients.

Very often the relationship between an adviser and client goes beyond business, it takes on a social perspective. They become mates, they play golf together and their families socialise together. This close relationship is even closer when you consider the kind of relations advisers have with 'old money' clients. Here, family wealth has been advised by the same adviser for years even generations and it is not uncommon for he or she to be regarded as part of the family. The result is that these guys stick together, they act together, the one does what the other is doing or not doing

In the unlikely event that a client, whose adviser is not eligible for amnesty, chooses to apply, the adviser will in all probability present him or her with an ultimatum that if he or she proceeds the adviser will resign. Considering the escalating powers and reach of Sars it is understandable that the sensible thing for the adviser to do, would be to sever relations with whichever clients turn legal because otherwise the situation becomes too
close for comfort, as the obvious thing for Sars to do would be to establish whether the adviser to the legalised grey funds is declaring his or her trail commission, which is paid on an on-going basis every quarter and which correlates with the value of the investment.

The moment a client is notified of the ultimatum he or she will in all probability reconsider the amnesty because of the obvious reluctance of losing a long serving and most importantly a trusted adviser who has done an excellent job, what's more has become a friend, possibly even a 'member of the family'. Such a relationship is not easily found or created so to replace or recreate it would not be easy. On the strength of this I believe the client would opt to decline the amnesty and thereby, in retaining his or her quality adviser, the future financial well being of his or her overseas nest egg would be assured.

I believe that if the opportunity for amnesty is extended to advisers they will take it up, and in turn that will place them in a position to motivate and encourage their clients to do the same, because a clean adviser will obviously want clean clients. I am adamant that a secret ingredient to the real success of the amnesty is to include all advisers because they wield a lot of influence which can either help or hinder. Giving amnesty to all advisers will enable the declaration of grey funds to be facilitated and maximised.

While government is entitled to offer the amnesty to certain quarters only, labeling it an incentive, it is tantamount to discrimination, and we all know only too well how damaging discriminatory policies are they achieve much less than would otherwise be the case.

I would like to take this opportunity to sincerely thank government for the amnesty initiative. If applied across the board I am certain it will be instrumental in a great many declarations.

Yours sincerely
Anonymous