New hur­dle for fi­nan­cial skills

Leg­isla­tive is­sues com­pound short­age of pro­fes­sion­als in fi­nan­cial sec­tor

Finweek English Edition - - Creating Wealth - MARC ASH­TON

THE SOUTH AFRICAN fund man­age­ment in­dus­try may find it dif­fi­cult to main­tain its com­pet­i­tive edge in the face of the po­ten­tially ad­verse tax and ex­change con­trol con­se­quences of manag­ing off­shore funds in this coun­try. In some cases the un­favourable en­vi­ron­ment dis­cour­ages in­vest­ment man­agers from set­ting up here. There are also in­stances of lo­cal in­vest­ment man­agers leav­ing SA and mov­ing their ex­ist­ing op­er­a­tions over­seas. The re­sult is of course a loss of skills and rev­enueearn­ing ca­pac­ity.

That’s the view of Doelie Less­ing, a part­ner at Mait­land, a multi­na­tional pro­fes­sional ser­vices and wealth man­age­ment firm. A core part of Mait­land’s of­fer­ing is to pro­vide ad­vi­sory and fund ad­min­is­tra­tion ser­vices to SA’s in­vest­ment fund in­dus­try, in re­la­tion to both lo­cal and over­seas funds.

Mait­land has noted a rapid in­crease in the num­ber of SA fund man­agers re­quir­ing as­sis­tance in set­ting up and ad­min­is­ter­ing funds off­shore. In some in­stances that’s to ac­com­mo­date South Africans ex­ter­nal­is­ing their wealth and want­ing to re­tain their trusted re­la­tion­ships with lo­cal fund man­agers. But it’s also the re­sult of the de­mand for in­com­ing in­vest­ment into Africa, largely through pri­vate eq­uity funds.

An­dré le Roux, re­spon­si­ble for busi­ness de­vel­op­ment at Mait­land, says Mid­dle East­ern and Euro­pean in­sti­tu­tional in­vestors are looking to pri­vate eq­uity in Africa to add value without adding risk to clients’ port­fo­lios (adding al­pha). Al­pha is a mea­sure­ment term fund man­agers use to gauge their out­per­for­mance over a bench­mark and their peers. “They’re looking to South African fund man­agers to man­age their pan-African in­vest­ment,” Le Roux says.

One of the is­sues fac­ing SA’s fund man­agers is that their man­age­ment of for­eign funds car­ries with it the risk that those ei­ther be­com­ing tax res­i­dent in SA or their prof­its are treated as be­ing SA source prof­its. In ei­ther case, the fund in­come be­comes sub­ject to SA tax as well as tax over­seas. Such a con­se­quence would de­feat the prin­ci­pal ob­jec­tive of set­ting up an off­shore fund, namely the at­trac­tion of for­eign in­vest­ment into SA.

A num­ber of other coun­tries have in­tro­duced a so-called in­vest­ment man­ager ex­emp­tion, the ef­fect of which is to avoid a for­eign fund de­vel­op­ing a tax foot­print in the coun­try where the in­vest­ment man­age­ment func­tion is per­formed. The ex­emp­tion ap­plies, among oth­ers, to the United States, Bri­tain, Ger­many and Aus­tralia and is a re­flec­tion of the level of so­phis­ti­ca­tion of those mar­kets.

Le Roux says rel­a­tively com­plex struc­tur­ing is of­ten re­quired to al­low South African fund man­agers to seek ef­fi­ciency from both an ex­change con­trol and tax­a­tion point of view. Man­agers are fre­quently re­quired to travel and, be­cause SA doesn’t cur­rently have an in­vest­ment man­age­ment ex­emp­tion in its tax laws, some are even re­lo­cat­ing.”

Le Roux says pan-African funds are be­ing set up in lower tax off­shore ju­ris­dic­tions, such as the Cay­mans, Bri­tish Vir­gin Is­lands, Isle of Man, Cyprus or Malta or on­shore low-tax ju­ris­dic­tions, in­clud­ing Ire­land and Lux­em­bourg. He adds African coun­tries, such as Nige­ria, Kenya and the Demo­cratic Repub­lic of Congo, are be­com­ing pop­u­lar des­ti­na­tions for SA busi­nesses and pri­vate eq­uity prac­ti­tion­ers.

“As many of th­ese coun­tries lack suf­fi­cient skills in the fi­nan­cial ser­vices in­dus­try, South African pri­vate eq­uity houses and fund man­agers have an op­por­tu­nity to fill that vacuum. Un­for­tu­nately, SA’s tax and ex­change con­trol rules re­sult in skilled pro­fes­sion­als be­ing forced to move out­side SA to ser­vice th­ese re­gions,” Le Roux says.

Less­ing agrees. She says: “Each year SA un­nec­es­sar­ily loses a num­ber of skilled pro­fes­sion­als from the fund man­age­ment in­dus­try. The prob­lem could be eas­ily solved and would re­sult in SA show­ing it has the cre­den­tials to com­pete with those coun­tries with a long­stand­ing so­phis­ti­cated le­gal and tax en­vi­ron­ment within which their fund man­agers can op­er­ate.”

Less­ing says many in­vest­ment and ad­min­is­tra­tive func­tions re­quired by fund man­agers could be more eas­ily car­ried on from SA should there be some ex­emp­tions of­fered in terms of tax leg­is­la­tion. “In a coun­try that al­ready has a skills cri­sis, we should look at adopt­ing an in­vest­ment man­age­ment ex­emp­tion to re­tain top fund man­agers.”

Mait­land is go­ing to start lob­by­ing gov­ern­ment on the in­vest­ment man­ager ex­emp­tion for off­shore funds and will launch an on­line “we­bi­nar” on this topic in the next week or so. The in­ten­tion is to get gov­ern­ment not to re­gard off­shore funds as tax­able in SA.

In­sti­tu­tional in­vestors looking to add value. An­dré le Roux Prob­lem can be eas­ily solved. Doelie Less­ing

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