New hurdle for financial skills
Legislative issues compound shortage of professionals in financial sector
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