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The attempt by billionaire software developer Mark Shuttleworth to declare a levy he was forced to pay on the transfer of assets out of South Africa more than three years ago as unconstitutional will be closely watched by local businesses as the outcome of the case could have far-reaching implications for the legislation that governs exchange controls.
Shuttleworth, who now lives on the Isle of Man, was forced to pay R250m when he transferred part of his estimated R4.27bn fortune out of SA in 2009 on the grounds that foreign exchange controls made it impossible for him to continue his entrepreneurial activities from his homeland. In broad brushstrokes, Shuttleworth is arguing that the levy was a tax based on a decision by the Finance Minister, which violates the constitutional mandate that laws aimed at raising revenue must be promulgated by an a c t of pa r l i a ment. Fur t her more, Shuttleworth argues that the Reserve Bank’s habit of applying exchange controls through an intermediary agent (i.e. commercial banks) is not procedurally fair and thereby violates the rights of individuals. More importantly, Shuttleworth is arguing t hat section 9 of t he Currency and Exchanges Act is unconstitutional as it allows the president to retrospectively declare certain activities criminal and grants the State powers to implement exchange controls that bypass parliament.
“On the point of the constitutionality of section 9 being the provision empowering the exchange control regulations it is per- haps unlikely that the court will strike it down in its entirety,” says Benjamin Cronin, an associate at Webber Wentzel in Johannesburg. “It would seem unlikely that this suit will result in the collapse the exchange control regime, but it is possible that it might succeed in getting the Government to i ntroduce new legislation around exchange controls that is perhaps more transparent and more in line with modern constitutional as well as administrative rights going forwards.”
Cronin explains that certain powers bestowed by the Currency and Exchanges Act, which dates back to 1933, could well be declared unconstitutional. The chief examples he cites are the power the Act bestows upon the president to retrospectively criminalise particular conduct as well as the purported power to supersede acts of parliament by means of the regulations.
“The exchange control regime will continue to be fertile terrain for suits of this nature while the relevant regulations continue to rely on an outdated, pre-constitutional piece of legislation such as the Currency and Exchange Act,” says Cronin.
In this matter, Cronin says the particular facts in question mean that less obvious elements of the empowering provision are under the spotlight. What is being considered in particular is whether the Act creates impermissibly broad and unfettered discretion to the president when issuing the exchange control regulations. It also raises questions about whether the imposition of the 10% levy at the time, per a circular issued under the auspices of the exchange control regulations, constituted an illicit circumvention of the due process of passing a taxing Act through Parliament. Properly understood, Cronin explains, the 10% levy should be seen as part of the historical process of relaxing exchange controls, which have always begun with the base assumption of an “absolute prohibition” on the export of capital unless permission is granted by the Reserve Bank. So in many ways Shuttleworth was a beneficiary of an increasingly relaxed exchange control regime.
As it stands SA citizens are allowed to move R5m in capital offshore each year (a R1m expenditure allowance and R4m for investment purposes). Any amounts above that level require express permission from the Reserve Bank.
Of course, Government is unlikely to go down without a fight. Jeremy Gauntlett SC, arguing for the SARB, has already labelled Shuttleworth an “economic refugee” who is tr ying to “bring down the temple” of exchange controls simply because he was unable to get all of his money out of the country.
“This might i nvolve R250m f or Mr Shuttleworth but it probably involves billions for Government that would need to be paid back should the court find in his favour,” says Cronin. “This makes this case all the more important to the Government.”