Group treasury management proposals
A treasury management holding company regime is to be established for exchange control purposes
THE Taxation Laws Amendment Bill 39 of 2013 contains proposed currency rules for “domestic treasury management companies”. The proposed legislation is in reaction to the announcement by the minister of finance earlier this year that a treasury management holding company regime will be established for exchange control purposes. It was suggested that such a regime would encourage the establishment of group treasury management functions in SA and further enhance SA’s position as a “gateway into Africa”.
In particular, for exchange control purposes it is provided that each entity listed on the Johannesburg Stock Exchange will be entitled to establish one subsidiary to fund African and other offshore operations and which will not be subject to the exchange control restrictions generally applicable to South African companies. These domestic treasury management companies will have to be registered with the financial surveillance department of the South African Reserve Bank and will be subject to the following conditions:
The domestic treasury management company must be incorporated and effectively managed in SA, ie it must be a South African tax resident;
Initially, only one domestic treasury management company per JSE listed entity will be allowed; however, this limitation will be considered further by Treasury in the future; and
Appropriate governance arrangements will be required.
From an exchange control perspective, benefits to be enjoyed by a domestic treasury management company, include:
Transfers of up to R750m a year from the parent company to the domestic treasury management company will be allowed without prior approval. These amounts may be freely deployed to fund foreign group operations. Additional amounts will be subject to prior approval from the Reserve Bank;
Domestic treasury management companies will be allowed freely to raise and deploy capital offshore, provided these funds are without recourse to SA. Additional domestic capital (ie in excess of the R750m a year referred to above) and guarantees will be allowed to fund foreign direct investments in accordance with the current foreign direct investment allowance;
Domestic treasury management companies will be allowed to operate as cash management centres for South African multinationals and cash pooling will be allowed without limitations;
Local income generated from cash management will be freely transferable; and
Domestic treasury management companies may operate foreign currency accounts as well as a randdenominated account for operational expenses.
The rulings issued by the Reserve Bank in respect of domestic treasury management companies state that a domestic treasury management company should “hold African and offshore operations”. However, it may not be necessary for a domestic treasury management company to hold shares in foreign subsidiaries.
For tax purposes, a “domestic treasury management company” will be defined as follows: “a company — (a) incorporated or deemed to be incorporated by or under any law in force in the Republic; (b) that has its place of effective management in the Republic; and (c) that is not subject to exchange control restrictions by virtue of being registered with the financial surveillance department of the South African Reserve Bank”.
It is proposed that the definition of “local currency” in section 24I of the Income Tax Act, 58 of 1962 will be amended to provide that the “local currency” of any domestic treasury management company in respect of an exchange item which is not attributable to a permanent establishment outside SA, should be the domestic treasury management company’s functional currency.
Accordingly, no gains or losses should arise in respect of, among others, any unit of currency, any amount owing by or to that company in respect of a debt or owing by or to that company in respect of a forward exchange contract denominated in the functional currency of such company. A similar amendment will be made to the definition of “local currency” in paragraph 43 of the Eighth Schedule to the act which deals with the calculation of capital gains and losses in respect of assets disposed of or acquired in foreign currency.
“Functional currency” is defined as follows in section 1 of the act: “… in relation to — (a) a person, means the currency of the primary economic environment in which the business operation so that person are conducted; and (b) a permanent establishment of any person, means the currency of the primary economic environment in which the business operations of that permanent establishment are conducted”.
The Explanatory Memorandum to the Taxation Laws Amendment Bill, 2010 (which introduced the above wording) states that, from an accounting perspective, the following factors are, among others, considered to determine a company’s functional currency:
The currency in which sales prices are denominated and settled;
The currency in which costs are determined and settled;
The currency of financing activities; and
The currency in which receipts from operating activities are retained.
It is also proposed that the currency translation rules in section 25D of the act will be amended to provide that any amount received by or accrued to, or any amount of expenditure incurred by a domestic treasury management company, in any currency other than the functional currency of that company which is not rand, must be determined in the company’s functional currency and translated to rand using the average exchange rate for the year of assessment.
The proposed tax relief is therefore limited to exchange gains and losses and the domestic treasury management company would be taxable on, among others, its interest income. However the company would be able to utilise SA’s double tax agreements in order to reduce any foreign withholding taxes on, among others, such interest income.
The broad idea is therefore to allow South African listed groups to avoid having to set up an offshore treasury company and, instead, to allow such groups to utilise a South African entity to fund their offshore operations.
Peter Dachs and Bernard du Plessis are directors and joint heads of ENSafrica’s tax department.