Exit charge ‘not a tax’, de­ters cap­i­tal out­flows

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

THE Con­sti­tu­tional Court de­liv­ered judg­ment on June 18 2015 against Mark Shut­tle­worth in favour of the South African Re­serve Bank (the Bank) and the min­is­ter of fi­nance.

Mark Shut­tle­worth em­i­grated to the Isle of Man in 2001 to in­vest out­side SA and ap­plied to the Bank to trans­fer about R2.5bn. The Bank im­posed an exit charge of 10% on the cap­i­tal and Shut­tle­worth paid R250m, although he chal­lenged the con­sti­tu­tion­al­ity of im­po­si­tion.

The is­sue was whether the exit charge was a tax im­posed to raise rev­enue or a reg­u­la­tory charge to dis­cour­age cap­i­tal out­flows.

Had it been a rev­enue-rais­ing tax it would be in­valid as it was not en­acted in ac­cor­dance with pre­scribed con­sti­tu­tional and statu­tory pro­vi­sions.

In 1933, Par­lia­ment passed the Cur­rency and Ex­changes Act which em­pow­ered the pres­i­dent to reg­u­late mat­ters re­lat­ing to cur­rency, bank­ing or ex­changes. The threat of eco­nomic re­ces­sion and cap­i­tal flight was res­ur­rected by the 1960 Sharpeville shoot­ings and the pres­i­dent in­tro­duced ex­change con­trols. SA started a process of ex­change con­trol re­lax­ation fol­low­ing the 1994 elec­tions. The min­is­ter, in his an­nual bud­get, gen­er­ally an­nounced the con­di­tions im­posed on cap­i­tal ex­pa­tri­a­tions. The min­is­ter took the view that the econ­omy could with­stand cap­i­tal out­flows. As a re­sult, em­i­grants were al­lowed to ex­port blocked as­sets sub­ject to cer­tain cri­te­ria. Cap­i­tal ex­ports ex­ceed­ing R750,000 (in­clud­ing amounts that al­ready left) had to be done through ap­pli­ca­tion to the Bank’s ex­change con­trol depart­ment which would be sub­ject to an exit sched­ule and charge of 10%. Although Shut­tle­worth’s funds were blocked, the Bank al­lowed Shut­tle­worth to re­mit in­ter­est on this at prime plus 2%.

On March 5 2008, Shut­tle­worth ap­plied to the Bank to trans­fer about R1.5bn out of SA. The Bank ap­proved this sub­ject to pay­ment of an exit charge of about R165m. In June 2009 Shut­tle­worth de­cided to trans­fer the re­main­der but was ad­vised that the exit charge was un­law­ful. On the Bank’s ap­proval, Shut­tle­worth re­quested them to re­con­sider the im­po­si­tion although he did pay about R250m un­der protest, pend­ing re­con­sid­er­a­tion. The Bank re­fused to re­con­sider.

Shut­tle­worth ap­proached the High Court for re­lief on the ba­sis the charge was un­con­sti­tu­tional. The High Court de­cided against him and held that the charge was not to raise rev­enue and was valid. Shut­tle­worth then ap­proached the Supreme Court of Ap­peal on the con­sti­tu­tional va­lid­ity of the charge.

The court held that the charge was a rev­enue-rais­ing mech­a­nism as the amount of about R2.9bn raised was paid into the Na­tional Rev­enue Fund. As it was found that the levy was a gen­eral im­po­si­tion on amounts ex­ceed­ing R750,000 and com­prised a “tax, levy or duty”, the court or­dered the Bank to re­pay the exit charge, with in­ter­est.

Although the reg­u­la­tory frame­work au­tho­ris­ing the exit charge was re­pealed five years ago, the out­come of this dis­pute would likely have had far reach­ing con­se­quences. The state’s ex­po­sure to fu­ture claims was about R2.9bn.

The fi­nal ap­peal hinged on three ques­tions: whether the im­po­si­tion was a de­ci­sion of the min­is­ter or the Bank; sec­ond, whether the charge com­prised a na­tional tax, levy, duty or sur­charge; and third, whether the pur­pose of the charge was to raise rev­enue. It was found that the im­po­si­tion was made by the min­is­ter, sub­ject to ad­min­is­tra­tive re­view. The Bank was only re­spon­si­ble to ap­ply the pol­icy and had no im­ple­men­ta­tion dis­cre­tion.

It was held that a bill be­fore the Na­tional Assem­bly is a money bill if it im­poses “na­tional taxes, levies, du­ties or sur­charges” and also ap­pro­pri­ates money; abol­ishes, re­duces or grants ex­emp­tions from taxes; or au­tho­rises di­rect charges against the Na­tional Rev­enue Fund. A money bill must be passed by the Na­tional Assem­bly as re­quired by the con­sti­tu­tion but only the min­is­ter may ini­ti­ate or pre­pare a money bill.

It was fur­ther held that the dom­i­nant pur­pose of the exit charge was not to raise rev­enue and that it was sub­ject to the re­quire­ments of the con­sti­tu­tion. Fi­nally, it was held that the exit charge was di­rected at dis­cour­ag­ing cap­i­tal out­flows due to the po­ten­tial drain on the econ­omy.

Mark Shut­tle­worth case high­lights court’s opin­ion that pur­pose of exit levy is not to raise rev­enue

Ferdie Sch­nei­der is head of tax at BDO South Africa.

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