Exit charge ‘not a tax’, deters capital outflows
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.