Liberalising outdated exchange controls will pay dividends

● Anyone who has read AA Milne’s Winnie the Pooh books might remember Tigger, who eats anything. Anything, that is, except thistles. And “haycorns”. And “hunny”.

This week’s budget in effect abolished the last vestiges of the exchange control system originally introduced almost 80 years ago. The old system of negative control — which banned you from moving money across borders unless you had specific permission — has been replaced with a new positive philosophy of capital flow management.

For individuals, the concept of financially emigrating will no longer exist. For companies that trade and invest cross-border, the red tape will be reduced and flows eased.

But there is something of Tigger in the new positive system. In theory it lets you do anything you like with your money as long as you pay your taxes and don’t get up to money laundering or other dodgy stuff.

Anything, that is, except for a list of specific transactions for which you will still require permission. Re-domiciling your company to another country is still on that list, mainly to prevent tax evasion; so too are the prudential limits on how much of their assets pension funds can invest abroad.

But the intention is to phase that list down. And the philosophical shift is important. SA has over 25 years gradually liberalised the highly restrictive system of exchange controls that originally prevented almost any capital flowing out of the country. There is little that individuals and companies can’t do now — as long as they apply for permission to the Reserve Bank, usually via the banks which are authorised dealers in foreign exchange.

But the bureaucracy of exchange control has remained cumbersome and time-consuming, sometimes leading to perverse outcomes — one trend that worries officials is that of individuals working abroad who emigrate and then can’t return to SA, merely because they are under the mistaken impression they have to do so to avoid being classed as tax resident here.

The new approach will prevent confusion about this when what’s been dubbed the “expat tax” comes into force today, when South African tax residents working abroad and earning more than R1.25m a year will no longer enjoy a full exemption on their foreign pay even if they work outside the country for more than 183 days (as they previously did).

Finance minister Tito Mboweni said in his budget speech that the new measures would make it easier to do cross-border financial transactions, which would support trade and investment. And he said: “We want to encourage South Africans abroad to keep their ties with the country.”

Globally, the OECD has put a new bestpractice Code of Liberalisation of Capital Movements in place and is leading a process in which several countries have embarked on implementing a more modern and flexible approach to currency flows — including Brazil and Colombia, as well as SA.

The new philosophy focuses on monitoring the risks of tax evasion and money laundering and illicit money flows across borders, with greater co-ordination between the Reserve Bank, Sars and Financial Intelligence Centre to oversee these as well as greater co-ordination with authorities in other countries.

The Reserve Bank had already changed its old exchange control department to a new financial surveillance department some years ago. Reserve Bank governor Lesetja Kganyago says of the new capital flow philosophy: “It shifts us from administration to analysis.”

While lawyers say the practicalities of the new measures are as yet unclear — detailed regulations are awaited — the impact on investment and on the ease of doing business in and around SA could be meaningful.

London-domiciled Anglo American — which was subject to specific restrictions dating back to its 1999 London listing — has welcomed the new capital flows system, which it says will make it much easier for the group to manage its cash between its subsidiaries across the world.