The most dramatic changes were implemented early this year where we saw National Treasury follow through with their proposed plans as per the 2020 Budget Review to phase out longstanding exchange controls.
Among others, the exchange control component of financial emigration was eliminated, with effect from 1 March 2021.
The purpose of this article is therefore to describe the overall state of play as of 1 March 2021 and briefly outline the prospective direction in which South Africa is headed insofar as exchange control for the individual is concerned.
The History of Exchange Control
To appreciate the degree of diminishing exchange controls, it is important to understand the history of exchange control and the many faces it has adopted since its introduction.
South Africa introduced exchange control in 1985 in response to the significant outflow of capital in the Republic due to debt defaults as well as economic sanctions. During that time, exchange controls were implemented through a dual rand system which meant that there was one exchange rate for current account payments for residents and another rate for capital account payments for non-residents. Consequently, this resulted in foreign investments in South Africa only being able to be sold for the Rand.
The purpose for exchange control was to ensure a number of things, including for foreign currency that was acquired by residents of South Africa to be repatriated into the South African banking system, to prevent the loss of the repatriated foreign currency through the transfer of real or capital assets in South Africa abroad, to effectively control the movement of real and financial assets in and out of South Africa whilst keeping the South African economy operating efficiently and circumventing unnecessary pressures on the country’s gold and foreign exchange reserves.
In 1994, following South Africa’s first democratic elections, it was decided by the South African Government that it would adopt a gradual approach to the elimination of exchange control in South Africa. It was decided by Government that the gradual elimination of exchange control would entail the following:
- The eradication of exchange control on the import and export of goods and services;
- The eradication of exchange control on non-residents;
- More leniency on granting approvals for the application of direct foreign investments by South African corporates;
- Allowing institutional investors to acquire foreign assets in order to diversify their portfolios; and
- Releasing emigrant “blocked accounts”.
As it stands, some of these initiatives have been completed, while others are still a work in progress.
Of particular relevance for current purposes, is the releasing of emigrant blocked accounts, which took effect on 1 March 2021 and which further drives the objective of eliminating exchange control altogether.
Going, going, gone!
A circular published by the South African Reserve Bank (“SARB”) earlier this year confirmed National Treasury’s announced plans to phase out the concept of emigration from an exchange control point of view.
With the rise in the number of South Africans working abroad ceasing their tax residency with SARS and subsequently becoming emigrants for exchange control purposes through the financial emigration process in the past few years, we saw Government taking this as an opportunity to remove the exchange control treatment of individuals. This was to be seen as Government making efforts to make it easier for South Africans abroad to take out and, most importantly encourage them to bring in foreign investments into South Africa.
The term “emigrant” specifically related to South Africans who had left or were set to leave South Africa and had taken up permanent residency or would have taken up permanent residency in a country outside of the Common Monetary Area. The transition from a resident to a non-resident involved a long-winded, antiquated and cumbersome process requiring an application to SARB using the previously known MP336(b) form which had to be attested by an Authorised Dealers and backed by an emigration tax clearance certificate issued by SARS, prior to any authorisation by SARB.
The whole purpose of one becoming an emigrant for exchange control was for individuals abroad to be able to initially transfer greater sums of funds abroad without the restrictions and controls by SARB. However, subsequent to the initial transfer, the administrative burden began, where South Africans permanently living abroad could only transfer funds as administered and allowed by their respective Authorised Dealers.
In terms of the new dispensation, all residents and emigrants would be treated identically, and the concept of an “emigrant” has completely fallen away insofar as exchange control was concerned. This meant that the process of controlling or blocking an emigrant’s remaining assets in South Africa in a special “blocked account” would fall away and all transfers from these accounts will be handled and treated as normal fund transfers, which would need comply with the same requirements as any other foreign capital allowance transfer applicable to residents.
We have seen that the new regime specifically acknowledges individuals who have formalised their non-tax residency status with SARS. The income transfers for South Africans permanently residing abroad are no longer subject authority of and are no longer required to report to the Financial Surveillance Department. This includes the transfer of income from trusts, interest and rentals (to name but a few) subject to certain conditions and protocols.
More for all
As a result of the removal of the exchange control restrictions on individuals, National Treasury also advised in the 2020 Budget Review that natural person residents and natural person emigrants would be treated identically.
In terms of the new regime, natural persons whether resident in South Africa or residing abroad, enjoy the same single discretionary allowance of R1 million without the need for a tax clearance status (“TCS”) pin from SARS. Authorised Dealers may also allow the transfer of funds of up to R10 million subject to the submission of a TCS pin to all individuals.
It is worthy to note, however, that any funds in excess of R10 million would now be subject to a more stringent verification process and subsequent approval from the Financial Surveillance Department, which is yet to be seen in practice.
Where to from now?
With the South African government scrambling to encourage foreign investment, but also moving in line with its gradual plans to eliminate exchange control, we can anticipate further relaxation of exchange control measures, although the extent thereof is not yet known.
What we do know, however, is that a number of initially confirmed plans to do away with exchange control have since been implemented, the newest being the elimination of the emigrant blocked account. However, we still see exchange controls predominantly existing in respect of direct foreign investments by South African corporates and the acquisition of foreign assets by institutional investors.
It remains to be seen, however, if we will reach a point where exchange control is abolished altogether.
Disclaimer: Since the article’s publication in #TaxTalk, there have been significant changes. Click here for an update on bank’s stance on emigrant blocked accounts.