The South African Federation of Trade Unions (SAFTU) reacted angrily to the rating agency’s decision to downgrade on Friday 24 November stating, “It is outrageous that these unelected enforcers of the big multinational monopoly corporations can wield such power…” Unfortunately, we can stomp our feet as much as we like, but while we are reliant on foreign investors to fund our budget and current account deficits, the rating agencies matter. At best the three major agencies are left unimpressed by our political uncertainty, prevalent corruption, low GDP growth, and high unemployment numbers.
Taking Funds Offshore – Clarifying the Options Available to South African Investors
There are four main ways that South African Investors can move funds offshore, but clients often seek advice as to the options under which maximum externalisation can take place, as well as on the expiry dates applicable to the SARS tax clearances.:
Single Discretionary Allowance
Individuals, 18 years and older, are permitted up to a limit of R1 million per calendar year without the requirement to obtain a tax clearance certificate. This allowance is shared with other offshore transactions such as travel, donations, purchases, maintenance, gifts, loans, and foreign investment. Any unused allowance does not carry over to the next year.
Foreign Capital Allowance
Furthermore, individuals can invest up to R10 million per calendar year abroad, subject to obtaining a SARS foreign tax clearance certificate. Any unused allowance does not carry over to the next year.
Once a foreign tax clearance certificate has been issued, it is valid for a period of 12 months from date of issue and once expired or fully utilised, investors will need to apply for a new foreign tax clearance certificate.
If there is an unutilised foreign tax clearance certificate carry-over amount, investors can only apply for an additional allowance remaining within the R10 million per calendar year SARB limit. Similarly, an investor can apply for a R10 million tax clearance certificate, having used their previous tax certificate in the same calendar year, but may only remit a total of R10 million cumulatively in any calendar year.
Individuals who wish to invest amounts in excess of R10 million per calendar year may make an application to the SARB together with the relevant tax clearance certificate for consideration.
The Use of Feeder Funds (Asset Swap)
Feeder Funds can be used where it is not possible to make use of the above (for example trusts and companies); where investors have utilised the above limits and do not wish to apply for further permission; or as an interim solution until they have received SARS approval in terms of the above. With feeder funds, the investments are placed within a rand-denominated fund that invests into foreign domiciled funds. The feeder funds have the same economic benefits of having the funds offshore, but the tax consequences and fee structures are different.
Dynasty typically prepares the applicable forex applications and supporting documentation for our clients. Once client funds are deposited in a designated Investec Call Account in the client’s name, we are able to book currency rates and hedge currency trades, even while waiting for the tax clearances above. Once investors have given an instruction to transact, we then remit the funds at favourable forex rates.
- North Korea has stated that they are not willing to negotiate with the US regarding their Nuclear Missile programme after firing an intercontinental ballistic missile on Tuesday last week.
- Angela Merkel’s party is in coalition talks in Germany. Negotiations between the Christian Democratic Party (CDU) Ms Merkel’s party, the pro-business Free Democratic Party (FDC) and the Green Party (GP) broke down last week. If Merkel is unable to establish a coalition, she will have to lead in a minority leadership whereby she may struggle to pass policies or face a new election. Either way, this would spell market disruption.
- Exports in Japan for October grew by 14.0% and posted the eleventh straight month of strong export demand. Imports grew by 18.9% when expectations were for 20.2%. Japan’s trade balance therefore remained in surplus despite contracting from the September figure. Two worthwhile points to note: Firstly, it is evident that external demand is a key driver of growth in Japan. Secondly, import demand has been strong but has not yet impacted inflation, which remains stubbornly low.
- Bitcoin surpassed its own record on Wednesday 29 November, surging past $11 000, only to slide back down to $9 000 on Thursday. The notoriously volatile cryptocurrency fell as much as 8% in one day but then bounced to over $11 000 again.
- Jared Kushner said in a public statement that Donald Trump will be making a decision regarding the US’s stance on Israel’s claim on Jerusalem as its capital. If he does this, there is a concern that it will spark extremist action from the Palestinians.
- The Senate has passed Donald Trump’s Tax Bill. Compromised legislation must now be worked on that will bring the House and Senate Bills together.
- Michael Flynn, an ex-advisor of Donald Trump, has admitted to lying to the FBI about his relations with Russia.
- S&P decided to downgrade South Africa’s debt rating on 24 November 2017.
- The last time South Africa’s credit rating was ranked as junk was in 1994, it took 5.5 years to get back to investment grade under the leadership of Finance Minister Trevor Manuel.
- Moody’s kept our rating at investment grade with the warning that South Africa has 90 days to show an attempt at reversing our regression. Local bonds remain in the larger Citi World Bond Index, which represents R70 – R100bn outflows if we get downgraded by Moody’s.
- The ANC branches have been voting for their potential leaders in the lead up to the ANC Conference in less than two weeks’ time. Nkosazana Dlamini Zuma has so far received 1 115 branch nominations while Cyril Ramaphosa secured 1 278. The nominations from KwaZulu-Natal still need to come in, and it is expected to be a very tight race.