In the budget speech delivered on 26 February 2020, the Minister of Finance, Tito Mboweni, said that “Today we announce complementary measures to make it easier to do cross-border financial transactions, which will support trade and investment”.
The Minister told South Africa, and anyone else who may be listening, that “We want to encourage South Africans abroad to keep their ties with the country.”
The Minister said that to achieve this “We will raise the exempt amount for foreign remuneration to R1.25 million. We will phase out the administratively burdensome process of emigration through the South Africa Reserve Bank.” These would appear to be the “complementary measures” that the Minister referred to.
There is another measure which remains neglected though – the need to relax or remove foreign exchange controls in respect of intellectual property transactions.
The statements by the Minister reflect a general trend since the 1994 elections that has been adopted by National Treasury to ease the stringent and restrictive foreign exchange regime that has been in place in South Africa since 1933 when the current Currency and Exchanges Act was introduced and implemented in South Africa.
In SARB and Another v Shuttleworth, Mark Shuttleworth fought against this regime. Despite being successful in the Supreme Court of Appeal, Mark ultimately lost the fight in 2015 in the Constitutional Court which ruled against him.
In a blog entitled “Exchange controls in SA provide no economic guarantees of stability, but drive up the cost of cross-border relationships for everyone” that Mark published on www.markshuttleworth.com in 2014, he called the then current foreign exchange regime, a “glaring flaw in South African government policy”.
He said that while banks profit from this system, the South African “economy is stifled, and the most vulnerable suffer most of all”. According to him, “It is more expensive to work across South African borders than almost anywhere else on earth, purely because the framework of exchange controls creates a cartel of banks authorized to act as the agents of the Reserve Bank in currency matters.”
Mark also said “it is exchange controls which make it impossible for me to pursue the work I am most interested in from within South Africa and which thus forced me to emigrate years ago. I pursue this case in the hope that the next generation of South Africans who want to build small but global operations will be able to do so without leaving the country.”
It is of course impossible to know whether Mark Shuttleworth’s expressed views have had any direct impact on government, but the general continued trend does seem to indicate that National Treasury is open to similar views. Either way, it appears that National Treasury has concluded for some time that it is time to move on from the old restrictive foreign exchange regime.
In overruling Mark Shuttleworth’s challenge, Judge Moseneke gave some history to the foreign exchange regime, noting that “During the Great Depression, South African authorities were fearful of diminished direct investment and capital flight and accordingly sought to put measures in place to prevent the total economic collapse of the country.”
Judge Moseneke noted that “The Sharpeville shootings of 1960 brought an increased threat of economic recession and related capital flight from South Africa. Accordingly, on the basis of section 9(1) of the Currency and Exchanges Act, the President introduced the Exchange Control Regulations on 1 December 1961”.
These regulations include regulation 10(1)(c) which states that “No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”
This is the primary regulation which controls the current foreign exchange regime, and which has slowly been relaxed since 1994.
One notable exception to the general easing has been in respect of intellectual property. Starting with a 2004 case, there were a series of cases which first ruled that transfers of ownership of intellectual property from a South African to a non-South African was included under regulation 10(1)(c) (ie subject to foreign exchange approval) and then confirmed it was not. This led to some debate about whether foreign exchange approval was necessary in respect of intellectual property transfers. The overwhelming view prior to 2004 was that it was not.
This debate was stopped in its tracks by the inclusion in 2012 of regulation 10(4) which states that capital shall include “any intellectual property right, whether registered or unregistered” and that “exported from the Republic” shall include “the cession of, the creation of a hypothetic or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.”
As things stand, intellectual property falls squarely within the ambit of foreign exchange control and cannot be assigned to a “non-resident” without foreign exchange approval. There are no signs that this noose is being loosened. While there may be many sides to this debate, for Mark Shuttleworth, foreign exchange is the reason he cannot continue to develop and create in South Africa and “pursue the work I am most interested in from within South Africa”.
It is not farfetched to think that Mark Shuttleworth is not the only South African affected by this system or that foreign companies who may want to invest in South Africans to do research and development on their behalf will look elsewhere for this to be done. Certainly, not being able to assign intellectual property to a non-resident without foreign exchange approval (and subject to “such conditions as Treasury may impose”) is a hurdle. This hurdle may be high enough to deter some non-residents from purchasing intellectual property created and developed by South Africans, choosing instead to spend their money elsewhere, and so encouraging further creation of such intellectual property away from South Africa.
In his speech, the Minister of Finance also said “Our Aloe Ferox can withstand the long dry season because it is unsentimental. It sheds dead weight, in order to direct increasingly scarce resources to what is young and vital.”
Given the movement by National Treasury away from a restrictive foreign exchange regime, and an expressed focus on encouraging “South Africans abroad to keep their ties with the country”, it may be time to shed the “dead weight” of this system and instead to encourage more South African talent to innovate and create in South Africa.
12 March 2020