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Forex changes for foreign firms

Johannesburg - South Africa plans to revise its exchange controls for companies and will delay tightening rules that govern cross-border interest taxation until 2013, Finance Minister Pravin Gordhan said on Tuesday.

"The proposed amendments remove various tax hurdles that a multi-national company would face if it based its regional headquarters in South Africa. We are also revising exchange controls to support such initiatives," he said in parliament, without further explanation.

Gordhan added that South Africa's exemptions for cross-border interest were much wider than global practice, costing the country significant potential revenue.

The Treasury's budget in February hinted at changes on cross-border interest. It did not immediately respond to questions. Further details may come in October when it presents its Medium-Term Budget Policy statement.

Current laws exempt foreign investors based in South Africa from tax on interest received from their operations outside the country.

"The proposed amendment will close this gap by narrowing the cross-border interest exemption, mainly to mobile international capital, such as listed government and corporate bonds."

"Most other forms of cross border interest payments will become subject to a 10% withholding charge. Unfortunately, this amendment will have to be delayed until 2013 because the change ... requires the renegotiation of certain tax treaties and the implementation of an administrative mechanism to allow for a withholding regime."

Gordhan said it would take up to five years for South Africa's tax-to-GDP ratio to recover to pre-recession levels of 28%.

The tax-to-GDP ratio fell to 24.1% in the 2009/10 fiscal year and is expected to be steady in the 2010/11 year.

Gordhan reiterated that uncertainties about the global recovery were a worry for the domestic economy. Data on Tuesday showed second-quarter GDP growth was lower than expected.

"Let's be positive and hope that the prediction that our economy will still grow by three percent for the remainder of this year and for the year as a whole happens to be true."

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