Johannesburg – Exchange controls have been effective in helping to prevent tax evasion, however it is unlikely Finance Minister Pravin Gordhan will announce plans to strengthen or relax these regulations at the National Budget, say analysts.
Justin Liebenberg, international tax leader at EY, explained to Fin24 in an emailed response that one of the ways to evade tax involves transferring funds outside South Africa to low or no-tax jurisdictions.
If tax authorities, like South African Revenue Services (SARS) are unaware of these transfers then tax revenue cannot be collected from them.
Exchange controls, has helped prevent such base erosion and profit shifting to low tax jurisdictions through its regulations and restrictions, explained Liebenberg.
He added that exchange controls do impact investors’ decisions on whether to invest in a country.
“Investors want to be sure that they can get their money out of the country when they decide to exit,” he said. “Generally foreign investors can get their funds out under our rules provided that certain requirements are met.”
Andrew Wellsted, head of tax at Norton Rose Fulbright, shared the view that exchange controls could be perceived as a “small disincentive” to do business in South Africa.
He explained however there are advantages to exchange controls, in addition to lowering tax avoidance. For example, exchange controls helped isolate the country from the effects in the global financial crisis in 2008.
He also said that it is unlikely changes would be announced regarding exchange controls. If there is relaxation it is likely to be in the area of intellectual property transfers.
Wellsted explained that funding for IT start-ups are better sourced from Silicon Valley. Venture capital for IT has been difficult to source in South Africa, which is why the sector is calling for a relaxation of rules.
* Visit our Budget Special for all the budget news and in-depth analysis.Read Fin24's top stories trending on Twitter: