The scrapping of non-resident shareholders’ tax is a=20 strong move to attract foreign investment, reports=20 Jacques Magliolo
The scrapping of non-resident shareholders’ tax (NRST)=20 and remaining import surcharges has elicited a positive=20 response from the market during this week’s Budget=20
Experts perceived it as one of the most positive=20 Budgets in decades as it aimed at job and investor=20 promotion, instead of punitive measures against=20 individuals and business.
In fact, market commentary indicated that Finance=20 Minister Chris Liebenberg made a strong case for=20 improving foreign investor sentiment towards South=20
In his Budget speech he said the abolishment of NRST on=20 October 1 this year was part of government’s effort to=20 create an investor-friendly environment in South=20 Africa. This was crucial as South Africa was competing=20 with other developing countries for foreign investment.
Tax experts and investment heads alike were pleased=20 with the removal of NRST, despite this tax having no=20 direct influence on South African individuals and=20
NRST resulted in non-residents being taxed at a=20 comparatively higher rate than local investors, as well=20 as creating an imbalance between foreign debt and=20 equity investments, as interest paid to non-residents=20 was tax exempt.
Tenk Loubser, a tax partner at Price Waterhouse=20 Meyernel, explains: “On top of company and Secondary=20 Tax on Companies (STC), foreigners had to pay the NRST,=20 which meant that they paid around 58 percent in taxes.
“The removal of NRST will create jobs in South Africa=20 as it will make foreigners feel more comfortable about=20 doing business here. Instead of investing through loan=20 structures, overseas investors will be able to do=20 business through share structures,” says Tenk.=20
This means that investment will be more permanent as=20 “it is more difficult to withdraw funds during short- term adverse fluctuations,” he says.
Essentially, if a foreigner sets up a factory in South=20 Africa, it is unlikely that he will sell the factory at=20 the first sign of adversity, whether it is economic or=20 political. However, if he only provided funds to build=20 the factory, he would be more likely to recall that=20 loan during strike action or political disclosures of=20
While the abolition of NRST would reduce government tax=20 income by about R235-million in 1995/96, or R572- million for a full year, analysts say that this is=20
Commercial Union’s head of investment, Alex Murray,=20 says: “This amount is not significant in terms of the=20 overall Budget, especially as the minister indicated=20 that the government has not ruled out privatisation.”=20
Murray believes that this is a “job creation Budget,=20 which has not interfered with company tax, STC or perks=20
“It is encouraging for foreigners, as it shows a=20 fiscally responsible Budget,” he says. To highlight=20 investors’ belief that this is a positive move by the=20 government, the new unitary rand remained steady at=20 R3,60 to the US dollar during the day. At one time it=20 dropped by a mere one hundredth of a cent before=20 returning to previous levels.
Tenk adds: “The cost of this loss to government revenue=20 should be offset by an increase in jobs as foreigners=20 return, thus broadening the tax base.”
One gripe from the investment community related to a=20 lack of discussion by the minister regarding removal of=20 outward investment exchange controls. Analysts suggest=20 that local institutions will only be able to invest=20 their funds overseas, without Reserve Bank approval,=20 once local business sentiment becomes more positive=20 towards South Africa than towards overseas markets.
Tenk suggests that the Johannesburg Stock Exchange=20 will, in the meantime, not be negatively affected.
He says: “We believe that foreigners will not sell=20 their shares, particularly after the scrapping of the=20 finrand and now the NRST.”
He is among a number of tax experts who believe that=20 the removal of these exchange controls could add to=20 growth potential and ultimately impact positively on=20 share prices.
In addition, proposed investigation into STC and Market=20 Securities Tax (MST) suggests that these taxes could=20 either be changed or abolished in the near term. This=20 should further help improve investor sentiment towards=20 our markets.
The abolition of the remaining import surcharges on=20 goods classified as “luxury” or “white” goods, would=20 result in a revenue loss of about R455-million in the=20 new fiscal year, or R1,1-billion for a full year.
Import surcharges on capital and intermediate goods=20 were scrapped last year.=20
The Budget speech indicated that the abolition of the=20 import surcharge supported the country’s normalisation=20 of foreign trade and financial relations, and was in=20 recognition of South Africa’s improved foreign reserve=20 position. It would also tend to lower prices and costs.
“The removal of import surcharges is not a bad thing,”=20 says Murray, “and is probably in line with Gatt.”=20 Luxury items are mostly imported and should thus not=20 have a negative effect on job levels in South Africa.
As with the abolition of the financial rand, the=20 scrapping of the remaining import surcharges reflected=20 government’s commitment on trade- and investor- friendliness, said Liebenberg.
At least, this step represents the final repeal of=20 measures introduced in 1985 to protect the country’s=20 foreign reserves as the temporary foreign debt=20 standstill came into force.