In a case that wrestled with balancing property rights and administrative justice with how South Africa can protect itself from losing money legitimately owed to it in taxes by way of capital flight offshore, billionaire Mark Shuttleworth has lost a case he brought to the Constitutional Court.
Shuttleworth challenged the constitutionality of the imposition of a 10% exit charge that must be paid by all citizens who want to move more than R750 000 offshore. This charge cost Shuttleworth R250-million of his fortune.
Shuttleworth argued that the charge was a tax, while the state argued that it was not, and that it was a disincentive for the wealthy to move their fortunes abroad.
Shuttleworth moved to the Isle of Man, a small island in the British Isles, in 2001. A known tax-haven, the country offers virtually no corporations tax, no wealth tax or capital gains tax, and is a popular destination for companies or individuals wanting to move their money offshore to avoid paying tax on it in their home countries.
Tax havens such as the Isle of Man are the subject of a heated debate in Europe where moves are afoot to force these countries to, at the very least, publish information about the true owners of the companies listed there.
Shuttleworth told the court that he wanted to move his money offshore to free it up with a view to investing it outside of South Africa.
He applied to the Reserve Bank to move R2.5-billion offshore. An exit charge of 10 %, or R250-million was imposed.
Shuttleworth went to court, arguing that the exit charge was a tax that was imposed in an unconstitutional manner. He also argued that the whole exchange control regulatory system was unconstitutional.
The Reserve Bank and minister of finance approached the Constitutional Court, seeking leave to appeal a Supreme Court of Appeal (SCA) judgment which found in Shuttleworth’s favour.
The SCA found that the exit charge was unlawful because the law was not passed, procedurally, in line with the Constitution’s requirements for passing a “money Bill”. It held that the exit levy was a tax, as it was paid into the National Revenue Fund.
A “money” Bill is defined as a Bill goes further than merely raising taxes; it also deals with the appropriation of money and the granting of exemptions from taxes. It must be passed by the National Assembly under strict prescripts outlined in section 75 of the Constitution.
The exit charge imposed by the minister of finance came into effect in a 2003 circular, announced in a budget vote in Parliament.
Deputy Chief Justice Dikgang Moseneke noted that the “power to tax residents is an incident of, and subservient to, representative democracy”.
“The manner and extent to which national taxes are raised and appropriated must yield to the democratic will as expressed in law.”
The SCA found that the Reserve Bank should repay the R250-million to Shuttleworth, with interest. But the SC did not rule on whether the exchange control provisions were unconstitutional.
In the Constitutional Court, the “decisive question”, said Moseneke, in a majority judgment, was whether or not the exit charge was a tax or a regulatory charge.
If it was a tax, as argued by Shuttleworth, the SCA would have been right, as revenue raising Bills have to be passed in line with how the Constitution demands that money Bills be passed.
But if it was a regulatory charge, this would not be so. The minister and the Reserve Bank argued that the exit charge was not a tax, but a regulatory mechanism designed to discourage capital flight.
Moving large profits offshore is a device often used by large corporations to avoid paying tax, thus lessening South Africa’s revenue base.
But Moseneke also said the case “engages constitutional guarantees related to property, [and] administrative justice”.
In the Constitutional Court, the state had argued that the decision to impose the exit fee on amounts in excess of R750 000 leaving the country was made by the minister of finance, and that the Reserve Bank was merely the implementer of this decision.
The court said that exchange control legislation had its roots in the Great Depression of 1929, and later, in the wake of the economic crisis following the Sharpeville shootings in 1960, and was designed to stave off capital flight.
The court agreed with the “uncontested” evidence of national treasury in this case, the exit charge was a regulatory, and not a revenue raising mechanism.
The court did not consider the “substance” of Shuttleworth’s broader attack on the constitutionality of the entire exchange control regulations.
It said Shuttleworth had not shown how the regulations infringed on his constitutional rights. He had also not shown that he was acting in the public interest, the court said.
But Moseneke said it may well be that some of the regulations are “truly archaic and at odds with the tenets of our Constitution”.
“The state parties are nudged to take appropriate steps to review the provisions in issue.”
Justice Johan Froneman, in a dissenting judgment, departed from the majority judgment in that he felt that parts of the exchange control regulations should be declared invalid. In particular, Froneman though Section 9 of the Exchanges Act was unconstitutional.
Froneman said that the exit charge had raised revenue for the national fiscus, and so its announcement in Parliament by the minister of finance was constitutionally invalid. He said Parliament could only delegate regulatory authority to the executive, and only with respect to implementation, not the decision to raise revenue.
So the only way in which government could raise revenue in this way was for Parliament to legislate it.
Froneman also took issue with the seeming constitutional relevance of Shuttleworth’s case.
“Shuttleworth’s case hardly seems fit with the more apparent transformational aspirations of the Constitution. He is a privileged person who has generated considerable wealth whilst living here,” Froneman said.
“Having acquired that wealth he then chose to go and live elsewhere and attempted to take all of his money out of the country. So what, then, is wrong with asking him to leave a relatively small part of that behind in South Africa through the imposition of an exit charge?”
“Nothing”, concluded Froneman. “As long as it is done in accordance with the Constitution.”