10-11 May 2012 Ernie Lai King Tax Executive: Edward Nathan Sonnenbergs Inc. IFA Conference...

10-11 May 2012

Ernie Lai King

Tax Executive: Edward Nathan Sonnenbergs Inc.

IFA Conference Mauritius

Topics

1. Chinese SOEs investing in SA and the region – a

personal experience

2. Africa Rising

3. SA’s regional headquarter company regime

Chinese SOE's investing in SA and the region – a personal experience

• Factors for success when Chinese SOEs invest in SA

– take sound proactive legal advice e.g. employment law, tax law;

– understand that doing business in SA is different to operating in the rest of Africa;

– find a SA partner with the right credentials;

– anticipate the problems caused by the language and cultural differences;

– anticipate how legal firms operate in SA;

• The South African environment is very different -

- it has a well developed and in many respects a 1st world legal and regulatory environment;

- SA ranked fifth out of 52 African countries on governance by The Mo Ibrahim Foundation;

– the International Standards of Accounting and Reporting body gave SA a top global

ranking out of 24 emerging markets



- a fiercely independent judiciary and press,

- a very vocal opposition party;

- a very active labour union, inflexible labour laws;

- country specific black economic empowerment rules;

- a very aggressive South African Revenue Service;

- a difficult Home Affairs Department re: work permits;

- A first world private sector especially - but 3rd world public sector


• The language and cultural barriers are particularly high.

• Cultural differences e.g. in negotiating styles cause frustration and misunderstanding.

• Chinese companies are very often, short on the detail - conclude the deal and worry about the problems afterwards.

• A certain amount of negative perception that requires management – “the new colonialists of Africa”

• Finding the right SA partner that can bridge the gap - very important

AFRICA RISING

Africa’s Improving Brand

May 2000 December 2011

Africa of Today

Source: McKinsey

$1.6 trillion - Africa’s collective GDP in 2008, roughly equal to Brazil’s or Russia’s

$860 billion - Africa’s combined consumer spending in 2008316 million the number of new mobile phonesubscribers signed up in Africa since 2000

60% - Africa’s share of the world’s total amount of uncultivated, arable land52 African cities with >1 million people each20 African countries with revenues of at least $3 bio.

Africa of Tomorrow

Source: McKinsey

Africa’s collective GDP in 2020 - $2.6 trillion

Africa’s consumer spending in 2020 - $1.4 trillion

Number of African householdswith discretionary income in 2020 - 1.1 billion Africans living in cities by 2030 - 50%

Africa’s Frontier Markets are Looking Up

The Economist’s Top Growers 2001-2010

Source: Economist and IMF forecast

The Economist’s Top Growers 2011-2015

Source: Economist and IMF forecast

The Investment Relationship

Growth in China’s outbound FDI flows (2003-2008)

Source: Ministry of Commerce of PRC, National Bureau of Statistics of PRC, State Administration of Foreign Exchange, 2009

Latin America

Europe

North America

World

Asia

Oceania

Africa

0 2,000 4,000 6,000 8,000

%

FDI to Africa has been increasing rapidly but from a very low base

By 2006, 800 Chinese companies in Africa, dominated by activity of SOEs

By 2008, 2,000 Chinese companies in Africa including also countless small private businesses

Africa’s Rising Trade with Asian Economies

Source: OECD (2011), Frontier Advisory analysis

China India South Korea Thailand Singapore Malaysia Indonesia0%

2%

4%

6%

8%

10%

12%

14%

16%

4.7%

2.3% 2.6%

0.8% 1.0%0.5% 0.8%

13.9%

5.1%

2.6%1.1% 0.8%

0.7% 0.7%

20002009

Select Asian countries’ share of African trade (2000 & 2009)

Africa’s Trade with Asian Economies

Source: OECD (2011), Frontier Advisory analysis

Africa’s exports and imports to key Asian economies in US$ terms (2009)

China

India

South Korea

Thailand

Singapore

Malaysia

Indonesia

0 5 10 15 20 25 30 35 40 45 50

Africa's imports from

Africa's exports to

US$bn

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

f

-2

0

2

4

6

8

10

12

14

16

18

Africa real GDP growth China real GDP growth

%

1999-2008: Growth correlation of 0.919972!

Almost an absolute correlation after 1999 – Coincided with China’s New Africa Policy

Africa’s growth is tracking the V-shaped recovery of China since Q1 2009

No correlation in growth trends between China and SSA prior to 1996

African growth tracked downwards China’s as fixed asset investment spend was cutback from Q4 2007

Africa’s growth has been robust on back of strong resource demand from the PRC

Source: IMF, EIU; Frontier Advisory analysis

The China-Africa Growth Coupling

S.A. REGIONAL HEADQUARTER CO

Regional Headquarters Regime

S. A. is an ideal location for regional HQ companies due to its -

large economy

sophisticated financial services

sophisticated legal, banking and accounting sectors

extensive DTT network


Growing interest in Africa as the investment destination of the future

A successful HQ regime will provide major economic spin offs for South Africa

Have to grow the tax base - need new money

Response to jurisdictions like Mauritius


The major barriers to SA becoming a regional HQ company jurisdiction included –

the Controlled Foreign Company ("CFC") rules,

the charge on outgoing dividends, viz. the new dividend tax;

the thin capitalisation rules;

SA exchange control;

the new withholding tax on interest.

The CFC rules impose a double administrative tax burden on foreign shareholders of a South African holding company if their home jurisdiction also has CFCs rules.

CFC rules don't make sense if the bulk of the holding company’s funds originate from abroad.


CFC Rules – s.9D

Offshore shareholder Application of CFC rules

South Africa co Application of CFC rules

Foreign co1 Foreign co2

100%


• The new dividend tax adds a 15% cost

Offshore shareholder

Dividends

South Africa co


100%Dividends


SA Transfer pricing rules – s.31

Offshore Shareholder

Loan Funding

South Africa co


Loan FundingLoan Funding


• A South African HQ co means any SA resident co with specified

asset and income requirements.

• SA resident co. must elect to be a HQ co.

• Once so elected, it will be a HQ co. from the beginning of that

tax year.

• The HQ co. must submit an annual report to the Minister of

Finance (anti-avoidance measure)


• A South African HQ co means any SA resident co with specified

shareholding and asset and income requirements.

• SA resident co. must then elect to be a HQ co.

• Once so elected, it will be a HQ co. from the beginning of that

tax year.

• Must submit an annual report to the Minister of Finance (anti-

avoidance measure)


• Specified shareholding requirements –

– each shareholder or together with any other "group“

company must hold 10 per cent or more of the equity

shares of the SA resident co;

– for the duration of that tax year and of all previous tax

years;


• Specified asset requirements –

– 80 per cent or more of the cost of the total assets (excl

cash or bank deposits) of SA resident co. must comprise:

• equity shares in any foreign co (at least 10% equity

and voting rights);

• any amount loaned to any foreign co;

• any intellectual property (s,23I(1)) licensed to any foreign co.


• Specified income requirements –

– where annual gross income (excl forex differences) of the SA co exceeds R5 million:

– 50 per cent or more of that gross income (excl forex differences) must comprise:

• rental, dividend, interest, royalty, or service fee, from its

foreign investment companies; or

• proceeds from the disposal of equity shares in its foreign

co’s or any intellectual property licensed to such co’s


Qualifying SA HQ Company

South Africa HQ co


at least 10%

equity and voting rights

* specified shareholding

* specified asset requirements

• specified income requirements

• must elect

• must report annually


• Advantages –

– SA CFC rules do not apply , refer s. 9D(2)

– S.31 SA transfer pricing rules do not apply

– CG Participation exemption on disposal by the SA HQ co of equity shares in foreign co’s;

– Exemption from interest withholding tax, refer s.37

– Exemption from dividend withholding tax, refer s.64E;

– Relaxation of SA exchange control rules


• Caveats –

– Change of residence on becoming headquarter company, refers.9H

– where an existing SA co becomes a headquarter co it is treated as having:

• disposed of each of its assets (apart from certain specified assets); and

• reacquired those assets immediately after becoming a headquarter company

– Ring-fencing of interest expenditure provided by non resident


Interest ring fencing

South Africa HQ co

Non-Resident Resident

Parent co1 Parent co2

Foreign sub 1

SA HQ interest income and interest expense ringfenced

Loan incurs int R140 000

Loan incurs int R140 000

100%Interest

Interest70% 30%


The qualifying holding company definition came into effect on 1 January 2011 and will apply in respect of any year of assessment beginning on or after that date.


thank you

10-11 May 2012 Ernie Lai King Tax Executive: Edward Nathan Sonnenbergs Inc. IFA Conference...

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