South Africa: Domestic Treasury Management Companies

The National Treasury and the South African Revenue Service ("SARS") presented their response document on submissions received on the 2013 draft tax bills to the Standing Committee on Finance to public comments received in respect of the 2013 draft  on 11 September 2013.

With regards to the draft legislation proposed in terms of the Draft Taxation Laws Amendment Bill, 2013 ("DTLAB") relating to the proposed currency rules for domestic treasury management companies, SARS indicated that further correspondence with National Treasury will ensue in this regard. However, from a tax perspective, in response to specific comments, SARS confirmed that, inter alia, a domestic treasury management company does not have to be a holding company and that approved multiple subsidiaries of domestic treasury management companies will qualify for the proposed same currency tax dispensation. We will have to wait until the draft legislation is formally introduced in Parliament to confirm whether SARS' comments are incorporated.

The proposed legislation introduced by the DTLAB is in reaction to an announcement by the Minister of Finance earlier this year, providing that domestic treasury management companies should be allowed to use their foreign functional currencies for tax accounting purposes. In this way, no tax liability should arise for a domestic treasury management company due to currency gains and losses arising in the course of treasury operations in a foreign functional currency.

In this regard, on 27 February of this year, the Minister of Finance announced the establishment of a treasury management holding company regime for exchange control purposes as part of the 2013 Budget proposals. It was suggested that such a regime will encourage the establishment of group treasury management functions in South Africa and further enhance South Africa's position as a "gateway into Africa" thereby increasing foreign direct investment.

In particular, National Treasury provided that each listed entity on the Johannesburg Stock Exchange ("JSE") will be entitled to establish one subsidiary to hold African and offshore operations which will not be subject to foreign exchange restrictions. These domestic treasury management companies will have to be registered with the Financial Surveillance Department of the South African Reserve Bank ("SARB") and will be subject to the following conditions:

• the domestic treasury management company must be incorporated and effectively managed in South Africa, i.e. a South African tax resident;
• initially, only one domestic treasury management company per JSE listed entity will be allowed, however, this limitation will be considered further by National Treasury going forward; and
• appropriate governance and transparency arrangements will be required.

Benefits, from an exchange control perspective, to be enjoyed by a domestic treasury management company, include:

• transfers of up to R750 million per annum from the parent company to the domestic treasury management company will be allowed without prior approval required. Additional amounts will be subject to prior approval from the SARB;
• domestic treasury management companies will be allowed to freely raise and deploy capital offshore, provided these funds are without South African guarantees;
• domestic treasury management companies will be allowed to operate as cash management centres for South African multinationals and cash pooling will be allowed without limitation;
• local income generated from cash management will be freely transferable; and
• domestic treasury management companies may choose their functional currency or currencies and operate foreign currency accounts as well as a rand-denominated account for operational expenses.

Accordingly, in line with this proposal, SARS introduced draft legislation in the DTLAB to amend sections 1, 24I and 25D of the Income Tax Act 58 of 1962, to provide for tax relief from currency translations, in that domestic treasury management companies will be allowed to utilise their functional currency, as opposed to Rand, as a starting point for currency translations for tax purposes.

A definition for "domestic treasury management company" is introduced in section 1. At present, the draft proposed definition provides that a domestic treasury management company "means a company –

The proposed changes to the currency translation rules contained in section 25D provide that any amount received by or accrued to, or any amount of expenditure incurred by a domestic treasury management company, in any currency other than the functional currency, which is not Rand, of the domestic treasury management company, the amount must be determined in the functional currency and translated to Rand using the average exchange rate for the year of assessment.

In addition, it is proposed to insert a further subsection to the definition of "local currency" in section 24I which provides that the local currency of any domestic treasury management company in respect of an exchange item which is not attributable to a permanent establishment outside South Africa, should be the functional currency of that domestic treasury management company.

As noted above, since SARS and National Treasury will still be engaging with each other in order to refine and align the rules relating to domestic treasury management companies, this legislation and its goal to promote South Africa as the "gateway into Africa" location to establish group treasury management functions, is still a work in progress.

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