Investmentin

South Africa

August 2002

Liability disclaimer

The information contained in this guide was collected during late 2001 and early 2002, and isbased on information available at that time. The information is not exhaustive and investorsare advised to take the relevant professional advice before taking any formal action.

KPMG cannot accept responsibility for any errors this guide may contain, whether negligentor otherwise, or take responsibility for any loss sustained by any person that relies oninformation herein, however caused.

© August 2002, KPMG IncThe Southern African member firm of KPMG InternationalISBN 1-875082-36-0 Produced by KPMGAlso available at www.kpmg.co.za

South Africa as an investment location

A dynamic investment location which offers:

■ a new constitution committed to democracy and the preservation of human rights;

■ unsurpassed physical and commercial infrastructures;

■ road, rail, air and sea access to the fastest growing markets in Africa;

■ growth-orientated economic policies;

■ a commitment to the expansion of trade links;

■ protection of intellectual property rights;

■ a commitment to public and private partnership in the expansion of infrastructureprojects in the region; and

■ a package of attractive investment incentives.

i

The protea is South Africa’s

national flower

ii

KPMG senior partner and chairman, Tom Grievewith deputy chairman, Moses Kgosana

About KPMG

KPMG is the world’s third largest business advisory firm, with 103 000 employeesbased in 152 countries and 760 cities. Locally, the firm has over 3 000 employees,based in 14 offices.

International clients include Apple Computer, BMW, BP Amoco, British Airways,Compaq Computer, DaimlerChrysler, Ericsson, Heineken, Hewlett Packard, HondaMotor, Mitsubishi Electric, Motorola, Nestlé, Nokia, PepsiCo, Rolls Royce, RoyalDutch Shell Group, Samsung, Siemens, Sony, TNT, TOTAL, Unilever and Volvo, toname only a few.

Its local client base is no less impressive. KPMG is proud of its 107 year track recordin South Africa which is reflected in our prestigious client listing which includes across-section of the country’s top performing companies, as rated by the FinancialMail’s annual top companies survey. These include six of SA’s top 10 asset leaders –Old Mutual, Stanbic, FirstRand, ABSA, Investec and Nedcor. Of the top 50industrials, KPMG provides services to Sasol, Bidvest, Iscor, Tongaat, PPC,Anglovaal Industries and Unitrans. A total of 91 companies listed on the main boardof the JSE enjoy the professional services of KPMG.

KPMG’s core services – assurance, consulting, tax, legal and human capital services,and financial advisory services – are delivered in conjunction with our five majorindustry-based areas – Financial Services, Industrial Markets, Consumer Markets,Infrastructure and Government, and Owner-Managed Businesses.

Transformation is affecting positively almost everything we do at KPMG. We areproud of our on-going transformation achievements. These include the merger ofKPMG and KMMT, which was completed by 1 April 2002. This merger now allowsour combined firm to radically accelerate our continuing transformation initiativesacross all spectrums of our business. We have a robust transformation strategy thatwas developed through a rigorous consultative process. We are also leading with theestablishment of our transformation advisory board.

Initiatives in our human resources area, which ensure that KPMG’s transformationinitiatives are on track, include recruitment, financial support, and a host ofdevelopment programmes. Black representation stands at 30% while women make up49% of the staff complement and 20% of senior management. Forty per cent ofbursaries have been allocated to previously disadvantaged groups. The vacationtrainee intake from this group stands at about 60%.

iii

Some R12 million was invested during 2001 on corporate social responsibility andvarious transformation initiatives, across a range of exciting educational and otherrelated community initiatives.

This guide has been written primarily to introduce the foreign investor to theformalities and procedures involved in setting up business in South Africa. I hopeyou will find it a useful introduction and look forward to you contacting myself orany of our offices where you will find professionals who will gladly help you set upbusiness in our country.

Tom GrieveSenior partner

iv

Truly South African

Transformation is positively affecting almosteverything at KPMG. Our firm, benefiting from ourambitious initiatives, is starting to truly reflect theSouth African society. Our merger with KMMT,

completed on 1 April 2002, is accelerating the process.

More detail about KPMG as a South African firmembracing transformation in the widest sense can be

found in our Trans[FIRM]motionTM publication or go towww.kpmg.co.za

Investment in South Africa

Page

Introduction ix

Note on the Republic of South Africa xiThis chapter covers issues such as investment climate,trade agreements, employment statistics, prospects for theeconomy and the restructuring of state assets.

KPMG’s corporate social responsibility (CSR) model xviii

Chapter 1 Investment in South Africa 1

Chapter 2 South Africa: A brief survey 31. Geographical description 32. Rainfall 43. Climate and temperature 44. Rivers 45. Vegetation 56. Population 57. Currency 78. Masses and measures 79. Land tenure 710. Minerals and natural resources 711. Business activity and living conditions 812. General welfare and living conditions 913. Public holidays 1014. Infrustructure 11

Chapter 3 Forms of business enterprise 171. Introduction 172. Industrial development 183. Regional industrial development 194. Import and export control 195. Patents, trademarks, designs and copyrights 20

v

6. Immigration and work permits 207. Exchange control and foreign investment 208. Competition 219. Tender preferences on government purchases 2110. Employment of labour and technical factory requirements 2211. Water, waterworks and water pollution 2212. Road transport 2213. Customs and excise 2214. Standards 2315. Industrial research and development 2316. Export trade promotion 2317. Industrial financing 2418. Small business promotion 24

Chapter 4 Companies and close corporations 251. Companies: Law and administration 252. Close corporations: Law and administration 31

Chapter 5 Exchange control 351. Introduction 352. Blocked rands 353. Exchange controls relating to individuals 364. Controls relating to companies resident in South Africa 435. Other regulations 476. Contraventions and penalties 48

Chapter 6 Banking and finance 491. Financial services industry 492. Bank legislation 513. South African Reserve Bank 524. Parastatal institutions 535. Insurance companies 556. International finance organisations 55

Chapter 7 Taxation in South Africa 611. Introduction 612. Income tax 623. Indirect tax 1014. Other taxes 1055. Budget proposal 106

vi

Chapter 8 Double taxation agreements 1091. Introduction 1092. Rates of withholding tax in terms of South Africa’s

double taxation agreements 111

Chapter 9 Incentive schemes 113

Chapter 10 Industrial relations 1231. Introduction 1232. Statutory enactments 1233. Trade unions 1244. The constitution 1255. The Labour Relations Act, 1995 125

Chapter 11 Black economic empowerment 133

Chapter 12 Corporate governance and accounting standards 1371. Corporate governance 1372. Anticipating King II 1373. Accounting standards 142

Chapter 13 Technology 1451. Introduction 1452. Telecommunications 1463. Internet 1474. Information security 1495. Major industry players 150

Chapter 14 Tourism in South Africa 1531. Introduction 1532. Tourism in South Africa 1543. Conclusion 156

Chapter 15 More about KPMG 157

Who to contact at KPMG South Africa 157Core services and lines of business 158

Chapter 16 Internet sites 161

The next step 163

What do you think 166

vii

viii

South African president, Thabo Mbeki

Introduction

The Republic of South Africa, the Kingdoms of Swaziland and Lesotho and theRepublics of Botswana and Namibia are the signatories to the Southern AfricanCustoms Union Agreement. The latter countries do not fall within the scope of thisguide and information relating to them may be obtained from the KPMG officeslocated in those territories.

The information provided in this guide is for non-residents of South Africa who maybe contemplating investment in the country. It is also hoped that this guide will helpbusiness people resident in Southern Africa.

Foreign investors wishing to invest in South Africa would naturally need to choose a suitable business entity for their enterprise. This may take the form of a company, a branch of an overseas corporation, a close corporation, a partnership or operatingdirectly as individuals in South Africa.

It is intended that this guide should explain, in broad terms, the local requirementsaffecting the establishment and operation of a business enterprise in South Africa. In addition, general information is provided concerning taxation and currencyregulations.

The contents of this guide are not exhaustive. Decisions involving investments or the setting up of operations in South Africa should be made only on the basis ofspecific and detailed advice on the contemplated structure and modus operandi of the proposed undertaking.

The information contained in the following pages is based on company law, taxlegislation and other regulations in force in late 2001 and early 2002. Publications areissued periodically by KPMG dealing with changes occurring in legislation from time to time and are sent to clients and associated offices. This information is alsoavailable at www.kpmg.co.za.

ix

x

Former South African president, Nelson Mandela

Note on the Republic of South Africa

On 27 April 1994, the first general election in which all citizens of the Republic ofSouth Africa took part, was held. Following the general election in which NelsonMandela became president and his party, the African National Congress (ANC), came into power with an over 60% majority, the transitional or interim constitutionbecame the supreme law of the Republic of South Africa. Early in 1997, this interimconstitution was replaced with the final constitution embracing these principles:

■ commitment to a democratic system of government based on universal adult franchise;

■ regular elections;

■ a multi-party system;

■ one citizenship for all;

■ an entrenched constitution;

■ acknowledgement of the fundamental rights of the individual;

■ no discrimination;

■ an independent judiciary;

■ equality before the law;

■ separation of powers to prevent abuses; and

■ three levels of government (president and cabinet; national parliament andprovincial legislatures).

Since the 1994 general election, the government has continued to redress decades ofracial discrimination, especially in education, housing and welfare services.

Unemployment officially stands at 26,4% and is based on the 16,1 million econom-ically active group of people between 15 and 65 years of age. It represents thecountry’s single biggest problem and helps explain the crime rate. The situation hasbeen aggravated by illegal immigration from neighbouring countries whereemployment prospects are poor. Government continues to take major steps toimprove the management and increase the manpower of the police and to enforcethe powers of the courts to deter criminals.

xi

Other problems facing the new government include corruption, particularly atprovincial government levels, legal and illegal immigration from neighbouringterritories, and urbanisation which has created massive informal squatter campsaround established cities.

Investment climate

On the positive side, real economic growth has shown a promising upturn from 1,1% before the election in 1993 to an average of around 6%. The inflation target isexpected to reduce the annual average consumer price index to between 3% and 6%within two to three years. Moves towards a gradual elimination of exchange controlsare under way. Tourism is growing steadily and Cape Town, in particular, has becomeone of the cities favoured by the rich and famous. Generally the investment mood ismore favourable than it has been for many years.

Despite improved investment ratings from international rating agencies, significantinvestment in South Africa has not been forthcoming and for the first time since1998, the country experienced a net outflow of capital. Policy makers are frustratedwith investor’s lack of enthusiasm considering the sound fiscal policies that are inplace and the discipline that has been shown in comparison to other emergingmarkets. The following factors have been identified as hampering foreign directinvestment (FDI):

■ political instability in the region (Zimbabwe);

■ ongoing currency depreciation;

■ the stance taken by the government with regards to the HIV/AIDS epidemic;

■ perceived crime rate;

■ “brain drain”;

■ restrictive labour policies; and

■ difficulty in obtaining a South African work permit.

But growth of our economy has been underpinned by extensive structural reformsdesigned to ensure a more dynamic and resilient economy:

■ Export diversification continues, both in non-traditional manufactured goods,tourism-related trade and growth in services exports. Manufactured exports grewfrom 9% to 20% of gross domestic product (GDP) between 1990 and 2000.

xii

■ The balance of payments is immeasurably stronger and better able to sustainstronger growth – the current account will register a moderate deficit of 0,5% ofGDP in 2002.

■ Real wages and productivity have increased by over 20% since 1994, bringingrising living standards to millions of people and strengthening the competitivenessof industry.

■ The net open forward position has been reduced from some US$24 billion in1998 to just under US$3 billion in January 2002.

■ The budget deficit is expected to be 2,1% of GDP in 2002/03 falling to 1,7% in2004/05.

Primary contributors

The agricultural sector contributes only 4% of the gross domestic product (GDP).The mining sector played an important role in the development of the South Africaneconomy, but its importance has declined in the last decade and currently accountsfor about 6% of GDP. The manufacturing sector accounts for approximately one-fifthof South Africa’s GDP. The contribution of financial services and business increasedfrom about 12% to nearly 18% during the nineties and, given the high level ofbanking and commercial activities in South Africa, this share is expected to expandeven further. Tourism activity is also expanding its relative size and further increasesin the contribution of the tertiary sector to GDP are expected. (Source: www.gov.za/yearbook)

Trade agreements

■ European Union

The SA European Union trade and development cooperation agreement has beenin operation since 1 January 2001. The agreement is extensive and covers a rangeof industries that produce commodities ranging from wines and spirits, stainlesssteel, purifying and filtering equipment, fruit juices, bottled water, fish products,gold, platinum, coal and diamonds, to name only a few.

The success of the agreement is evident in the 35% increase in SA’s exports to the EU in 2001. During the same period, EU exports to SA grew 20% (November 2001).

xiii

After the end of the 10 year transition period of the free trade area, 95% of EUimports from SA would enter the EU market free of duty. SA would be able toretain its tariff barriers for longer. After a transition of 12 years, SA will open86% of EU imports to duty free trade.

■ United States

South Africa, together with other eligible countries, is covered by the UnitedStates Africa Growth and Opportunity Act (AGOA) which affects many industriessuch as clothing and automotive sectors.

The Africa act is meant to provide duty- and quota-free access to the US marketessentially to all products from sub-Saharan African countries. This includespreferential access for some products that were previously considered to beimport-sensitive. It also provides additional security for investors and traders in sub-Saharan African countries with a general system of preference benefits for eight years.

In the apparel industry, the act lifts all existing US import quotas on textiles andapparel products from sub-Saharan Africa and extends duty- and quota-free USmarket access to apparel made in Africa from US yarn and fabric.

The act also extends duty- and quota-free treatment to sub-Saharan Africanapparel made from yarns and fabrics not available or not produced in commercialquantities in the US and for “knit-to-shape” sweaters made in Africa fromcashmere and some merino wool.

It extends duty- and quota- free treatment to apparel made in Africa with Africanor regional fabrics and yarns.

Employment statistics

■ Despite the endeavour of government to uplift the economy, the legacy of the pasthas a huge impact on growth potential. In 2001, there were an estimated 27,1million people aged between 15 and 65 years, of which 16,1 million were econom-ically active; 11,8 million were employed and 4,2 million were unemployed. *

However, the total labour force was projected to be 21% lower in 2015, with theoverall size of the labour force remaining almost stagnant over the next 14 years.This is according to a macro-economic sensitivity analysis of the impact ofHIV/AIDS on the South African economy through 2015 conducted by the Bureauof Economic Research (BER).

xiv

■ The total number of people employed in the formal sector, excluding agriculture,stands at 6,7 million.*

■ All provinces, except KwaZulu-Natal, Mpumalanga and North West, experienced aslight increase between September 2000 and February 2001.*

■ Unemployment is highest among African women and lowest among white men.However, the disparity in gender within population groups is highest among theIndian population.*

■ The previously disadvantaged sector of the community holds 14% of the wealth,but comprises 80% of the population. Unemployment and income distribution aretwo of the major challenges facing modern South Africa – future focus on thesekey issues will go a long way to improving economic growth within the country.Economists believe that annual growth of at least 5% is required to addressunemployment and past social imbalances.

■ With a population growth rate of 2%, the economy could continue to register 3%average real GDP growth – or better – over the next 10 to 15 years. However,sceptics remain negative and sizeable international investments have not beenforthcoming since 1997. In order to increase optimism and create employment,foreign direct investment is a requirement.

Prospects for the economy in the future

There is a need for clean differentiation between South Africa and its neighbours, butthere is also a need for the country to take an active role in the development of itspartners in Africa. The signs are positive. The increasing role of South Africancompanies across the whole economic spectrum in places like Tanzania, Mozambiqueand Gabon is reminiscent of the role played by Singapore and Hong Kong in thedevelopment of regional economies in the Far East. The knowledge of Africa andability to apply African solutions to peculiar problems is perhaps the light that isrequired to fire economic growth.

The government has been particularly pro-active in communicating its vision of anAfrican Renaissance, African Century and a “Marshall Plan” for Africa. The wordssound good and make sense, but economic judgement will be made on delivery, notgood intentions. South Africa is, however, taking the lead and such an approach couldprovide dividends as greater focus becomes placed on employment, investment andgrowth, rather than aid.

xv

* These statistics are taken from Statistics SA’s Study; Labourforce Survey, February 2001.More detail is available at www.statssa.gov.za.

Econometrix has projected the following growth figures for South Africa over thenext ten years:

Amidst this, South Africa’s economy has shown impressive resilience. It is easilyforgotten that the average rate of growth in real GDP between 1994 and 2000 was2,7%. If we exclude 1998, a year of exceptional international turmoil due to the Asianfinancial crisis, average growth was 3,1%. The economy grew by 3,4% in 2000 andabout 2,2% in 2001, underpinned by a moderate recovery of investment and a strongexport performance in the first half of last year.

But of course the South African economy is not immune to internationaldevelopments which have temporarily unsettled growth and inflation trends. Growthfor 2002 is expected to be 1,8% rising to 3,7% in 2003. Against the background of anunexpected depreciation of the rand in the second half of last year, we now expectinflation to pick up moderately this year.

Such figures are attainable if government maintains its current endeavours to winover the international community. Government has laid the following plans to attractinternational investors:

xvi

■ create a welcoming environment for investors;

■ establish a greater distance between South Africa and other African countries inperception, but convergence in economic terms;

■ double the economic growth rate from 2,5% to 5% through a mixture of domesticand foreign investment;

■ liberalise labour policies; and

■ limit bureaucracy for skilled personnel applying for work permits.

Government also plans to be more pro-active in promoting South Africa throughinitiatives such as the International Marketing Council, the Africa developmentprogramme and an international advisory panel. There is goodwill in the internationalcommunity towards South Africa. There must, however, be recognition thatcompetition for foreign direct investment (FDI) is global and that the wrongs ofapartheid mean little in terms of international shareholder value.

Restructuring of state assets

Apart from new regulatory initiatives and competition policy to stimulate investmentand expand employment through gains in efficiency, the government is engaged inthe restructuring and privatisation of state enterprises.

Most state-owned enterprises, especially in the energy, telecommunications andtransport sectors, have now been corporatised, allowing for management reform andincreased transparency in the allocation of financial resources. The government iscommitted to the further restructuring over time of the four largest state-ownedenterprises, namely Telkom, Eskom, Transnet and Denel.

The objectives of the restructuring of state assets are to extend public services, suchas the roll-out of telephone lines to more people, and to improve the efficiency ofservice delivery.

The restructuring of state enterprises aims to bring capital, technology and renewedcorporate leadership to the utilities sectors, while transferring several non-strategicentities to the private sector. Further economic benefits include a reduction in statedebt, the lowering of interest costs and thus the possibility of a reallocation ofresources towards social spending and infrastructure. Privatisation will also lead toincreased foreign direct investment.

(Reference: www.gov.za/yearbook)

xvii

xviii

KPMG’s corporate social

responsibility

At KPMG, community matters. A three-tiered investment model, consisting of charity,commercial initiatives and community involvement, supports KPMG’s corporate socialresponsibility (CSR) strategy.

The strategy is enduring and invaluable, contributing to programmes as diverse aseducation of people from previously disadvantaged areas, help for the physically andmentally disabled, and hands-on involvement in environmental projects such as therelocation of elephants. KPMG’s philosophy is to lean towards sustainable projectswhere the firm can make a difference, ideally through active involvement.

The old adage, Charity begins at home, is one that KPMG takes seriously and putsinto practice. KPMG is strongly committed to improving the well-being of those lessfortunate, having made significant contributions through corporate social responsibility.

The firm provides more than 150 honorary engagements to charities such as theJohannesburg Child Welfare organisation, and makes financial contributions to manyothers. These include the Association for the Physically Disabled, Boy’s Town, theAvril Elizabeth Homes and the Takalani Project for the Mentally Disabled, SOSChildren’s Village and the Association for the Physically Disabled.

In the spirit of the words of Henry Ford, My best friend is the one who brings out thebest in me, KPMG strives to befriend the community by providing communityinvestments that are uplifting and durable.

KPMG has strengthened its involvement in educational projects implemented someyears ago, which now have enviable reputations. The wisdom of monitoring progress,and providing resources in a focused manner, have borne fruit with an outstandingimprovement in the matric pass rates in the schools that are supported.

Kudung, near Heidelberg, has improved its matric pass rate by 269% between 1997,the year before KPMG’s involvement, and 2000. The neighboring Kgoro-Ya-Thutoschool turned in a 94% improvement between 1999 and 2000.

Apart from resources that are committed to schools, KPMG also invests in universitiesand informal learning centres, through financial donations, honorary audit andaccounting work, time spent lecturing and mentoring, marking examination papers,and other direct donations, particularly of computer equipment. It will spend morethan R4 million on bursaries in 2002. Academic intervention programmes aresupported at several universities.

Building equity for previously disadvantaged communities goes beyond the obviousfor KPMG. Those still learning must be exposed to KPMG’s long-term commitment totransformation; thus the commissioning of the Johannesburg Girls’ School to do theartwork for KPMG’s first corporate social responsibility brochure.

A comprehensive programme aimed at addressing career awareness of theaccountancy profession in schools is now in place.

A two-year academic support programme for previously disadvantaged individualsbegan this year.

It has been said Humans are complex beings. They make deserts bloom and lakes die.KPMG’s commercial initiatives aim to create sustainable and productive environmentsin which all life can blossom.

The firm has continued its involvement in elephant relocation, extending this to the new Transfrontier Park straddling the borders of South Africa, Mozambique and Zimbabwe. The project now also involves the relocation of buffalo, rhino and roan antelope.

The Cape Town office participated enthusiastically in the clean-up of the penguinsfollowing the oil spill off the Cape coast early in 2001. KPMG also sponsoredawareness programmes for a crime-free society.

In a groundbreaking public-private sector initiative to fight cholera in KwaZulu-Natal,KPMG donated more than 12 tons of Jik to families in some of the worst affectedareas in the province. The programme was praised by Professor Ronald Green-Thompson, secretary of the KZN department of health, as one that had a significantimpact in providing safe water, and in educating people on how to protect themselvesfrom the disease.

KPMG also boasts an entirely local art collection. Black artist commissions make uphalf of this inspiring collection, that we continue to invest in.

xix

xx

An example of South Africa’s vast mineral resources is the Phalaborwa Complex inthe Limpopo Province. This geological phenomenon is one of the world’s great

mineral repositories containing large deposits of copper and phosphates, magnetiteas well as the world’s largest deposit of vermiculite. It also hosts important concen-trations of zirconium, nickel and precious metals. This treasure trove is also yielding

titanium, one of the world’s most sought-after metals. Shown above is Foskor’s phosphate plant in the region.

Chapter 1

Investment in South Africa

South Africa is a young developing country and depends heavily on overseasinvestment for its continued growth. The injection of investment funds from abroad isessential to ensure the proper exploitation of the country’s vast natural resources,which will in turn enhance the continued development and advancement of all thepeople living in the sub-continent.

Now, more than ever before, South Africa has many attractions for the foreign investor:

■ South Africa is the most advanced country, both technologically and economically, in Africa.

■ South Africa represents some 80% of Africa’s rail infrastructure.

■ South Africa possesses seven superb deep water ports. These, together with its airports, contribute in no small measure to its claim to be the gateway to sub-Saharan Africa.

■ South Africa generates 70% of the electric power on the African continent.

■ The steady increase in black living standards, together with massive urbanisation, has resulted in this section of the population being recognised aspossessing an enormous amount of disposable income and being responsible forthe major share of consumer spending.

■ The country has a highly sophisticated transport infrastructure, which isconstantly being improved.

■ Communications are efficient and improved technologies are continually beingintroduced into the system.

■ Primary and secondary industries are modern and competitive. The mostadvanced technologies are also employed.

1

■ The country is endowed with a fabulous store of natural mineral resources.

■ South Africa’s vast proven coal reserves have more than made up for its lack of oil.

■ The country is acknowledged as a world leader in “oil from coal” technology with numerous plants presently in operation together with an “oil from off-shore natural gas” operation.

■ The country’s first nuclear power station came on stream in 1984.

■ South Africa is today a net exporter of energy.

■ The country’s climate is probably one of the best in the world with mainlytemperate conditions all year round.

■ Situated as it is on the African continent, South Africa is ideally placed to export to any part of the world.

■ Similarly, South Africa enjoys the many benefits of being within the CentralEuropean time-zones, falling between the Americas and Asia-Pacific.

2

South African cities such as Johannesburgwere built as a result of the discovery of

gold some 100 year ago.

Chapter 2

South Africa: A brief survey

1. Geographical description

South Africa forms the southern most part of the African continent and liesalmost entirely in the southern temperate zone between 22° and 35° south.The country has a surface area of 1 219 090 km2 and is five times the sizeof Great Britain and almost as large as the combined areas of France, Italy,the Netherlands, Belgium and the former West Germany.

South Africa presently consists of nine provinces – Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Mpumalanga, Northern Cape,Limpopo (Northern Province), North West Province and Western Cape.Most of the country is a vast interior plateau with an average altitude ofmore than 1 200 metres.

LIMPOPO

KWAZULU-NATAL

EASTERN CAPE

NORTHERN CAPE

WESTERN CAPE

Polokwane

Durban

East London

Cape Town

NAMIBIA

BOTSWANA

ZIMBABWE

MOZAMBIQUE

REPUBLIC OF SOUTH AFRICA

MPUMALANGAGAUTENG

FREE STATE

LESOTHO

NORTH WESTPROVINCE

Johannesburg

Bloemfontein

Port Elizabeth

Upington

SWAZILANDPretoria/Tshwane

3

There are four major geographical regions: The Coastal Belt between theescarpment and the sea; the Little Karoo, a narrow tableland separatedfrom the Coastal Belt by the Langeberg and Outeniqua mountains; theGreat Karoo, separated from the Little Karoo by the Swartberg andSuurberg mountains; and the Highveld comprising the Northern Cape, theFree State and part of KwaZulu-Natal together with Gauteng and most ofthe Northern Province. The coastline is 3 000 km long and is bordered bytwo oceans, the Atlantic in the west and the Indian in the south and east.Two major current systems, the warm Mozambique in the east and southand the cold Benguela in the west, flow along the country’s shores.

2. Rainfall

South Africa enjoys a summer rainfall. There is a relatively small region, theWestern Cape, where winter rainfall occurs. On the eastern seaboard, therainfall exceeds 1 000 mm per annum but it decreases gradually to less than125 mm in the desert regions of the Northern Cape in the west. The centralplateau enjoys a rainfall varying between 375 mm and 715 mm annually.

3. Climate and temperature

South Africa has a very healthy and invigorating climate which is probablyone of the best in the world. Warm and temperate conditions prevail and theaverage number of hours of sunshine a day throughout the year ranges from

7,5 to 9,4. It is interesting to compare this with London andNew York which enjoy 3,8 and 6,9 hours respectively. In

winter, the sun shines continually and there is norain, except in the Western Cape. Mean annual

temperatures tend to be lower in South Africathan in countries in similar latitudes elsewhere

in the world, mainly being due to thegreater elevation of the sub-continent.

4. Rivers

South Africa’s rivers are not navigable;their fall is steep and their flow erratic.

Accordingly, water conservation enjoys toppriority. The most ambitious scheme to date is

the Orange River project which harnesses thewaters of the Orange River for industrial and

agricultural purposes and also the generation of electric power.

4

During the periods of drought, some remarkable feats of engineering havebeen accomplished. The flow of the Vaal River was reversed for a portionof its length in order to ensure a constant supply of water to the series ofenormous thermal power stations situated in the Northern Province.

The World Bank is presently funding a project which will see the waters ofthe rivers in the mountains of Lesotho being sold to South Africa. Thisambitious project is well advanced.

5. Vegetation

Vegetation in South Africa ranges from desert and semi-desert throughbushveld and savannah to temperate grasslands and forests. The mainvegetation is grass veld which ranges from poor to good, and is prairie-likein the highveld regions. South Africa has more than 17 000 species of wildflowers, the richest variety in the world.

6. Population

According to Census ’96 figures, released in October 1998, on the night of 9 October 1996 there were 40,58 million people in South Africa. This tablereflects how the population is broken down between the major race groups.

According to Statistics SouthAfrica, the country’s mid-1999population estimates stood at43,054 million, of whichwomen constituted some 22million.

A census was again conductedduring 2001, the results ofwhich are expected to beavailable in 2003.(www.statssa.gov.za)

5

The South African population consists of:

■ the Nguni people, who account for two-thirds of the population;

■ the Sotho-Tswana people, who include the Southern, Northern andWestern Sotho (Tswana);

■ the Tsonga;

■ the Venda;

■ Afrikaners;

■ English;

■ Coloureds;

■ Indians; and

■ several different groups of people who have immigrated to SouthAfrica from the rest of Africa, Europe and Asia and who maintain astrong cultural identity.

A few members of the Khoe and the San also remain.

[Source: www.gov.za]

Whites are descended from European settlers; large influxes of all nation-alities having been experienced with the discovery of diamonds and goldin the second half of the 19th century.

Coloureds are the historical result of the intermingling of the variouspopulation groups. Their forebears were the white settlers, the indigenousHottentots, Malay and other slaves from the East and black Africans.Eighty per cent of the coloureds live in the Western Cape Province. Theirlanguage is predominantly Afrikaans. The Cape Malay section of thecoloured population has retained its Muslim traditions including Islam.

The Indian population is descended predominantly from the indenturedlabourers brought to KwaZulu-Natal from India from 1860 onwards towork in the sugar cane fields. They live mostly in KwaZulu-Natal butmany are resident in Gauteng. They speak various Indian languages andthe Hindu and Muslim faiths predominate.

South Africa is a multilingual country and there are eleven officiallanguages. These are English, Afrikaans, Zulu, Xhosa, Sesotho, Siswati,Tsonga, Venda, Pedi, Setswana and Ndebele. The most widely spokenlanguage is Zulu, while Afrikaans is the most widely used. English is themain language of business.

6

7. Currency

The currency unit of South Africa isthe Rand (ZARl=100c). TheCommon Monetary Area (CMA)comprises South Africa, Namibia,Lesotho and Swaziland. The CMAcountries have their own currencies,but trade on parity with the SouthAfrican rand.

8. Masses and measures

The metric system of masses andmeasures is used in South Africa.

9. Land tenure

Except in very special circumstances, all land in South Africa is heldunder freehold title. Land is referred to as “immovable property” and alldeeds affecting ownership of immovable property must be registered at theoffice of the Registrar of Deeds. There are ten deeds registries each withits own territorial jurisdiction.

10. Minerals and natural resources

The country is rich with minerals and natural resources. The mostimportant export minerals are gold, coal, diamonds, iron-ore, platinum,copper, manganese, chromium and uranium.

South Africa is the world’s main supplier of manganese, gold, vanadium,ferrochromium, alumino-silicates and chrome ore, and the second mostimportant supplier of platinum group metals, vermiculite, zirconium,titanium, antimony and asbestos. The country is also the third mostimportant supplier of diamonds and uranium.

In 2001, the South African government introduced a minerals bill into thepublic forum for debate and comment. The primary objective of the mineralsbill is intended to bring the South African minerals industry in line with therest of the world and enable all minerals beneath the surface to belong to thenation. The bill is expected to be enacted as law within 2002.

7

11. Business activity and living conditions

Business in South Africa is conducted on lines very similar to the Britishbusiness system. Many of the fundamental characteristics of South Africanbusiness were derived from British systems, but there are also a great manysubsidiary and associated companies of western European parentcompanies in the country.

Many US parent companies, because of the sanctions campaign againstSouth Africa, disinvested. Most of these subsidiaries were either boughtout by management or purchased by South African conglomerates. A number of US businesses have returned to the country since 1994.

Business is well-organised and the country’s infrastructure operatesefficiently. Statutory controls on banks, insurance and public investmentcompanies are strict and a high degree of investor security in these areas is maintained.

The JSE Securities Exchange enjoys an enviable reputation. The legal,accounting, medical and other professions are well regulated by theirrespective controlling bodies.

The country is well-developed industrially and commercially, and businesstechniques and services are highly sophisticated.

Banking services are comprehensive and the business community is servedby a number of commercial banks, merchant banks, discount houses,general banks and building societies offering a wide variety of up-to-datefinancial facilities. Banking technology is very sophisticated and SouthAfrica has probably one of the most advanced electronic banking systemsin the world.

All types of goods and services are freely available. Prices generallycompare well with those in other parts of the western world.

South Africa was plagued by a very high rate of inflation. However, thecountry’s monetary authorities have, through stringent monetary policies,reduced the inflation rate from around 15% per annum on average, to acurrent figure of about 6–7%.

8

For the overseas visitor, business person or investor, the low value of therand means that prices in South Africa are currently very attractive. Hotelaccommodation compares favourably with the rest of the world and isinexpensive by world standards.

Middle income housing is generally in separate houses or townhouses,flats and apartments.

Transport facilities by rail, road, sea and air are efficient and more thanadequate for the needs of the business community.

Business dress for men is usually a business suit with comparablestandards of dress being observed by women in the world of commerce.

Hours of business vary but are usually from 08:00–08:30 to 16:30–17:00Monday to Friday. Shops open for approximately the same hours and ifhoused in shopping centres are also likely to be open on Saturdays and, inmost areas, on Sunday mornings. Those shops not housed in shoppingcentres are likely to be open until 13:00 on Saturday and closed on Sundays.

All sporting and cultural pursuits are well-catered for and the superbclimate makes for an outdoor lifestyle.

12. General welfare and living conditions

South Africa has many advantages for the investor. The far-reachingconsequences of the country’s divided history complete the picture,however. For example:

■ Social, educational and community welfare services and employmentopportunities are skewed along the lines set by apartheid policies, eventhough these policies no longer apply.

■ Although the country produces more than enough food for a population of its size, poverty and malnutrition are a reality formillions of South Africans.

■ There is a large backlog in the provision of low-cost housing.

■ Literacy and skills among the majority of the economically activepopulation are at a low level.

9

■ Unemployment, officially standing at 26,4%, is based on the 16,1 million economically active group of people between the ages of15 and 65. This has resulted in a high crime rate, particularly in theurban areas.

■ Despite government’s differing views on HIV/AIDS, it is believed to bethe country’s number one killer and government has given substantialfinancial aid to its HIV/AIDS programme. This includes increasing itsspend on provincial health departments for Aids-related illnesses,funding for prevention programmes in schools and communities,hospital treatment and community care programmes. It also includes aprogressive roll-out of the programme to prevent mother-to-childtransmission, medication for prevention of tuberculosis and pneumoniain infected people and treatment of opportunistic infections.

13. Public holidays

South Africa has 12 public holidays. They are:

New Year’s Day – January 1Human Rights Day – March 21Good Friday – Friday before Easter SundayFamily Day – Day after Easter SundayFreedom Day – April 27Workers’ Day – May 1Youth Day – June 16National Women’s Day – August 9Heritage Day – September 24Day of Reconciliation – December 16Christmas Day – December 25Day of Goodwill – December 26

If any of these days fall on a Sunday, the following Monday becomes apublic holiday.

10

14. Infrastructure

South Africa has a solid infrastructure including an extensive roadnetwork, railways, airports, pipelines and harbours. The modern transportsystem plays an important role in South Africa’s national economy as wellas for several other African states which use the South African transportinfrastructure to move their imports and exports.

Transport in South Africa is coordinated by the Department of Transport(www.transport.gov.za). The new policy shifts government from operationsto policy, planning and regulation. It bases delivery of infrastructure andservices on public-private partnerships and promotes the contracting out ofbus and rail services while drawing the taxi industry into the formaltransport system.

The National Department of Transport began the Moving South Africaproject in June 1997, with a mandate to “develop a strategy to ensure thatthe transportation system of South Africa meets the needs of South Africain the 21st Century and therefore contributes to the country’s growth andeconomic development”. The project encompassed a 14-month process totake the goals of the 1996 White Paper on National Transport Policy anddevelop a twenty-year strategy to achieve them.

14.1 Public transport

South Africa has inherited a public passenger transport system that isunder-performing against its obligation to achieve national goals. Keydevelopment goals are not being met, including basic mobility, basicaccess, and social integration. Workforce mobility is restricted, creatingfriction around national efforts to create employment opportunities.Current spatial distribution leaves commuters and other residents distantfrom key services that they need, and the system’s overall inefficiency iscreating high requirements for subsidy.

There are three main forms of public transport in the country:

■ taxi (vans);

■ rail; and

■ bus.

11

14.2 Roads

On 1 March 1998, motorists in South Africa were introduced to the newformat driving license, replacing the license previously printed or affixedto pages in identity documents. The new license is termed credit cardformat (CCF) as it resembles in shape and size, a conventional bank credit card.

The national road system provides links to all the major centres in thecountry as well as to neighbouring countries. These roads include around1 400km of dual-carriage freeway, 292km of single carriage freeway and4 401km of single-carriage main road with unlimited access.

14.2.1 Fuel prices

Recent fuel price trends are as follows:

The increase in fuel prices can be attributed to:

■ depreciation of the rand; and

■ increase in the dollar rate per barrel.

Government has cut South Africa’s roadworks budgetfrom R1,5 billion to R550m per annum which raisessome concerns as to the ongoing maintenance of theroads in the light of inevitable deterioration of theroads over time.

To maintain South Africa’s major roads, the following national routes havebeen converted to toll roads:

■ N1 (primary Johannesburg / Cape Town route) – 6 toll plazas

■ N2 (primary Cape Town / Durban route) – 5 toll plazas

■ N3 (primary Johannesburg / Durban route) – 4 toll plazas

■ N4 (primary Johannesburg / Pietersburg route) – 5 toll plazas

2000 1999 1998 1997

Petrol 25% 25% 4% 9%

12

14.2.2 N3 construction project

The contract for the R2,5 billion upgrade of the N3 highway betweenDurban and Johannesburg was awarded to the N3 Toll Road. The contractis for the construction, financing, operation and maintenance of 420km oftoll road between Cedara in KwaZulu-Natal and Heidelberg in Gauteng,plus the development of associated facilities under a 30-year concessioncontract to be managed by Sanra.

14.2.3 Arrive Alive

The problem of road safety is very simple: Between 9 600 and 10 000people die on South African roads every year. Almost 150 000 people areinjured in the approximately 500 000 crashes that occur each year. Besidesthe traumatic emotional cost this has on the social fabric of society, theCouncil for Scientific and Industrial Research (CSIR) estimates that thiscosts R11,9 billion to the country’s economy.

The Arrive Alive road safety campaign was initiated as a short-terminitiative to reduce the carnage on South Africa’s roads. The first campaignran from 1 October 1997 to the end of January 1998 with subsequentcampaigns following. (www.transport.gov.za/projects/arrive)

The main objectives of the campaign are:

■ to reduce the number of road traffic accidents in general – andfatalities in particular – by 5% when compared to the same period theprevious year;

■ to improve road user compliance with traffic laws; and

■ to forge an improved working relationship between traffic authorities atthe various levels of government.

14.3 Rail

The rail network in South Africa falls under the control of Spoornet(www.spoornet.co.za) and the South African Rail Commuter Corporation(SARCC). Spoornet provides rail transport mainly for goods andcontainers, but also transport for passengers on the long-haul routesbetween major cities. The SARCC, in turn, is responsible for providingcommuter services in the six major urban centres.

13

14

Spoornet’s rail infrastructure represents some 80% of Africa’s railinfrastructure, including 31 700km of single track, 3 500 locomotives and124 000 wagons. There are nine major rail routes that cover, amongstothers, the following main geographic locations:

■ Johannesburg

■ Cape Town

■ Durban

■ Port Elizabeth

■ East London

■ Bloemfontein

■ Kimberley

14.3.1 Spoornet

Spoornet is a South African company that operates in the freight logisticsand passenger markets in southern Africa. In line with industry forces,Spoornet has committed itself to a vision of world-class freight logisticsand accepted the challenge of being a world leader in this field, fulfillingits responsibilities to South Africa.

Spoornet is the largest division of Transnet, a state-owned company with adiverse portfolio that includes port management and services, pipelines,road haulage and air carrier divisions. Transnet was created in 1990 as aresult of government policy to commercialise its transport businessinterests and deregulate the transport industry in South Africa.

Spoornet is the largest heavy haulier and transporter of general freight inthe Southern African region. Spoornet enhances its rail offerings with anumber of logistics services, each solution flexible and customised tomatch the customer’s unique requirements. The freight business structureincludes two specialised business units:

■ COALlink, benchmarked as a world best heavy haul operator; and

■ OREX which provides dedicated services for the export of iron ore onthe Sishen-Saldanha line.

The general freight business is managed by dedicated business managers.

In the domestic passenger market, Spoornet provides safe and cost-effective transportation to more than five million people each year. Theflagship luxury Blue Train is a five-star hotel on wheels, offering gueststhe best of modern technology and superior service.

14.3.2 SA Rail Committee Corporation (SARCC)

SARCC’s mandate is to ensure that, at the request of the NationalDepartment of Transport or any local government body designated as atransport authority, rail commuter services are provided in the publicinterest. These services are currently provided under contract by MetrorailServices in terms of an operating agreement.

14.4 Harbours

By far the largest, best-equipped and most efficient network of ports onthe African continent, South Africa’s seven commercial ports have asignificant role to play. They are not only conduits for the imports andexports of South Africa and neighbouring countries, but also serve as hubsfor traffic emanating from or destined to the East and West African coasts.

Portnet (www.portnet.co.za), a division of Transnet Ltd, manages andcontrols all seven commercial ports on the South African coastline –Durban, Richards Bay, East London, Port Elizabeth, Mossel Bay, CapeTown and Saldanha Bay. Another deepwater port designed primarily forcontainers, the Port of Ngqura (Coega Industrial Zone), in the PortElizabeth area, has been given the go-ahead by the South Africangovernment (www.coega.co.za). It is expected that the port will becommissioned in 2005.

The South African Marine Corporation (Safmarine) and Unicorn andGriffin Shipping are the country’s largest shipping lines. Their fleets ofcontainers, oil tankers, general cargo and bulk cargo vessels provideservices between South African ports and the major ports of the world.

14.5 Pipelines

Since its inception in 1965, Petronet manages, operates and maintainsSouth Africa’s strategic network of 3 000km of high pressure petroleumpipelines. Products transported are crude oil, leaded and unleaded petrol,diesel, aviation turbine fuel, alcohol and gas.

15

14.6 Air

The Airports Company South Africa (www.airports.co.za) operates all nineof the state airports – Bloemfontein, Cape Town, Durban, East London,George, Johannesburg, Kimberley, Port Elizabeth and Upington. The Johannesburg, Cape Town and Durban airports are classified asinternational airports.

South African Airways (SAA), Comair (British Airways), Nationwide, SAExpress and SA Airlink operate scheduled domestic and/or internationalair services within South Africa, with Africa and to Europe, North andSouth America, Australia, and the Middle and Far East.

SAA (www.flysaa.co.za) is Africa’s leading airline and their mission is tobe the carrier of choice in the markets they serve. On 1 April 1999 SouthAfrican Airways, formerly a division of Transnet, entered a new era ofprivatisation and was renamed South African Airways (Pty) Ltd. SAA isthe largest airline in Africa and annually carries more than five millionpassengers to 32 international destinations. In addition to passenger flights,SAA operates four dedicated freighters both within South Africa andabroad. SAA also provides technical maintenance for certain other interna-tional airlines.

While operating on a code-share basis in various instances, South Africa isalso well-connected through regular scheduled flights on among others ofthe world’s leading airlines, including: British Airways, Virgin Atlantic andQantas.

16

Chapter 3

Forms of business enterprise

1. Introduction

Business enterprises in South Africa may be conducted by individuals,partnerships of individuals, trusts, close corporations, South Africancompanies or branches of foreign companies (“external companies”).

Factors such as the duration of business activities, the type of businesscapital requirements, income tax requirements, accounting requirementsand number of members will be taken into account in determining themost suitable method of operation.

The most common vehicle for conducting business operations in SouthAfrica is the private [(Pty) Ltd] company and there is no minimum equitycapital requirement for companies. The formation and regulation ofcompanies and close corporations are dealt with in Chapter 4.

There are no marked administrative advantages or disadvantages tooperating a South African company rather than conducting a branchoperation and both are subject to the Companies Act. There may be a taxadvantage to being a branch operation, depending on the parent company’scountry of domicile.

There may be certain disadvantages relating to branch operations, viz.disclosure. The financial statements of a parent company as well as thoseof its branch are required to be lodged with the Registrar of Companies,although in certain circumstances one may apply for an exemption.

The legal liabilities of branches are not limited. In the case of a subsidiarycompany, the liability of the parent is limited to the amount of capitalcommitted, together with any guarantees it has given on behalf of that subsidiary.

Most types of business can be started with a minimum of formalities.Certain activities, such as banking and insurance, are strictly controlled.

17

Licences are required for some activities, but there is generally nodifficulty in obtaining the required licence.

Business enterprises whose expected turnover will exceed R300 000 perannum are required to register for value added tax (VAT). All persons andbusinesses must register for income tax purposes. There is no generalobligation to register a business or business name other than for legalprotection of that name.

A prospective industrialist requires certain governmental consent should he wish to establish a new industrial enterprise. Some of the governmentdepartments which advise on and regulate the setting up or expansion ofindustries are listed below.

2. Industrial development

Investment South AfricaBox 782084 Tel: +27 (12) 428 7905Sandton 2146

Investment South Africa was established on 1 April 1996 by theDepartment of Trade and Industry to fulfil the functions of investmentpromotion and facilitation. Investment South Africa is part of thegovernment’s strategy which strives for technology transfer, job creation,value added export potential and international competitiveness in terms ofSouth Africa’s comparative advantage in the global business community.

Working closely with the private sector, provincial government and thevarious investment promotion agencies, Investment South Africa focuseson promoting South Africa as the premier corporate and industrial relocation destination in Africa.

Department of Trade and IndustryDirectorate: Industrial Development and Investment Centre (IDIC)Private Bag X84 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

The Department of Trade and Industry (Directorate: IndustrialDevelopment) has issued a brochure Establishing a manufacturing concernin South Africa. This publication is issued as a “do it yourself ” guide toprospective industrialists, both local and foreign. We acknowledge theassistance which we derived from it and can do no better than to quotefreely from it.

18

It sets out in some detail the various state services and certain aspects ofstate policy. It also identifies directives issued by those institutions whichaffect their implementation.

In the end, the decision to establish or expand any enterprise rests entirely with the industrialist. He must determine the viability of such an undertaking.

3. Regional industrial development

Enterprise OrganisationPrivate Bag X86 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

On 1 May 1991, a new incentive scheme for regional industrialdevelopment was introduced. The scheme makes provision for the paymentof an establishment grant (two years) and a profit incentive (three years).

A prime requirement is for the entity to be incorporated either as a companyor a close corporation. It must have its own tax base. Only new secondaryindustries or expansions of similar existing operations are eligible. Theymust be engaged in manufacturing, processing or assembling and achieve atleast 25% added value in order to be eligible for the concessions.

Details of the scheme can be obtained from the Board for RegionalIndustrial Development.

4. Import and export control

Department of Trade and IndustryDirectorate: Import and Export ControlPrivate Bag X192 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

Import and export control on commodities is being phased out. However,certain products are still subject to control.

Undertakings wishing to import or export goods which are subject tocontrol must apply for permits to the Director (Imports and Exports),before placing the order for such goods.

All enterprises which import or export goods are also required to registerwith the Commissioner of Customs and Excise.

19

5. Patents, trademarks, designs and copyright

Department of Trade and IndustryOffice of the Registrar:Patents, Trade Marks, Designs and CopyrightPrivate Bag X400 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

This directorate administers legislation concerning patents, trade marks,designs and copyright.

6. Immigration and work permits

Department of Home AffairsPrivate Bag X114 Tel: +27 (12) 314 8911Pretoria 0001 www.homeaffairs.dbs1.gov.za

Persons wishing to immigrate to South Africa or work here have to applyfrom abroad and await the outcome of their applications before makingarrangements to leave for South Africa. More information on this issue isavailable from the South African diplomatic missions or direct from theDirector General, Department of Home Affairs.

7. Exchange control and foreign investment

The South African Reserve BankExchange Control DivisionBox 3125 Tel: +27 (12) 313 3911Pretoria 0001 www.resbank.co.za

Exchange control in South Africa is administered by the South AfricanReserve Bank with the assistance of banks appointed as authorised dealersin exchange. Any enquiry or request of an exchange control nature should,in the first instance, be submitted to a South African commercial bankwhich will, if necessary, confer with the Reserve Bank.

20

8. Competition

Competition CommissionPrivate Bag X720 Tel: +27 (12) 482 9000Pretoria 0001 www.compcom.co.za

The Competition Commission is a statutory body which was established inorder to advise the government concerning competition policy.

The act governing the commission allows it to make provision for themaintenance and promotion of competition in the economy as well as theprevention of, or control of, restrictive practices. The acquisition ofcontrolling interests in businesses or undertakings as well as the investi-gation of monopolistic conditions arising from concentrations ofownership, fall within the ambit of this board’s powers.

9. Tender preferences on government purchases

Directorate: Government PurchasesPrivate Bag X84 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

In awarding tenders for the supply of goods to government and semi-government institutions, tender price preferences are granted for locallymanufactured products. The preferences are based on:

■ local content;

■ the bearing of the South African Bureau of Standards (SABS) mark;

■ manufacture in decentralised areas;

■ locally manufactured electronic systems and components; and

■ black economic empowerment considerations.

21

10. Employment of labour and technical factory requirements

Department of ManpowerPrivate Bag X117 Tel: +27 (12) 309 4000Pretoria 0001 www.manpower.gov.za

The nearest local office of the department should be consulted regardingstatutory regulations affecting the employment of labour. Registration withthe Workmen’s Compensation Commissioner and the UnemploymentInsurance Fund is required. All factory building plans must be approved bythe factory inspector.

11. Water, waterworks and water pollution

Department of Water Affairs and ForestryPrivate Bag X313 Tel: +27 (12) 336 7500Pretoria 0001 www.dwaf.gov.za

This department controls all aspects of water usage, waterworks and waterpollution. All enquiries should be directed to the regional director of theDepartment of Water Affairs and Forestry concerned.

12. Road transport

Department of TransportPrivate Bag X193 Tel: +27 (12) 309 3000Pretoria 0001 www.transport.gov.za

Applications for public and private road carrier permits must be directed to the local Road Transportation Board in the area where theconveyance originates.

13. Customs and excise

Department of FinanceCommissioner for Customs and ExcisePrivate Bag X21 Tel: +27 (11) 241 5500Marshalltown 2107 www.sars.gov.za

Registration with the local controller of Customs and Excise is requiredfor all factories subject to excise duties and for all enterprises whichimport on a regular basis.

22

14. Standards

South African Bureau of Standards (SABS)Private Bag X191 Tel: +27 (12) 428 7911Pretoria 0001 www.sabs.co.za

Information regarding existing specifications for products, specificationsfor new products and guidance on quality control generally is availablefrom the bureau.

15. Industrial research and development

Council for Scientific and Industrial Research (CSIR)Box 395 Tel: +27 (12) 841 2911Pretoria 0001 www.csir.co.za

The CSIR is responsible for the promotion of scientific and industrial research.

16. Export trade promotion

Department of Trade and IndustryDirectorate: Export Trade PromotionPrivate Bag X84 Tel: +27 0861 843384Pretoria 0001 www.dti.pwv.gov.za

In order to promote export trade, the government offers certain incentivesand assistance to exporters. Full particulars may be obtained from thedirectorate. To qualify for this assistance, an undertaking has to beregistered as an exporter with the directorate.

Credit Guarantee Insurance Corporation of Africa LtdBox 125 Tel: +27 (11) 889 7000Randburg 2125 www.creditguarantee.co.za

This corporation provides short, medium and long term credit insurancefor exporters and for domestic credit transactions.

23

17. Industrial financing

Industrial Development Corporation of South Africa Ltd (IDC)Box 784055 Tel: +27 (11) 269 3000Sandton 2146 www.idc.co.za

The IDC is a statutory institution offering an extensive range of financingfacilities to assist private entrepreneurs in the establishment and expansionof economically viable manufacturing industries in South Africa. Forfurther information on the IDC, see Chapter 6 (4.4).

18. Small business promotion

Business Partners LimitedBox 7780 Tel: +27 (11) 480 8700Johannesburg 2000 www.businesspartners.co.za

Business Partners Limited was founded with the specific purpose ofdeveloping small business undertakings of all population groups withinSouth Africa’s Common Monetary Area. For this purpose, BusinessPartners offers a wide range of aid programmes to small businessmenmainly in the fields of financing, the provision of business sites andadvisory services.

A small business undertaking is defined as an independent enterprise withgross assets not exceeding R10 million (see Chapter 9 on page 117 forincentive details).

For further information, please visit www.kpmg.co.za or contact:

Colin Esslemont telephone +27 (11) 647 7185 colin.esslemont@kpmg.co.za

Cristina von Eckardstein telephone +27 (11) 647 7182 cristina.voneckardstein@kpmg.co.za

24

Chapter 4

Companies and close corporations

1. Companies: Law and administration

1.1 Company legislation

All companies are subject to the provisions of the Companies Act 1973, as amended, which follows closely on British company legislation. Varioustypes of companies are allowed by the act:

■ companies having a share capital which includes incorporated profes-sional bodies and the word “incorporated” forms the last work of theirname – these companies must provide unlimited liability of itsdirectors in terms of section 53(b) of the Companies Act – this type ofcompany can only be formed where it is allowed by the professionalbody; and

■ companies not having a share capital and having the liability of itsmembers limited by its memorandum of association – a company’smemorandum may provide for unlimited liability of its directors.

1.2 Public and private companies

Companies having a share capital are either “Private” (Proprietary)Limited or “Public” Limited.

■ A “private” company is a company which by its articles of association:

– restricts the right to transfer its shares; and

– prohibits any offer to the public of its shares and debentures.

■ A “public” company is generally one which wishes to raise capitalfrom the public and therefore the above restrictions applicable to aprivate company are absent.

25

1.3 Establishment of a South African company

The Companies Act is administered by the Registrar of Companies who islocated in Pretoria. Incorporation is achieved by:

■ reserving the company’s name with the Registrar of Companies – it is advisable to put forward alternative names, in order of preference, when making application – stamp duty for reserving a name is R50 –the name of the company must be in line with its main object;

■ lodging the memorandum and articles with the Registrar of Companies –the memorandum must state, inter alia:

– the name of the company;

– the company’s main object – it can, however, contain unlimited ancillary objects; and

– the amount of share capital (authorised capital) – it is not necessaryto issue shares to the amount of the authorised capital (see below) –share capital may consist of shares having a par value or shareshaving no par value, but may not have both par value and no parvalue shares of the same class;

■ lodging the written consent of the auditors;

■ lodging a return of directors and officers, ie secretary (if applicable)and all directors;

■ lodging notice of situation of registered office; and

■ lodging application for Certificate to Commence Business.

A standard form of memorandum and articles which can be adapted to thecompany’s individual needs, if necessary, is available. Registration takesapproximately two weeks, from date of lodging.

1.4 External companies (branch of a foreign company)

As an alternative to the registration of a South African company, a branchof a company incorporated outside South Africa can establish a place ofbusiness in South Africa and become registered as an external company.

26

In order to achieve the registration of an external company as a branch of aforeign company, the following must be lodged:

■ two notarially certified (each paged to be signed) copies of thememorandum and articles of association of the foreign company;

■ two notarially certified translations thereof (each page to be signed), if the memorandum and articles of association are not in one of theofficial languages of the Republic;

■ a certificate from the notary certifying that he is a qualified notary;

■ a certificate from the translator certifying that he is an official translator;

■ names and personal details of the directors of the external company;

■ the consent of the auditor of the company’s branch in South Africa;

■ the name and personal details of a South African resident who isauthorised to accept service on behalf of the company;

■ the year end of the foreign company; and

■ the issued share capital of the foreign company.

Also required is a South African resident public officer who will beresponsible for all tax affairs of the branch, for example, submitting taxreturns, VAT and PAYE.

1.5 Shareholders

■ The minimum number of shareholders for a private company is oneand the maximum is fifty, excluding persons who are in theemployment of the company or past employees of the company whowere members on termination of their employment.

■ The minimum number of shareholders for a public company is seven,unless wholly owned, and the maximum is unlimited.

■ It is not necessary for any shares to be held by a South African resident.

27

1.6 Share capital

■ Par value shares of any denomination, or no par value shares.

■ Different classes of shares are permitted with different rights, iepreference shares and redeemable preference shares.

■ There is no minimum amount of share capital which must besubscribed for by the shareholders.

■ Foreign investors should take note of the exchange control restrictionsrelating to local financial assistance which apply to foreign controlledSouth African resident companies (see Chapter 5).

■ Foreign investors should also be aware that thin capitalisation rulesapply if the debt:equity ratio exceeds 3:1 (see Chapter 7).

■ Shares may be issued at par value with or without a premium.

1.7 Directors

■ Minimum number of directors for a public company is two.

■ Minimum number of directors for a private company is one.

■ Directors need not be resident in South Africa.

■ For ease of administration, a South African resident director isdesirable if only for the signing of returns, for example.

■ A director may, depending on the articles of association, appoint analternate director to act in his place and stead.

■ There is no share qualification for directors.

1.8 Company secretary

Every public company must appoint a company secretary who is required,in terms of section 268(g)(d) of the Companies Act, 1973, as amended, tocertify in the annual financial statements that the company has lodged withthe Registrar of Companies all such returns as are required of a publiccompany and that all such returns are true, correct and up-to-date.

28

29

1.9 Public officer

Every company must appoint a South African resident to be its publicofficer who will be responsible under the Income Tax Act for all thecompany’s tax affairs.

1.10 Registered office and postal address

■ Every company and external company must have a “registered office”in South Africa which is a street location.

■ The Registrar of Companies must also be notified of the postal addressof every company and external company.

■ The statutory registers of the company, for example, must be kept atthe registered office of the company unless the Registrar of Companies is otherwise notified.

1.11 Financial statements

■ All companies, including external companies, must keep properfinancial records which must be retained in the Republic.

■ Their annual financial statements must be subject to independent audit.

■ Only public companies and external companies are required to lodgetheir annual financial statements, together with copies of the financialstatements of their subsidiaries, irrespective of whether subsidiaries arepublic or private companies, with the Registrar of Companies.

■ External companies must also lodge the financial statements of the foreigncompany as a whole. Exemption from lodging annual financial statementsfor an external company can be applied for on various grounds.

1.12 Financial year

■ On incorporation, a company must choose a date on which to close its financial year.

■ A subsidiary must have the same financial year end as its holding company.

■ Changes can, however, be effected subsequently, provided the Registraris notified before the expiry of the current year end.

1.13 Annual general meetings

■ Every company, except an external company, must hold an annual general meeting.

■ The first annual general meeting must be held within eighteen monthsof the date of incorporation.

■ Subsequent annual general meetings must be held within nine months,depending on the articles of association, of the year end of the companyand within fifteen months of the preceding annual general meeting.

1.14 Stamp duty

1.14.1 Authorised share capital

■ Stamp duty is payable on the amount of authorised share capital of the company on incorporation.

■ Stamp duty is payable at the rate of R5 per R1 000 or part thereof onthe nominal value of the authorised share capital.

■ In the case of no-par value shares, stamp duty is payable at the rate ofR5 per 1 000 shares authorised.

1.14.2 Issued share capital

■ Stamp duty on the issue of shares is payable within 21 days of issue ofthe share certificate. The share certificate must be issued within twomonths of date of issue.

■ Stamp duty is payable at the rate of 5c per R20 or part thereof on thepar value and premium of shares issued.

■ Stamp duty is payable at the rate of 5c per R20 or part thereof of thevalue attributable to no-par value shares issued.

1.15 Costs

■ The cost of incorporating a South African company in September 2001was approximately R9 000.

■ The cost of registering an external company in September 2001 was approximately R4 500.

30

■ This amount does not include stamp duty, VAT and disbursements.

1.16 Shelf companies

KPMG forms and holds shelf companies for the convenience of theirclients. The advantage of this is that the company is already registered and is available immediately.

1.17 Registration number

A company must display its registration number on all official stationeryand documentation and at the registered office of the company.

2. Close corporations: Law and administration

A close corporation is a form of business enterprise designed for ease of operation. It is regulated by the Close Corporation Act of 1984, asamended, the provisions of which commenced on 1 January 1985.

2.1 Nature of the close corporation

■ A close corporation is a simple business entity with a separate legalstatus from its members or owners.

■ It indicates its status by most commonly displaying the letters CC orBK, but similar lettering in all 11 official languages may be used.

■ Close corporations must display their registration numbers on allofficial stationery and documentation.

■ A close corporation may easily be converted to a company.

2.2 The act and regulations

■ The act is administered by the Registrar of Close Corporations who islocated in Pretoria.

■ The Close Corporation Act and its regulations are expressly designedto be relatively simple to administer for ease of operation.

31

2.3 Membership

■ Only natural persons may be members of a close corporation.

■ The maximum number of members is 10.

■ No company or other juristic person can directly or indirectly, whetherthrough a nominee or otherwise, hold a member’s interest in the corporation.

■ The names and initials of all members must appear on all officialstationery of the corporation.

2.4 Interest of members

■ Close corporations do not have share capital.

■ Members hold an interest in the corporation.

■ A member’s interest is expressed as a percentage of the total members’ interest.

■ A certificate of membership is issued to each member showing that member’s interest.

■ A member acquires his interest by either making a contribution incash, or by way of property (both corporeal and incorporeal), or forservices rendered or by purchase from an existing member.

2.5 The founding statement and incorporation

Incorporation is simple.

■ The name must be reserved with the Registrar of Close Corporations.It is advisable to put forward alternative names, in order of preference,when making application. Stamp duty payable for the reservation of aname is R50. The close corporation’s name must be in line with itsmain object.

■ The founding statement must be lodged, in duplicate, with theRegistrar of Close Corporations. The stamp duty payable is R100.

32

2.6 Association agreement

A close corporation, having more than one member may, if it so desires,have an association agreement:

■ The agreement would regulate the internal affairs of the corporation.

■ Such an agreement does not imply that outsiders have constructive knowledge thereof.

■ It is of no force and effect on third parties.

2.7 Meetings and minutes

■ The corporation must keep minutes of all meetings.

■ The rules for meetings are similar to those of companies or other like bodies.

2.8 Accounting requirements

■ A close corporation is required to keep adequate and proper books andrecords of account.

■ A close corporation must have a financial year end.

■ Annual financial statements must be drawn up within nine months ofthe year end.

2.9 Accounting officer

■ Close corporations are not subject to any independent audit provisions.

■ An accounting officer who is responsible for reporting on the annualfinancial statements must be appointed.

■ The professions whose members qualify to accept appointment asaccounting officer are chartered accountants, chartered secretaries, costand management accountants, and commercial and financial accountants.

33

2.10 Liability of members

■ Under certain circumstances, members of a close corporation maybecome liable to both the corporation, its members and third parties,either individually or jointly and severally.

■ The liability would arise mainly from:

– omissions by the member; or

– his deliberate acts in contravention of the law governing close corporations.

2.11 Taxation

The main points concerning the taxation of a close corporation are:

■ A close corporation is taxed exactly as if it were a company.

■ Tax is levied at the corporate rate, which was 30% in January 2001.

■ Distributions are subject to the secondary tax on companies which was12,5% in January 2001.

2.12 Costs

The cost of forming a close corporation was approximately R3 000 in September 2001.

For further information, please visit www.kpmg.co.za or contact:

Colin Esslemont telephone +27 (11) 647 7185 colin.esslemont@kpmg.co.za

Cristina von Eckardstein telephone +27 (11) 647 7182 cristina.voneckardstein@kpmg.co.za

34

Chapter 5

Exchange control

1. Introduction

Although considerably relaxed in recent years, for residents of theRepublic, strict exchange controls still exist. What follows is a summary ofthose regulations as they are presently administered.

The Exchange Control Regulations are administered by authorised dealersin exchange (commercial and merchant banks) acting for the SouthAfrican Reserve Bank. The regulations are contained in GovernmentNotices R1111 and R1112 of 1 December 1961.

The regulations contain no permissive clauses; only prohibitive andcompulsive clauses. In other words, what you may not do and what you must do.

It is possible to make application to the Exchange Control authorities forthe relaxation of any rule. Each case will be considered on its individualmerits provided such request falls within the policy guidelines applicablefrom time to time.

2. Blocked rands

Blocked rands are created as a consequence of an emigrant from SouthAfrica leaving assets in excess of the permissible settling-in allowance inthe Republic after departure.

The capital amount of a blocked account is not transferable abroad.Blocked rands may be used for a limited number of purposes, includingvarious forms of investment, expenses incurred when subsequently visitingSouth Africa and paying premiums on existing life assurance policies.

Income earned on blocked rands is remittable and is no longer subject to limitations.

35

Assets in excess of the above allowances will be blocked when theemigrant departs and will be subject to the rules regulating blocked rand.

3. Exchange controls relating to individuals

3.1 Residents

The term “residents” is not defined. The main division is always betweenresidents and non-residents. There can be various further divisions, viztemporary residents, emigrants and immigrants.

As mentioned previously, all South African residents are subject toexchange control regulations which basically means that they are restrictedin the transfer of funds abroad. From 1 July 1997, residents may:

■ operate foreign bank accounts;

■ maintain income and funds abroad; and

■ transfer R750 000 offshore.

Maintenance payments have always been permitted on providingsatisfactory evidence. The current maintenance payments limits are up to a maximum of R7 000 per month per receiving family unit to the non-residents’ dependent parents, brothers or sisters.

3.2 Holiday and business travel allowances

Subject to various restrictions, the allowances are:

■ Holiday business visits to other foreign countries: R140 000 per adultand R45 000 per child under 12 years, per calendar year, without adaily limit.

■ The distinction between neighbouring states and “other” has been abolished.

■ Lesotho, Swaziland, and Namibia are in the Common Monetary Areaand no exchange control exists between these countries.

■ Only formal emigration causes a resident to lose his status.

36

■ Persons temporarily working or studying abroad remain subject to exchange control.

■ A living allowance of R140 000 per annum for a student or R280 000per annum if accompanied by a spouse who is not studying is allowed.A travel allowance of R45 000 per annum or R90 000 if accompaniedby a spouse, is also permitted.

3.3 Non-residents

A non-resident is an individual who is resident outside South Africa andwho is not an emigrant. (Emigrants who departed from South Africa priorto 7 May 1958 are strictly speaking non-residents and exchange controldoes not apply to them.)

3.4 Immigrants

Immigrants settling in South Africa, other than former South Africanresidents, are also subject to certain exchange controls. Among these are:

■ Immigrants must declare all foreign assets and liabilities on formMP335 and give an undertaking that they will not make such assetsavailable to South African residents.

■ After three years, immigrants to the Republic will be regarded as fullresidents for South African exchange control purposes and they willonce again have to formally declare their foreign assets and liabilities.

■ Immigrants who leave South Africa within the first five years of residencewill be allowed to retransfer any funds brought into South Africa.

3.5 Foreign nationals temporarily resident in South Africa

These rules apply to foreign nationals on contract or secondment in South Africa:

■ They need only declare foreign assets and give an undertaking thatthey will not make such assets available to South African residents.

■ They are not required to remit to South Africa income arising from foreign assets.

37

■ They may make reasonable transfers to their home countries from theirearnings in the Republic.

■ Their initial application must be accompanied by a letter from theiremployer confirming that they are on contract or secondment andgiving details of their earnings.

■ On departure from South Africa, they may transfer to their homecountry any savings in South Africa.

3.6 Emigrants

A South African resident, subject to exchange control, emigrating from theRepublic will have a number of fairly restrictive regulations applied tohim. This includes an immigrant who has resided in South Africa for morethan three years.

These restrictions and the amounts which an emigrant may export from theRepublic are set out below:

3.6.1 Settling-in allowance

■ A departing family unit may remit to another country a maximum of R400 000.

■ A single emigrant has a ceiling of R200 000.

3.6.2 Travel allowance

■ Emigrating families are entitled to travel allowances of R140 000 peradult, provided a holiday allowance has not already been taken.

3.6.3 Household effects and motor vehicles

■ A departing emigrant may export bona fide household effectsincluding motor vehicles up to an amount of R500 000 per family unit.

■ Household effects would include clothing, jewellery and furniture.

■ Household effects do not include items specifically acquired to swellthe amount allowed to be exported.

■ They do not include non-clothing items acquired during the last year.

38

39

■ Where the value of any household effects exceeds R500 000, theReserve Bank must specifically give approval for the export thereof.The authorities are reasonable in granting such requests. They must,however, be satisfied that such effects were acquired by the emigrant in the normal course of events, such as by inheritance or bypurchase over the years.

3.6.4 Hardship and other allowances

■ The authorities may be approached where an emigrant believes that he has a specific case of hardship.

3.6.5 Emigrants’ blocked funds and assets

■ An emigrant leaving the Republic is not required to sell or otherwiseliquidate his assets.

■ An emigrant is free to retain any assets in the Republic that he may wish.

■ Any assets and any cash which remain after all the applicableallowances have been transferred, are blocked.

■ The blocked assets and cash have to be placed under the control ofauthorised dealers in exchange (commercial and merchant banks).

■ Emigrants’ blocked funds and assets can only be utilised for:

– making current or interest-earning bank deposits with authorised dealers;

– acquiring South African quoted shares, government, municipal orpublic utility stocks and units in mutual funds;

– all the above investments are blocked and may not be exported;– financing of visits to South Africa by the emigrant family subject to

a per diem maximum of R3 000 per adult and R1 500 per childunder l2 years of age – there is an overall limit of R75 000 perfamily per calendar year;

– financing the direct return air fares of the emigrant family between the country of residence and South Africa – these fares must bepaid in the Republic; and

– subscriptions to clubs and professional societies and sundry otherincidental payments.

3.6.6 Income from emigrants’

blocked funds and assets

■ Dividends declared from profits earnedafter the date of emigration, and interest earned

from blocked assets after that date, may beexported subject to the conditions set out below:

– the income can be exported via normal bankingchannels; and

– agreements for the payment of income to an emigrant,other than by way of interest or dividend (eg rentals), require the

prior approval of the authorities.

3.6.7 Other exportable income

■ Directors’ fees – the limit was abolished in March 1997.

■ All pension payments from registered pension funds may be exported.

■ An emigrant is entitled to receive cash bonuses on insurance policies.

■ The permission of the authorities must first be obtained to export:

– retirement annuity payments;

– lump sum pension fund payments; and

– rentals from property in South Africa.

3.7 Estates and legacies

Where the deceased was a non-resident, the South African portion of theestate may be transferred in full to non-resident beneficiaries.

Foreign assets forming part of the deceased estate of a South Africanresident may be distributed to South African or foreign beneficiaries freely.Any foreign estate duty or costs incurred in winding up the estate must bemet from the foreign portion of the estate.

40

3.8 Beneficiaries of trusts

3.8.1 Testamentary

■ The provisions contained in testamentary trusts do not require the priorapproval of the control.

■ Income may be transferred through normal banking channels providedthere is no evidence of excess local financial assistance by the trust.

3.8.2 Inter vivos

The provisions of any inter vivos trust which will have beneficiaries whoare non-resident (including emigrants) must first be cleared with theReserve Bank.

The control imposes stringent regulations on inter vivos trusts having non-resident beneficiaries.

Basis on which inter vivos trusts may be permitted to remit funds abroad:

■ established in favour of a non-resident; (income and capital distributions are placed in a blocked account until the death of the“founder”, following which the distributions become a legacy andapplication may be made for the remittance of the funds; capital distributions are credited to a blocked account)

41

Estates of persons who were permanent residents of the Republic at time of death:

Cash bequests, legacies and unlimited amount per beneficiarydistributions to beneficiariespermanently resident outsidethe rand monetary area

Jewellery R50 000 per beneficiary – this must be attested to by an authorised dealer.

South African portion of estates of persons including emigrants domiciled outside the Republic:

Cash bequests, legacies and unlimited amount per beneficiarydistributions to beneficiaries

Jewellery R50 000 per beneficiary – this must be attested to by an authorised dealer.

■ own asset trust established by any person; (income is allowed to bedistributed as if it is earned on the emigrant’s own blocked assets) and

■ third person funded trusts in favour of an emigrant:

Exchange control permission must be obtained to remit income to benefi-ciaries of such third party trusts where those beneficiaries have never beenresidents of the Republic. Contrast this with beneficiaries who werepreviously residents of South Africa and who emigrated as above.

Some further points to be noted. These are:

■ The trust deed should be approved by exchange control, prior to anytransactions being carried out in terms of the trust deed.

■ Income can only be transferred abroad which is not of a capital natureand was earned after the date of emigration.

■ The control will not allow excessive income to be transferred to non-resident vis-a-vis resident beneficiaries in terms of the exercise of thetrustee’s discretion.

■ Trusts which are declared to be “affected persons” (see localfinancial assistance rules hereafter) and which are over-borrowed in terms of the formula may not be able to remit any income to non-resident beneficiaries.

■ Details of annual financial statements and off balance sheet financewill be required by the control.

■ An emigrant cannot transfer his blocked assets arising from hisemigration to a trust after he has had those assets subjected to blocking.

42

Income

trust created within five years distributions credited to prior to emigration a blocked account

trusts created more than five distributions are permitted years prior to emigration with exchange control approval

Capital

where the founder is alive distributions credited to a blocked account

where the founder has died distributions credited to a blocked account

■ Income of a trust subjected to blocking in terms of Regulation 4(2)(see above) cannot be remitted. Any income earned on such blockedfunds is also blocked in the same way.

■ Trust income blocked in terms of Regulation 4(2) will only be releasedupon the death of the founder, ie the inheritance principle is followedin such cases.

■ Capital distributions from trusts to non-resident beneficiaries will beconsidered by the control in each and every case. Withdrawals or distri-butions cannot be made other than with the prior approval of theauthorities.

4. Controls relating to companies resident in South Africa

4.1 Remittance of income

Income derived from investments in South Africa is generally transferableto foreign investors, subject to the restrictions below.

4.2 Interest

Interest is freely remittable abroad, provided the loan facility has beenapproved by exchange control and the interest rate is related to the marketrate of the currency in which the loan is raised.

4.3 Dividends

Dividend distributions, whether capital or revenue, are freely remittableabroad although an auditor’s covering letter is still required.

4.4 Royalties and license agreements

■ The authorities will normally allow royalties based on sales to be paid to overseas franchise-holders provided prior approval has been obtained.

■ Applications must be supported by a completed questionnaire(MP337(b)) which is obtainable from any authorised dealer, and shouldbe directed to the Department of Trade and Industry, Directorate:Technology, in Pretoria.

43

44

■ Two categories of products or know-how are identified for the purposeof determining an acceptable royalty fee:

Consumer goods or know-how 0 – 4%Intermediate and final capital goods or know-how 0 – 6%

■ Payments for trademarks will be considered if they are linked totechnology. It should not exceed 1,5% and the total royalty paymentshould not exceed the maximum percentage noted above.

■ The maximum period for royalty agreements is five years, which can be extended on application for a further five years.

■ Drafts of royalty agreements should be submitted to the authorities as soon as possible.

■ Credits should not be raised in the books of the debtor until approvalfor payment of the royalty has been obtained.

■ It is a contravention of the regulations to credit a non-resident in respectof royalties or any other agreement without prior control approval.

■ An auditor’s certificate is required with each application for foreignexchange to pay the royalty.

4.5 Management and administration fees

Payment of a management fee by a South African company to an overseascompany or beneficiary is subject to exchange control approval. Theamount paid must be reasonable in relation to the services provided.Payments of such fees by wholly-owned subsidiaries of overseascompanies are not readily approved.

4.6 Local financial assistance to “affected persons”

■ An “affected person” falls under a very wide definition. It will includeany body corporate, foundation, trust or partnership operating in theRepublic, or an estate, in respect of which:

– 75% or more of the capital, assets or earnings thereof may be utilised for payment to, or to the benefit in any manner of, anyperson who is not resident in the Republic; or

– 75% or more of the voting securities, voting power, power of control, capital, assets or earnings thereof, are directly or indirectly vested in, or controlled by or on behalf of, any person who is notresident in the Republic.

■ Effective capital is basically the net worth of the company, togetherwith approved shareholders’ loan funds which are regarded asinvestment funds because of their permanence.

■ Effective capital will include:

– issued share capital;

– reserves (not including unrealised appreciation of assets);

– retained earnings;

– share premium account;

– approved foreign shareholders’ loans;

– local shareholders’ loans (provided these exceed foreignshareholders’ loans in proportion to their shareholdings); and

– minimum balances of inter-company current accounts with non-resident group shareholders.

■ A formula determines how much foreign-held companies may borrow:

– The local financial assistance formula is:

– Thus a 50% foreign-held company may receive local financialassistance of up to 200% of its effective capital.

■ Financial assistance includes:

– lending of currency;

– granting of credit;

– taking-up of securities;

– concluding of hire purchase or lease agreements;

– financing of sales or stocks;

– discounting of receivables;

– factoring of debtors;

45

{100 +SA participation

non-resident participationx 100} x effective capital

– guaranteeing of acceptance credits;

– guaranteeing or acceptance of any obligation;

– any suretyship; and

– a buy-back or lease-back agreement.

■ Financial assistance excludes:

– granting of credit by a seller in respect of any commercialtransaction directly involving the passing of ownership of the goods sold from seller to purchaser; and

– granting of credit solely in respect of services rendered.

■ The lender is expected to satisfy himself that the borrower has obtainedexemption to have credit granted to him.

■ A company which exceeds its permitted local financial assistance, mayfind that the Reserve Bank might restrict the distribution of dividendsout of South Africa until such time as the position has been rectified.

4.7 Loans to resident companies from abroad

■ The acceptance of foreign loan funds by a local entity requires theapproval of the authorities.

■ There is a minimum period of approximately six months for a loan.

■ No repatriation guarantees will be given by the control.

■ The maximum interest rate that the control will consider is 2% abovethe market rate of the currency borrowed.

■ The control may consider requests to borrow from non-shareholders.

■ Forward cover can be obtained for the repayment of foreign loans.

4.8 Foreign parent company share incentive or share option

schemes

Applications by South African entities to participate in such schemes mustbe referred to the Exchange Control Department of the South AfricanReserve Bank.

46

The policy regarding these schemes has been increased to R750 000.

5. Other regulations

Various other regulations exist covering foreign exchange transactions.Among these are:

■ Payments for imports and other services

– With the exception of those designated as “free”, all goods requirean import permit.

– Payment for imports cannot be made earlier than the date of shipment.

– Incidental costs for such things as buying commissions can beremitted through normal banking channels.

– Advance payments for capital goods in excess of 33,3% of the ex-factory cost require prior approval by the control.

■ Payments for exports

– All persons exporting goods must declare these on a form Fl78 to their bankers.

– The full foreign currency payment must be repatriated to SouthAfrica within six months or such further period as may be granted.

– Selling commissions for sales of the exporters’ goods may be remitted overseas.

■ Forward exchange cover

– Forward exchange cover is provided by the Reserve Bank via thecommercial banking sector.

– Forward exchange cover is usually for a period not exceedingtwelve months.

– Cover is normally only granted for visible imports and for firmorders placed therefore.

■ Tender guarantees, bid bonds and performance guarantees

47

– Guarantees, both in favour of and on behalf of South Africanresidents, can be issued by authorised dealers subject to certain limits.

6. Contraventions and penalties

There are very heavy penalties, consisting of fines and prison sentences,for contravention of the regulations.

For further information, please visit www.kpmg.co.za or contact:

Alison Beck telephone +27 (11) 647 7294 alison.beck@kpmg.co.za

48

Chapter 6

Banking and finance

1. Financial services industry

South Africa has a sophisticated financial services industry, which datesback to 1793 when the first commercial bank was established in the Cape ofGood Hope. The banking environment closely resembles that of the UnitedKingdom and there are a number of large banks which operate extensivebranch networks. There is no depository insurance protection scheme.

Regulation of South African financial institutions and markets will betransformed over the next few years. The Policy Board for Financial Servicesand Regulation has commenced a process which will bring South Africa intoline with recent international trends and heralds a more holistic and co-ordinated approach to the regulation of financial services. The FinancialServices Board Act regulates short- and long-term insurance, pension funds,unit trusts, participation bond schemes, portfolio management, friendlysocieties and the financial markets (the JSE Securities Exchange SouthAfrica, incorporating the South African Futures Exchange and the BondExchange of South Africa).

Set out below are the objectives and functions, in brief, of the importantcontrolling bodies operating in the financial markets industry.

1.1 The JSE Securities Exchange South Africa

The JSE (www.jse.co.za) was established in 1887 and has since grown totake its present position as the twelfth largest stock exchange in the world,ahead (in terms of market capitalisation) of stock exchanges such as thosein Hong Kong, Australia and Taiwan.

The JSE is the principal centre for raising equity capital in South Africaand plays a major role in the economy by channelling the savings of the

49

nation in a secure and cost-effective manner to the users of capital. In thisway it encourages fixed investment, improves productive capacity andcontributes to greater employment.

1.2 The Development Capital Market

The Development Capital Market (DCM) was brought into being by theCommittee of the Johannesburg Stock Exchange (JSE) during 1984.

It is a separate section of the JSE on which a company can be listed whilefulfiling substantially less onerous conditions than those required for a listingon the “main boards”. Companies are listed in a separate section, but it mustbe emphasised that it is not a secondary listing, nor is it a dumping groundfor companies which no longer merit their listings on the “main boards”.

The DCM provides smaller companies with all the advantages of a listingon the Johannesburg Securities Exchange at far less cost than a “mainboard” listing. One of the principal advantages is the ability to raiseventure capital which, in turn, promotes opportunities for economicgrowth and development in South Africa.

1.3 The South African Futures Exchange (SAFEX)

SAFEX is the body that governs the futures market in South Africa. Itsmembership consists of banks, stockbrokers, futures brokers and certainother institutions. All of the approximately 87 members must own at leastone seat in order to be able to trade.

The market is three-tiered, with clearing members who guarantee all tradesdone in the market, non-clearing members (either broking or non-broking)who must clear trades through a clearing member, and clients who mayonly trade through a broking member.

On 6 August 2001, the Minister of Finance granted approval for theacquisition of SAFEX by the JSE. In terms of this acquisition, the businessof SAFEX was incorporated into the JSE as a new derivatives division.

1.4 Bond Exchange of South Africa (BESA)

BESA is the body to be empowered, under license, by the Registrar ofFinancial Markets to regulate the fixed interest securities market.

50

Membership comprises banks, insurers, investors, stockbrokers andindependent intermediaries. Operations of the Bond Exchange aregoverned by the Financial Markets Control Act.

2. Bank legislation

2.1 Banks Act of 1990

The main objective of this act is to create a framework for regulating andsupervising the business of accepting and employing deposits made bythe general public. The regulations are aimed at establishing andmaintaining financially sound banking institutions which conduct theirbusiness in such a way as to safeguard the investments of depositors andto protect the integrity of the banking system. Further, it is designed toensure an efficiently functioning overall financial system. The interests ofpotential depositors are protected by the act’s prohibition on the conductof deposit-taking business by persons not registered as a bank.

The act adopts a functional instead of an institutional approach in so faras it addresses the function of accepting and employing deposits and notthe institutions acting as banks. The advantages of such an approach arethat different groups of banks can be regulated in terms of a single actand that inequalities and discrepancies in the regulation of differentgroups of institutions can be eliminated.

The act covers:

■ interpretation and application of the act;■ administration of the act;■ authorisation to establish, register and cancel registration of banks;■ shareholding in, and registration of controlling companies in respect

of banks;■ functioning of banks and controlling companies with reference to the

Companies Act;■ prudential requirements;■ provisions relating to aspects of the conduct of the business of a bank;■ control of certain activities of unregistered persons; and■ general provisions.

51

2.2 Consolidated supervision

Recent directives and minimum standards issued by the EuropeanCommunity (EC), as well as the Basle Committee on BankingSupervision, require regulatory authorities to exercise proper consolidatedsupervision of the domestic and international activities of banking groups.

In order for South African regulatory authorities to comply with interna-tionally accepted norms, and to facilitate the international expansion ofSouth African banks, requirements regarding consolidated supervision on a domestic and international basis have been updated and implemented.Consolidated supervision results in:

■ The preparation of consolidated returns, with specific emphasis beingplaced on the capital adequacy and large exposures of a banking group.This consolidation includes the foreign operations of local banks. Italso entails a holistic approach to the supervision of all entities, bothbank and non-bank, in a financial services group.

■ Special emphasis is placed on ensuring close co-operation between thevarious domestic regulatory authorities, as well as closer co-operationwith international regulatory authorities.

3. South African Reserve Bank

The South African Reserve Bank was founded in 1920. Like all centralbanks, its primary function is the control of money and credit. TheReserve Bank’s stock is held by about 750 private stockholders. Thegovernment achieves control through its right to appoint six of the twelvedirectors, including the governor and deputy governor.

The responsibilities of the Reserve Bank are many, and include:

■ formulating and implementing monetary and exchange rate policies;■ issue of notes and coinage;■ clearing bank for the banking system, since prescribed levels of

deposits must be held with the Reserve Bank;■ the operation of the exchange control mechanism;■ bank of rediscount and lender of last resort;■ custodian of national bullion and foreign exchange reserves;■ selling of gold bullion on international markets;

52

■ banker and adviser to the government and quasi-government;■ control of banking institutions by issue of regulations;■ engaging in open market operations to regulate money supply, interest

rates or foreign exchange rates;■ representation of South Africa with foreign governments, foreign

financial institutions and international banking organisations; and■ collection of statistics and data from banking institutions.

A wholly owned subsidiary of the Reserve Bank, the Corporation forPublic Deposits (formerly known as the National Finance Corporation of South Africa) acts as the interest-paying arm of the Reserve Bank. The Corporation for Public Deposits accepts deposits from the public andprivate sectors and invests these in government, municipal or publiccorporation securities. The corporation is not in competition with theprivate banking sector. This is reflected in its lower interest rate structure.It is a vehicle for assisting banks and provides a vital link in the chainmaking up the money market.

4. Parastatal institutions

There are a number of specialised institutions operated or funded bygovernment, whose functions are to fulfil government objectives in thisrapidly developing country. These are:

4.1 The Land Bank of South Africa

This institution receives funding from various sources, including theprivate banking sector. Owing to difficult agricultural conditions in SouthAfrica, loans are made available to bona-fide farmers at favourable rates.These rates are below market rates but are sufficient to ensure the LandBank’s solvency.

4.2 The Post Office Savings Bank

This is not a true bank since it accepts deposits only and does not extend credit.

The Post Office Savings Bank operates a sophisticated electronic banking network which is linked to those operated by the banks andbuilding societies.

53

4.3 The Development Bank of Southern Africa

This institution was founded jointly in 1983 by the governments of SouthAfrica and those of the then TBVC countries (Transkei, Bophutatswana,Venda and Ciskei). It receives funding from the public sector fordevelopment of major capital works or business undertakings in econom-ically underdeveloped areas of the Republic.

4.4 The Industrial Development Corporation

Established in 1940, the Industrial Development Corporation of SouthAfrica Limited (IDC) provides financing to entrepreneurs engaged incompetitive industries. Even though the IDC is state-owned, it functions asa private enterprise, following normal company policy and procedures inits operations, paying income tax at corporate rates and dividends to itsshareholder, while reporting on a fully consolidated basis.

Their vision is to be the primary driving force of commercially sustainableindustrial development and innovation to the benefit of South Africa andSouthern Africa.

The IDC’s primary objectives are to contribute to the generation ofbalanced sustainable economic growth in Southern Africa and to furtherthe economic empowerment of the South African population, therebypromoting the economic prosperity of all citizens. The IDC achieves thisby promoting entrepreneurship through the building of competitiveindustries and enterprises based on sound business principles.

They do not seek shareholding control or management participation. Theirrole is to assist financially. Financial participation is usually by way ofloan finance, but other financial instruments include equity, quasi-equity,wholesale finance, share warehousing, guarantees, export/import financeand short-term trade finance. Finance is only made available after compre-hensive risk management assessments.

4.5 Business Partners

This company was founded in 1981 as a joint venture between the publicand private sectors with the goal of promoting the development of smallbusinesses in South Africa. It does this by providing loans, guaranteeingprivate sector bank loans and providing training and guidance to suchenterprises.

54

55

5. Insurance companies

Both long and short-term insurers operate on a large scale in South Africa.

The industry is controlled by the Financial Services Board. This is aregulatory and supervisory body which is self-funded by the financialinstitutions it regulates and supervises.

Life insurance is dominated by South African companies. Short-terminsurance is carried on by both foreign and domestic insurers.

Many pension funds are underwritten by the life insurance companies.There is no state pension fund.

The role played by insurance companies in the investment field in thecountry is immeasurable.

For more information on the South African insurance industry, go towww.kpmg.co.za for KPMG’s annual insurance survey.

6. International finance organisations

South Africa is a founder member of, and actively participates in, thedeliberations of these international financial and economic organisations:

■ International Monetary Fund (IMF);■ World Bank;■ International Bank of Reconstruction and Development (IBRD);■ International Finance Corporation (IFC); and■ International Development Association (IDA).

South Africa is a shareholder and member of the Bank for InternationalSettlements and is a signatory to the General Agreement on Tariffs andTrade (GATT).

For more information on the South African banking industry, go towww.kpmg.co.za for KPMG’s annual banking survey.

6.1 Registered banks – locally controlled

56

ABSA Bank Ltd +27 11 350 4000 www.absa.co.zaAfrican Bank Ltd +27 11 256 9000 www.africanbank.co.zaAfrican Merchant Bank Ltd +27 11 784 9112 www.amb.co.zaBOE Bank Ltd +27 31 364 4400 www.boe.co.zaBrait Merchant Bank Ltd +27 11 507 1000 www.brait.co.zaCape of Good Hope Bank +27 21 480 5000 www.coghb.co.zaCapitec Bank Limited +27 21 809 5900 -Cashbank Ltd +27 21 415 1300 -CorpCapital Bank Ltd +27 11 283 0110 www.corpbank.co.zaFBC Fidelity Bank Limited +27 11 630 7111 www.nedcor.co.zaFirst National Bank of Southern Africa Ltd +27 11 371 2111 www.fnb.co.zaFirstRand Bank Ltd +27 11 371 8336 www.firstrand.co.zaGensec Bank Ltd +27 11 778 6000 www.gensec.co.zaImperial Bank Ltd +27 11 879 2000 www.imperialbank.co.zaInvestec Bank Ltd +27 11 286 7000 www.investec.comMarriott Merchant Bank Ltd +27 31 366 1219 www.marriott.co.zaMEEG Bank Ltd +27 47 502 6200 www.meegbank.co.zaMercantile Bank Ltd +27 11 302 0300 www.mercantile.co.zaMLS Bank Ltd +27 11 486 1430 www.mlsbank.co.zaNedcor Bank Ltd +27 11 630 7111 www.nedcor.co.zaNedcor Investment Bank Ltd +27 11 480 1000 www.nib.co.zaOld Mutual Bank Ltd +27 21 503 4111 -PSG Investment Bank Ltd +27 21 680 5800 www.psgib.comRand Merchant Bank Ltd +27 11 282 8000 www.rmb.co.zaRennies Bank Ltd +27 11 407 3211 www.renniestravel.co.zaSasfin Bank Ltd +27 11 887 7310 www.sasfin.co.zaSecurities Investment Bank Ltd +27 11 328 9000 -TEBA Bank Ltd +27 11 203 1500 www.tebabank.comThe Standard Bank of South Africa Ltd +27 11 636 9112 www.standardbank.co.zaUnibank Ltd +27 11 259 7000 -

Institution Code Tel no Web address

6.2 Registered Banks – foreign controlled

6.3 Registered branches of foreign banks

6.4 Registered mutual banks

Registered banks at 1 July 2001 as supplied by the South African ReserveBank. Telephone numbers are, where possible, those of the chief executive.For further information, visit www.resbank.co.za.

57

Albaraka Bank Ltd +27 31 307 2972 -Habib Overseas Bank Ltd +27 11 834 7441 -HBZ Bank Ltd +27 31 360 0400 www.hbzbank.co.zaInternational Bank of Southern Africa Ltd +27 11 644 3300 -TA Bank of South Africa Ltd +27 11 770 1000 -The South African Bank of Athens Ltd +27 11 832 1211 -

Institution Code Tel no Web address

ABN Amro Bank NV +27 11 685 2000 www.abnamro.comBank of Baroda +27 31 209 0133 -Bank of China Johannesburg Branch +27 11 520 9600 www.bankofbaroda.comBank of Taiwan South Africa Branch +27 11 880 8008 -Barclays Bank Plc, South Africa Branch +27 11 441 6300 www.barclays.co.ukChina Construction Bank

Johannesburg Branch +27 11 520 9400 www.ccbjhb.comCitibank NA +27 11 280 2200 www.citibank.comCommerzbank Aktiengesellschaft +27 11 328 7600 www.commerzbank.comCrédit Agricole Indosuez +27 11 240 0400 -Deutsche Bank AG +27 11 775 7000 www.db.co.zaING Bank NV South Africa Branch +27 11 302 3200 www.ingbarings.comMerrill Lynch Capital Markets Bank Ltd +27 11 305 5000 www.ml.comMorgan Guaranty Trust Co of New York +27 11 507 0300 www.jpmorgan.comSociété Générale +27 11 488 1400 www.socgen.comState Bank of India +27 11 788 6746 www.statebank.co.za

Institution Code Tel no Web address

GBS Mutual Bank +27 46 622 7109 www.gbsbank.co.zaVBS Mutual Bank +27 15 516 3542 -

Institution Code Tel no Web address

6.5 Foreign bank representative offices in South Africa

58

American Express Bank Ltd +27 11 403 0052 www.amex.co.zaBanca di Roma +27 11 784 7758 -Banco BPI, SA +27 11 622 4376 -Banco Comercial Português +27 11 622 0847 -Banco Espirito Santo e

Comercial de Lisboa +27 11 616 5382 www.bes.ptBanco Totta & Açores SA +27 11 616 3156/7 -Bank Leumi Le-Israel BM +27 11 447 5033 www.leumi.comBank of America, National Association +27 11 784 9292 www.bankofamerica.comBank of Cyprus Group +27 11 784 3940 www.bankofcyprus.co.zaBanque Bruxelles Lambert SA +27 11 784 1464 www.bbl.beBanque Commerciale du Congo +27 11 883 9125/6Banque Privée Edmond de Rothschild

Luxembourg +27 11 728 5050 www.lcf_rothschild.luBNP Paribas +27 11 884 8032 www.bnpparibas.comBarclays Private Bank Ltd +27 11 441 6300 www.barcap.comBayerische Hypo-und

Vereinsbank Aktiengesellschaft +27 11 482 2022 -Bayerische Landesbank Girozentrale +27 11 442 5038 www.blb.deBelgolaise Bank +27 11 883 9125Berliner Handels-und Frankfurter Bank +27 11 302 3072 -China Everbright Bank,

South African Representative Office +27 11 784 5689 www.cebbank.comChristiania Bank og Kreditkasse ASA +27 12 348 6962 www.nordea.comCommerzbank AG +27 11 328 7600 www.commerzbank.comCoöperatieve Centrale Raiffeisen-

Credit Commercial de France +27 11 294 5000 www.hsbc.comCredit Industriel et Commercial +27 11 646 0930 -Crédit Lyonnais +27 11 883 0600 -Credit Suisse +27 11 884 6741 www.credit-suisse.comCredit Suisse First Boston +27 11 505 0000 www.csfb.comDeutsche Bank AG +27 11 883 4812 www.deutsche-bank.deDresdner Bank AG +27 11 380 0600 -Dresdner Kleinwort Wasserstein Limited +27 11 380 0600 -Export-Import Bank of India +27 11 442 8010 www.eximbankindia.com

(continued)

Institution Code Tel no Web address

Foreign banks with approved local representative offices at July 2001 assupplied by the South African Reserve Bank. Visit www.resbank.co.za

For further information please visit www.kpmg.co.za or contact

John Louw telephone +27 (11) 647 7101 john.louw@kpmg.co.za

59

First Union National Bank +27 11 447 5373 www.firstunion.comFortis Bank (Nederland) NV +27 11 783 5908 www.fortisbank.comHambros Bank Ltd +27 11 784 5050 www.za.sg-ib.comHellennic Bank Ltd +27 11 783 0155 www.hellenicbank.com.cyHSBC Equator Bank Plc +27 11 2945000 www.equator-africa.comKBC Bank NV +27 11 783 3720 www.kbc.beKredietbank SA Luxembourgeoise +27 12 348 6962 www.nordea.comLaiki Banking Group +27 11 607 9200 -MeesPierson (CI) Ltd

South Africa Representative Office +27 11 783 0014 -Merita Bank Plc +27 12 348 6962 www.nordea.comNatexis Banques Populaires +27 11 784 4040 www.nxbp.banquepopulaire.frNational Bank of Egypt +27 11 880 8170 -National Bank of Malawi +27 11 325 7086 -Nordbanken AB +27 12 348 6962 www.nordea.comRabobank International +27 11 442 4649 www.rabobank.comRoyal Bank of Canada +27 11 784 4317 www.rbcprivatebanking.comRoyal Bank of Canada Europe Limited +27 11 784 5065 www.royalbank.comSociété Générale – South Africa +27 11 488 1400 www.sg-ib.comStandard Chartered Bank +27 11 484 7556/7 www.standardchartered.comSumitomo Mitsui Banking Corporation +27 11 706 8675 www.smbcgroup.comThe Bank of Tokyo-Mitsubishi Ltd +27 11 884 4721 -The Chase Manhattan Bank +27 11 507 0300 www.chase.comThe Rep. Off. for Southern and Eastern

Africa of The Export-Import Bank of China +27 11 783 0767 www.eximbank.gov.cnUBS AG +27 11 322 7900 www.ubswarburg.comUnibank A/S +27 12 348 6962 www.nordea.comUnion Bank of Nigeria Plc +27 11 883 3313 www.unionbanking.comVereins- und Westbank AG +27 11 482 2022 -Westdeutsche Landesbank Girozentrale +27 11 884 0410 www.westlb.co.uk

Institution Code Tel no Web address

60

Designed by world-renowned architect Sir Herbert Baker, the Union Buildings proudly overlook South African capital city, Pretoria (to be renamed Tshwane).

Chapter 7

Taxation in South Africa

1. Introduction

The public revenue requirements of South Africa are at present derivedfrom the following taxes:

■ Income taxes: The provisions relating to these taxes fall within theIncome Tax Act, no.58 of 1962.

■ Indirect taxes: The provisions relating to these taxes fall within theValue-Added Tax Act, no.89 of 1991 and the Customs and Excise Act,no.91 of 1964.

■ Other taxes: The provisions relating to these taxes fall within the Estate Duty Act, no.45 of 1955; the Stamp Duties Act, no.77 of 1968;the Transfer Duty Act, no.40 of 1949 and the Skills Development Act,no.9 of 1999.

The Income Tax Act, the Value-Added Tax Act, the Customs and ExciseAct, the Estate Duties Act, the Stamp Duties Act, the Transfer Duties Actand the Skills Development Act are all administered by the Commissionerfor South African Revenue Services (SARS) whose offices are located inPretoria. He appoints Receivers of Revenue to collect the taxes due.

At present there are no municipal income taxes in South Africa. Propertyowners pay assessment rates based on the rateable value of their respective properties.

In addition, most areas levy a further tax to provide the requisite funding forthe third tier of government, namely the regional services councils or boards.These levies consist of a services levy based on all remuneration paid by anenterprise and an establishment levy which is calculated on turnover. Thelevies are treated as a deductible business expense for the purpose ofincome tax. The rates of the levies vary depending on the location of theenterprise and are all less than one percent.

61

1.1 Budget Proposal 2001

In his budget speech on 21 February 2001, the Minister of Financeannounced certain changes to the tax laws. The draft legislation in respectof most of these changes was tabled in Parliament in July 2001. Theproposed changes include an increase in the exemption in respect of interestincome, a decrease in the rate applicable to donations tax and estate duty,the introduction of an investment allowance for strategic industrial projectsand an investment deduction for small business corporations.

The introduction of capital gains tax was delayed until 1 October 2001.

Paragraphs 2 to 4 have not been amended to include the budget proposalsas legislation has not yet been promulgated.

2. Income tax

Income tax is the most important element of the tax system and is dealtwith in the first part of this chapter.

2.1 Fundamentals of the South African income tax system

■ At present income tax is levied by the central government only, and notlevied by provincial authorities.

■ The South African income tax system is changed from a sourced-basedsystem of taxation to a residenced (worldwide) system with effect fromyears of assessment commencing on or after 1 January 2001 and tax islevied with reference to taxable income. Taxable income in respect of aSouth African resident is gross income received by or accrued to suchresident, not of a capital nature less any exempt income and less allallowable expenditure actually incurred in the production of that income.

■ Taxable income in the case of any person other than a resident is grossincome received by or accrued to such person, not of a capital nature,from a source within or deemed to be within South Africa, less exemptincome and less all allowable expenditure actually incurred in theproduction of that income.

■ In certain cases income having a source outside South Africa, isdeemed to be from a South African source.

62

■ Dividends on South African shares held by a South African residentindividual, trust, company and a close corporation are exempt fromincome tax.

■ A close corporation is similar to a private company incorporated underthe Companies Act. It is a simpler organisation governed by simplerrules, aimed at the smaller business.

■ Foreign dividends received by or accrued to a South African residentbecame taxable with effect from 23 February 2000.

■ Capital gains are subject to capital gains tax (CGT) with effect from1 October 2001. In the case of companies, close corporations and othertrusts, 50% of capital gains will be subject to CGT at normal rates. Inthe case of natural persons and special trusts, 25% of capital gains willbe subject to CGT at normal rates.

■ Charitable donations made by a taxpayer are not allowed as adeduction in the determination of taxable income. Limited donations to public benefit organisations are, however, allowable.

■ Every company is a separate taxable entity. There is no scheme ofrelief for companies in a group.

■ There are different tax tables for natural persons and persons other thannatural persons (ie trusts and deceased estates); companies and closecorporations are taxed at a single rate.

■ A natural person’s tax year ends on the last day of February or June.Companies’ tax years usually coincide with their financial years. Atrust’s tax year ends on the last day of February. These tax years areknown as the year of assessment.

■ Assessed losses incurred in any year of assessment may be set offagainst subsequent years’ taxable income. There is no limit to the timein which the losses can be utilised. In the case of assessed lossesderived by companies from trading activities, the loss will fall away ifthere should be a full year’s interruption in those trading activities.

■ Tax paid in a particular tax year is not refundable by reason of lossesincurred in a subsequent tax year, ie no roll-back of losses.

63

■ A trust is taxed on its taxable income unless the Income Tax Act modifiesthis rule by deeming the income of the trust to be taxable in someoneelse’s hands (such as the donor or beneficiary).

■ A trust is taxed on the income it retains. Beneficiaries are taxed on theincome passed to them from the trust. Deductions and allowancesallocated against the income accruing to the beneficiaries are deductiblein the hands of the beneficiaries. However, these deductions andallowances will be limited to the beneficiaries income earned from thetrust. The deductions and allowances in excess of the beneficiaries’income may be deducted by the trust in that year, but limited to thetrusts’ income. The deductions and allowances which exceed the trust’sincome in that year will be allowed in the following year against thebeneficiaries income, subject to the same limitations.

■ With effect from 1 March 2001, where income vests in a beneficiarybecause of the exercise of the trustee’s discretion, none of thedeductions or allowances attributable to the income constitutesdeductions or allowances in the hands of the beneficiary.

■ In addition, with effect from 1 March 2001, where a resident acquires avested right to an amount representing capital of a non-resident trustand such capital arose from income of the trust during any past yearsduring which the resident had a contingent right to such income andsuch income has not been subject to tax in the Republic, then theaccumulated income accruing to the resident must be included in hisincome and the year of accrual to him of the capital.

2.2 Normal income tax

2.2.1 Non-provisional taxpayers

2.2.1.1 Standard Income Tax on Employees (SITE)

■ Employees who derive their income by way of a salary, wage or similarpayment in respect of their employment will have employees tax (SITEand/or PAYE) deducted by their employers.

■ Such tax collections are allocated to the specific year of assessment.

■ Persons in standard employment earning less than the annual equivalentof R60 000 from net remuneration for the year of assessment ending

64

28 February 2001 are subject to Standard Income Tax on Employees(SITE) only.

■ SITE is a final tax.

■ SITE is not normally refundable.

■ A person subject only to SITE does not have to submit an income tax return.

2.2.1.2 Pay As You Earn (PAYE)

Employees earning remuneration in excess of R60 000 or those who arenot in standard employment or not in receipt of “net remuneration” will besubject to PAYE.

2.2.2 Provisional taxpayers

All other taxpayers are classified as provisional taxpayers and will include:

■ all companies;

■ persons who derive their income from carrying on a business, trade orprofession, ie not by way of remuneration;

■ persons who earn more than R2 000 income from sources other thanremuneration;

■ any director of a private company if such director is ordinarily residentin South Africa or if such company is managed and controlled or hasits registered office in South Africa;

■ any member of a close corporation if such member is ordinarilyresident in South Africa; and

■ any person notified by the commissioner that he is a provisional tax payer.

Persons over the age of 65 years (other than directors of privatecompanies) whose taxable income will not exceed R80 000 and is derivedonly from remuneration, dividends, interest or rental from letting ofproperty are exempt from paying provisional tax. Payment of tax will bemade on assessment.

65

A natural person must apply to be registered as a provisional taxpayerwithin 30 days of becoming a provisional taxpayer.

2.2.2.1 Estimates of taxable income

■ Provisional taxpayers are required to estimate their income for the tax year in question. Such estimates are subject to certain restrictionsas set out hereafter.

■ Provisional taxpayers are required to make tax payments during theyear based on that estimate.

■ These payments are required to be made twice a year.

■ In some cases, a voluntary third “top up” payment can be made.

■ There are exceptions to this rule for certain classes of taxpayers.Persons who derive their income mainly from farming, diamonddigging or fishing make only one annual payment before the end of their tax year.

■ A person who has tax deducted from his remuneration fromemployment can still be a provisional taxpayer.

2.2.2.2 Provisional tax payments

■ A provisional taxpayer is required to submit a duly completed IRP6 formto the Receiver of Revenue with his provisional tax payment.

■ First payment

– The first payment must be made not later than six months prior tothe commencement of the year of assessment.

– The calculation of tax payable is based on the taxpayer’s estimate of his taxable income for the current year of assessment.

– Unless prior approval has been obtained from the Receiver ofRevenue, the estimate of taxable income cannot be less than thetaxpayer’s last assessed taxable income. This figure is normallyshown on the IRP6 form.

– The tax payable will be one-half of the total estimated or assessedtax due, calculated for the full year. Any employees’ tax deductedcan be utilised to reduce the tax payable.

66

■ Second payment

– The second payment must be made not later than the last day of theyear of assessment.

– The tax payable is the tax calculated for the full year based on thetaxpayer’s estimate of his taxable income. See the section on“Penalties” below for restrictions on this estimate.

– Any payment made in respect of the first period will be deductedfrom the tax payable.

– A taxpayer may also deduct any employees’ tax which has beendeducted by the employer from any remuneration.

■ Third payment

– This is a voluntary payment and applies only to companies whosetaxable income exceeds R20 000 and to those persons other thancompanies whose taxable income exceeds R50 000 for the tax year.

– The payment must be made not later than seven months after theend of the tax year in the case of February year ends and in allother cases within six months of the year end.

– The top-up payment must bring the aggregate of tax paid by way ofprovisional tax and employees’ tax payments to an amount equal tothe total tax due by the company or natural person for the year ofassessment in question.

– Interest at the current rate of 13% per annum (which is notdeductible for tax purposes) will be imposed on any outstandingtax due upon final assessment.

– Interest will run from the due date of the third payment until thedate of payment.

– Any tax overpaid by a company whose taxable income exceeds R20 000 for the year, or by any person other than a company with anannual taxable income in excess of R50 000 will be refundedtogether with interest at the current rate of 9% per annum calculatedfrom the due date of the third payment until the date of payment.Interest will also be paid where the taxable income falls below theabove two amounts and the overpayment exceeds R10 000.

67

– Interest paid to a taxpayer is taxable in his hands.

■ Penalties

– A penalty of 20% will be imposed if the estimate for the secondpayment is less than 90% of the taxable income for the year, asfinally assessed.

– This estimate would also have to be less than the taxable incomeshown on the last assessment received by the taxpayer for thepenalty to be applicable.

– The risk of incurring a penalty is avoided by always using thetaxable income shown on the last assessment received by thetaxpayer as the estimate.

– The penalty of 20% will be imposed on the difference between thenormal tax payable, based on the taxable income shown in theestimate, and the lesser of the tax payable on an amount calculated at90% of the taxable income as finally determined, and the tax due ascalculated using the last assessed taxable income.

– The commissioner is entitled to impose a penalty on any latepayments of provisional tax for the first and second periods. Thepenalty is 10% of the amount not paid. Interest is also payable on thelate payment at the current rate of 13% per annum.

■ Nil returns may be submitted in cases where:

– taxpayers have not previously been assessed; or– taxpayers have assessed losses.

2.2.3 Income tax returns – natural persons

■ Taxpayers with taxable income not exceeding an amount stipulated bythe commissioner and which is subject to SITE only, are relieved of theobligation to render income tax returns (Form IT12 or IT12s).

■ For the 2000/2001 tax year (in most cases, the year ending 28 February 2001) the stipulated amount is R60 000.

■ All other taxpayers must annually complete and submit a return of theirincome to the Receiver of Revenue.

68

2.2.4 Income tax returns – companies

All companies are required to submit a tax return each year (Form IT14).

2.2.5 Tax assessments

■ Following the determination of the taxable income for any tax year, a notice of assessment is issued by the Receiver of Revenue.

■ Any shortfall between the tax assessed and the amount of provisionaltax and/or PAYE paid, is due for payment by the second date asindicated on the tax assessment.

■ If an assessment is incorrect, an objection should be lodged within 30 days of the due date as indicated on the assessment.

■ These rules apply to persons as well as companies.

2.2.6 Overpayments

■ Refunds of overpayments of normal tax are made.

■ Refunds to taxpayers who are required to make the third topping-uppayment will also receive interest on their overpayment.

2.3 Specific provisions

2.3.1 Residence-based taxation

For tax years commencing on or after 1 January 2001, South Africanresidents are taxed on their worldwide income irrespective of the sourcethereof. The following definitions contained in section 1 of the Income TaxAct form the foundation of the residence based tax system:

“ ‘Gross income’ in relation to any year or period of assessment means:

(i) in the case of any resident, the total amount, in cash or otherwise,received by or accrued to or in favour of such resident; or

(ii) in the case of any other person other than a resident, the totalamount, in cash or otherwise, received by or accrued to or in favourof such person from a source within or deemed to be within theRepublic;

during such year of assessment …”

69

A resident is defined to mean “ a

(a) natural person who is –

(i) ordinarily resident in the Republic; or

(ii) not at any time during the year of assessment ordinarily resident in the Republic, if such person was physically present in theRepublic –

(aa) for a period or periods exceeding 91 days in aggregateduring the relevant year of assessment, as well for a periodor periods exceeding 91 days in aggregate during each ofthe three years of assessment preceding such year ofassessment; and

(bb) for a period or periods exceeding 549 days in aggregateduring such preceding years of assessment …

(b) any person (other than a natural person) which is incorporated,established or formed in the Republic or which has its place ofeffective management in the Republic (but excluding any internationalheadquarter company).”

The following elements have also been included in the new tax system:

■ With certain exceptions, the income tax base has been extended toinclude all income of South African residents. Foreign taxes paid areallowed as a credit against the South African tax liability.

■ The provisions of section 9D of the Income Tax Act have beenextended to impute all income of controlled foreign entities to theresidents with an interest in such entities.

■ In certain instances, business profits attributable to a permanentestablishment (business establishment) of a controlled foreign entity indesignated countries are not included in the income of the SouthAfrican resident. The designated country list is limited to thosecountries with whom South Africa has a double taxation agreementand that have a similar basis and level of taxation as South Africa.

■ Foreign residents will be taxed on their South African source income only.

70

2.3.2 Special allowances and deductions

In the determination of a taxpayer’s taxable income for normal taxpurposes, there are a number of special allowances and deductions whichare taken into account. Among these are:

■ Manufacturing plant and machinery – capital allowances

– From 15 December 1989, an allowance of 20% per annum on thestraight line basis may be deducted.

– For new or unused machinery or plant acquired and brought intouse during the period 1 July 1996 to 30 September 1999 oracquired under an agreement formally and finally signed by everyparty to the agreement during the period 1 July 1996 to 30 September 1999 and brought into use during the period 1 October 1999 to 31 March 2000, an accelerated allowance of 33% per annum on the straight line basis may be deducted. Thisaccelerated allowance also applies to lessors of manufacturing plantand machinery.

■ Farm equipment – capital allowances

– Farmers enjoy a deduction based on a 50:30:20 write off of any farm equipment.

– Agricultural co-operatives may claim an allowance of 20% perannum on the straight line basis on machinery or plant used forstoring or packing farm products of its members.

■ Hotel-keepers and lessors of hotel equipment

– An allowance of 20% per annum on the straight line basis may beclaimed on qualifying machinery, implements, utensils and articles.

■ Wear and tear allowances

– Wear and tear allowances are granted in respect of the use of non-manufacturing plant and machinery, implements, utensils and articles.

– These allowances generally allow a write-off of the cost of the assetover its estimated useful life.

– Estimated useful lives of particular assets have been set out by thethe Revenue Authorities in Practice Notes 19 and 39.

71

■ Industrial building allowances

– An annual allowance is granted at the rate of 2% per annum on thecost of buildings (excluding the cost of the land) brought into useprior to 1 January 1989. The cost of buildings, the erection of whichcommenced after 1 January 1989 will enjoy an annual allowance of5% per annum.

– An accelerated allowance of 10% per annum is granted on the costof buildings or improvements, the erection of which commencedduring the period 1 July 1996 to 30 September 1999 and which arebrought into use before 31 March 2000.

– To qualify for the allowance, a process of manufacture or similarprocess must be carried on in the buildings.

■ Scrapping allowances and recoupments

– There are provisions for making adjustments where assets in respectof which allowances have been claimed, are disposed of.

– A scrapping allowance may be claimed, where the proceeds ofitems scrapped are less than the written-down tax value.

– A taxable recoupment will arise should the proceeds exceed thewritten-down tax value.

– The taxable recoupment is limited to the amount of the allowancespreviously claimed.

■ Employees housing allowances

Where assets are acquired from a connected person as defined, the coston which the allowances are determined may, in certain circumstances,be limited to the lesser of the cost or market value of the asset to theconnected person.

■ There are a number of other special deductions provided for in the taxlegislation which are less frequently encountered than the above. Thereare also other concessions designed to assist industrialists. These will bedealt with in Chapter 9 – Incentives for business activities.

72

2.3.3 Withholding taxes

In addition to normal income tax, withholding taxes may be imposed onincome in certain instances.

2.3.3.1 Withholding tax on royalties paid to non-South African residents

■ 30% of the gross amount of royalties or similar payments (eg for “know-how”) made to non-residents who do not carry onbusiness in South Africa, is deemed to be taxable income, for suchresident, from a South African source.

■ The taxable portion of the royalty is subject to tax at the normal taxrates applicable to the recipient of the royalty.

■ The person paying the royalty is obliged to withhold tax at the rate of12% of the amount of the royalty.

■ The tax becomes payable 14 days after the end of the month in whichthe liability to pay the royalty was incurred.

■ This is not a final tax and an adjustment may be required on assessment.However, for years of assessment commencing on 1 January 2001, thiswill be a final tax. As a result of this amendment, royalties are exemptfrom gross income in accordance with section 10(1)(KA).

■ To claim a tax refund, the non-resident recipient of the royalty has toregister as a taxpayer in South Africa, and submit an income tax return.

■ Most double tax treaties that South Africa has with other countries,reduces the withholding tax rate to 0%. Approval must be obtained fromthe South African Revenue Service to use this exemption.

2.3.3.2 Non-resident shareholders’ tax on dividends

Non-resident shareholders’ tax on dividends was abolished for alldividends declared on or after 1 October 1995.

2.3.3.3 Non-resident tax on interest

The withholding tax on interest was abolished with effect from 16 March 1988.

73

2.3.4 Foreign exchange transactions

Generally, foreign exchange gains or losses whether realised or not andwhether capital or revenue, are included or deductible in the year that theyare incurred. The exception is exchange differences on loans of a capitalnature, received from non resident connected persons. In such an instancetaxation of the exchange differences on the loan are “pooled and thededuction for taxation purposes spread” over a period of 10 years.

2.3.5 Thin capitalisation

The thin capitalisation regime contained in the transfer pricing legislationof the South African Income Tax Act applies to both the amount of theloan and the rate of interest.

SARS issued guidelines during 1996 regarding their approach to thelegislation. These indicate that the maximum debt equity ratio should, in theabsence of prior approval to the contrary, be 3:1. Debt includes any interestbearing financial assistance including trade debt. Equity, however, does notinclude interest free loans. Interest free loans are taken into account whencalculating the effective interest rate paid on loans.

The exchange control regulation in relation to a company’s debt equity ratiowas withdrawn in November 1996. It was announced that the South AfricanReserve Bank (SARB) would leave the review of thin capitalisation to the taxauthorities. SARB approval is still required for overseas loans, in particular inrespect of the rate of interest to be charged.

If a company has trade losses in its current and/or immediately twopreceding accounting periods, such losses may be added back to equity forthe purposes of calculating the debt equity ratio. This is on condition thatthe investor was a shareholder (directly or indirectly) at the time the losseswere made and that the loan existed at the time.

Loans denominated in a foreign currency will be converted at theexchange rate applying when the financial assistance was granted if therand depreciates against the foreign currency.

The commissioner has a discretion to increase the 3:1 ratio. The taxpayermust apply in writing to the commissioner motivating why a higher ratio isrequired. The commissioner has indicated that he may allow financialinstitutions a higher ratio in certain circumstances and a newly

74

incorporated company may also be allowed a higher ratio for its firstaccounting period only.

The guidelines state that a foreign parent company bank guarantee will notconstitute financial assistance where it is given to a South African bank, butwould if given to a foreign bank. In addition, back-to-back arrangements willconstitute financial assistance. A back-to-back arrangement is when a foreignparent company makes a loan to a South African Bank, a foreign bank or anyother person, and the conditions of the loan are that the bank or other personon-lends the funds to the South African subsidiary of the parent company.

The maximum rate of interest depends on the denomination of the loan. For rand loans, the rate is the South African prime rate plus 2%. For otherloans, the rate is the relevant interbank rate plus 2%. However, for exchangecontrol purposes, the latter rate is not acceptable. Generally, the maximumapproved rate would be the relevant interbank rate plus 2% in the case of aforeign currency denominated loan, and the prime rate in the case of randdenominated loans.

Any amount disallowed under the transfer pricing (see 2.3.6 below) or thincapitalisation legislation will be treated as a distribution on which STC(see 2.3.7 below) would be applied, notwithstanding the fact that there maynot be any profits available for distribution.

2.3.6 Transfer pricing

Where a South African resident enters into an agreement in terms of whichgoods or services are supplied to or acquired from a non-resident connectedperson, the commissioner may, in the determination of the taxable income ofeither the acquirer or the supplier, adjust the consideration in respect of thetransaction to reflect an arm’s length price for the goods or services.

The arm’s length principle also applies to transactions between:

■ two non-residents where goods or services are supplied to or by a SouthAfrican permanent establishment of either of such non-residents;

■ two residents where goods or services are supplied to or by a foreignpermanent establishment of either of such residents; or

75

■ a resident and a non-resident where either is not subject to tax in SouthAfrica as a result of the application of any double tax treaty to whichSouth Africa is a party.

An amount that has been adjusted or disallowed in accordance with theabove provisions is deemed to be a dividend on which secondary tax oncompanies is payable.

2.3.7 Secondary tax on companies (STC)

STC is levied on dividend distributions made by both companies and closecorporations at the current rate of 12,5% of the net amount of the dividenddeclared. The net amount is dividends declared or deemed to be declared lessdividends received in a dividend cycle as defined. STC is a tax on thecompany and not a withholding tax levied on the shareholder. STC, therefore,increases the effective tax rate of the company or close corporation.

In the case of groups of companies where dividends are distributedupwards to the holding company, distributing subsidiaries may in certaincircumstances elect not to pay STC. A deduction would then not beallowed to the holding company for the dividends it received whencalculating its liability for STC on any subsequent dividend declared to itsshareholders. The legislation governing this tax is complex and there are anumber of anti-avoidance provisions. It is not considered appropriate toattempt to reproduce the legislation in any detail in this guide. Full detailscan be obtained from any KPMG office in South Africa.

2.3.8 Taxation of investment income from foreign sources

Section 9C of the Income Tax Act (ie the provision that dealt with thetaxation of foreign investment income) has been repealed with effect from1 January 2001.

2.3.9 Income from foreign sources

Income earned by a South African company as a branch in a foreignjurisdiction will not be subject to tax in South Africa, provided that thebranch is situated in a designated country and is subject to tax at astatutory rate of at least 27%. Should this not be the case, the foreignincome will be subject to tax in South Africa, but only in the year ofassessment during which such income may be remitted to South Africadue to currency or other restrictions imposed in terms of the law of suchforeign jurisdiction.

76

2.3.10 Exemption from income tax on interest earned by non-residents

Interest accruing to a person, other than a company, who is residentoutside the Republic and is physically absent from the Republic for aperiod or periods of at least 183 days in aggregate during the year ofassessment in which such interest is received or accrued, is exempt fromnormal income tax. This exemption shall not apply to any natural personwho was at any time a resident of the Republic if such person, has duringthe year of assessment carried on business in the Republic.

The same exemption applies to interest earned in the Republic by anycompany which is not a resident of the Republic. Where interest is earnedby such company after 1 April 1996, the exemption will only apply if inaddition to the fact that the company is not a resident of the Republic, theinterest is not effectively connected to a business carried on by it in theRepublic. For purposes of this exemption, “the Republic” is defined as allcountries within the Common Monetary Area. The Common MonetaryArea is the Republic of South Africa, Lesotho, Namibia and Swaziland.

2.3.11 Temporary residents

■ In terms of the fundamental source principle, all remuneration of non-South African residents (including any benefits arising fromemployment) in respect of services rendered in South Africa, is taxablein South Africa.

■ The source of such income is normally where the services are rendered.

■ Remuneration from a South African source is taxable in South Africa,regardless of where the employer is domiciled or where payment is made.

■ In terms of several of the double tax agreements with other countries, employees may be exempt from South African tax incertain circumstances.

■ In many instances, one of the conditions is that they are present inSouth Africa for less than 183 days in any one tax year (l March to thelast day of February).

■ There are, however, other provisions which may make theirremuneration taxable.

77

■ Remuneration for services rendered outside South Africa and retainerspaid, for example, as a consideration for an undertaking to rejoin aforeign employer, are normally not taxable in South Africa.

■ SITE and PAYE will be deducted in the normal way in respect ofemployees who are temporarily resident in South Africa.

■ Directors of companies and senior executives who are temporarilyresident will usually be registered as provisional taxpayers. They wouldthen make the required provisional payments to settle their tax liability.

2.3.12 Investment income of controlled foreign entities andinvestment income arising from donations, settlements and other dispositions

Income, which has accrued to a controlled foreign entity (CFE) to theextent that it is attributable to the participation rights of a South Africanresident in the CFE, is required to be included in the income of the SouthAfrican resident.

A CFE is defined as a foreign entity in which residents of South Africa,individually or jointly, directly or indirectly:

■ hold more than 50% of the participation rights; or

■ are entitled to exercise more than 50% of the votes or control of such entity.

The term “foreign entity” means any person (other than a natural person ora trust), who is not a resident or who is a resident but due to theapplication of a double taxation agreement entered into by South Africa, istreated as not being a resident.

This provision is in the nature of an anti-avoidance measure to preventresidents investing through an offshore entity so that taxable income isdeferred or avoided by accumulating or capitalising the income in aforeign entity.

78

2.3.13 New amendment: Section 7(8)

This legislation covers situations where income is received by or accruesto a non-resident in consequence of a donation or similar settlement madeby a resident; the attributable income would be included in the income ofthe donor.

2.3.14 Foreign dividends

All dividends from foreign registered or incorporated companies will formpart of the income of South African residents where such dividends accrueor are received on or after 23 February 2000, or where such dividends haveaccrued before 23 February 2000 but are received by the South Africanresident on or after that date. These provisions do not, however, apply toany dividend declared by:

■ a listed company before 23 February 2000; and

■ any unlisted company before 23 February 2000 if its chief executiveofficer and its external auditor (or an equivalent person) have declaredunder oath or affirmation that the dividend was actually declared bythe company before 23 February 2000.

When a shareholder has a shareholding of at least 10% (a “qualifyinginterest”) in a foreign company in a designated country, certain foreigndividends declared from profits that are taxed on a similar basis to that ofSouth Africa, and at a rate of at least 27%, are exempt from foreigndividends tax. A list of designated countries has been published in thegovernment gazette.

South African residents who are taxed on foreign dividends will be able toclaim a credit of foreign tax paid on the dividends against their SouthAfrican income tax liability, but limited to such liability. Local companieswill not be able to claim foreign taxable dividends as a credit in thecalculation of their liability for STC.

Interest expenditure incurred in earning foreign dividend income will beallowed as a deduction against such foreign dividend income during theyear of assessment during which such dividend income is included in thegross income of the taxpayer. The interest deduction is, however, limited:

■ to foreign dividend income included in the taxpayer’s gross income;

79

■ the amount whereby the interest expenditure exceeds the taxableforeign dividend income will be reduced by the amount of foreigndividend income (that is exempt from tax) received by or accrued tothe taxpayer during the relevant year of assessment;

■ the balance will be carried forward to the succeeding year ofassessment and be deemed to be interest actually incurred in thesucceeding year of assessment in the production of foreign dividends.

Unit portfolios constituting a company for tax purposes will not be taxedon foreign dividends which are distributed as a dividend to unit holders(such dividends will be taxed in the hands of the unit holders). Retirementfunds and insurers will also be taxed on their foreign dividends.

2.3.15 Donations tax

Donations tax is levied at a flat rate of 20% on the value of propertydonated. The first R25 000 of property donated in each year by a naturalperson is exempt from donations tax. Both husband and wife, irrespectiveof whether they are married in or out of community of property, areentitled to donate R25 000 each. Donations of property by spousesmarried in community of property will be deemed to have been made inequal shares by both spouses if the property falls within the joint estate.Where the property falls outside the joint estate, the donation will bedeemed to have been made by the spouse making the donation.

In the case of a taxpayer who is not a natural person, the exempt donationsare limited to R5 000 per year.

2.3.16 Capital gains tax

The capital gains tax (CGT) legislation has been inserted into the IncomeTax Act and became effective on 1 October 2001. This means that allcapital gains arising after 1 October may be subject to CGT.

Where does CGT fit in?

CGT is not a separate tax. Instead, taxable capital gains are added to the“taxable income” of a taxpayer (ie the amount, before rebates, which issubject to income tax). Assessed capital losses cannot, however, reduce the“taxable income”, but can only be carried forward to reduce future capitalgains, which would, effectively, reduce the amount of capital gains to beadded to “taxable income” in subsequent years.

80

Who is subject to CGT?

In line with the residence basis of tax, all persons who are residents forpurposes of income tax are subject to CGT on the disposal of theirworldwide assets. Non-residents are also subject to CGT but to a limitedextent. The following assets of a non-resident are subject to the tax:

■ immovable property situated in South Africa;

■ the assets of a permanent establishment in South Africa; and

■ a 20% interest in the shares of a company where 80% of its net assetvalue is attributable to immovable property situated in South Africa.

Triggering CGT

The CGT legislation is triggered when an asset is disposed of. The basicCGT calculation is set out in the following table:

proceeds from disposalless: base cost of asset

capital gain / loss

A capital gain or loss must be determined in respect of each asset disposedof. The gains and losses on all assets disposed of during the tax year areaggregated to arrive at a net capital gain or assessed capital loss for the year.

In the case of natural persons and special trusts, there is an annualexclusion of R10 000 that applies both to the capital gains and lossesarising during the year. If this exclusion is not used, it cannot be carriedforward to the following tax year. In the year that a natural person dies,this exclusion increases to R50 000.

The portion of the capital gain that is included is determined withreference to the particular type of taxpayer’s inclusion rate (see table thatfollows). Tax is payable on the taxpayer’s taxable income for the year at thenormal (income tax) rate applying to that particular type of taxpayer.

81

82

Effective CGT rates

What assets are subject to CGT?

The concept “asset” is defined very widely. It includes any form ofproperty and interests in property excluding any currency (gold andplatinum coins are however included).

Refer to the section dealing with “exclusions” below for examples ofassets not subject, or partially not subject, to the CGT legislation.

Disposal

A capital gain or loss only arises if an asset as defined above is disposedof. The disposal of an asset includes circumstances where ownership in anasset is transferred, for example, by means of sale, as well as a widevariety of other events such as the destruction or loss of an asset. Whencalculating a capital gain or loss, it is not only important to determinewhether a disposal has taken place but also when that disposal took place.Timing rules have been included to determine the time of disposal. Forexample, in the case of a sale, the disposal is deemed to take place at thedate the agreement of sale is concluded or, if it is subject to a suspensivecondition, then the disposal is deemed to have taken place at the date thecondition is satisfied.

Individuals/special trusts/testamentary trusts formed for the benefit of minor children 25 0–40 0–10

Companies 50 30 15

Small business corporations 50 15–30 7,5–15

Employment companies 50 35 17,5

Permanent establishments 50 35 17,5

Life assurers

- Individual policyholder fund 25 30 7,5

- Company policyholder fund 50 30 15

- Corporate fund 50 30 15

Trusts

- Other 50 40 20

Type of taxpayer Inclusion Statutory Effectiverate % rate % rate %

In addition to the abovementioned disposals, there are a number of circum-stances where an event is treated as a disposal even though an actualdisposal has not taken place. This includes, for example, the case where aperson becomes a South African resident and he is deemed to havedisposed of his assets at market value and immediately reacquired thesame assets. The timing of most of these deemed disposals and reacqui-sitions is deemed to be the day immediately prior to the particular event.

Proceeds

Proceeds include amounts actually received on disposal of an asset as wellas an unconditional right to receive payment.

Proceeds must be reduced by amounts:

■ already taken into account in determining the taxable income beforethe inclusion of any taxable capital gain;

■ that have been repaid or have become repayable to the disposer of theasset; and

■ whereby an unconditional right to receive payment has been reduced.

The legislation deems the proceeds to be equal to the market value of theasset disposed of in circumstances where:

■ the taxpayer receives consideration which is not measurable in money;

■ the asset is donated; or

■ the taxpayer receives consideration, which is not at arm’s length from aconnected person.

Special rules apply to the calculation of proceeds:

■ following the disposal of assets resulting from the death of a person; and

■ in respect of short-term disposals and acquisitions of identical financialinstruments between connected, or by the same persons.

83

Base cost

The legislation only applies to capital gains made on or after 1 October2001 (the valuation date). In order to ensure that only these gains areincluded, a distinction is drawn between pre-valuation date assets (assetsacquired prior to 1 October 2001 and not disposed of by this date) andpost-valuation date assets (assets acquired on or after 1 October 2001).

Post-valuation date assets

The base cost of an asset is made up of various costs incurred including:

■ the expenditure incurred in acquiring the asset;

■ other costs related to the acquisition or disposal of the asset;

■ maintaining or defending legal title to the asset; and

■ improvement costs in respect of improvements that are still reflected inthe asset at the date of disposal.

The following “holding costs” can only be included if the asset is usedwholly and exclusively for business purposes or if the asset is a listedshare or non-property unit trust:

■ maintenance, repair and insurance costs;

■ rates and taxes if the asset is immovable property; and

■ interest costs incurred to finance the acquisition or improvements.

These costs cannot be included in respect of any other assets and, in the case of listed shares and unit trusts; only one third of these costs can be included.

The base cost of an asset must be reduced by certain costs, for example, thosethat have been allowed as a deduction for normal income tax purposes.

Special rules apply to the calculation of the base cost of certain post-valuation date assets, for example, identical assets and non-SA assets of aperson who becomes a resident after valuation date.

84

Pre-valuation date assets

The base cost of a pre-valuation date asset is made up of the valuation datevalue of the asset plus allowable expenses incurred after valuation date.Generally, and subject to specific rules in respect of instruments referredto in section 24J of the Income Tax Act and identical assets, the valuationdate value could be one of four values (depending on inter alia theproceeds received on disposal and expenditure incurred on the asset):

■ market value of the asset at valuation date;

■ time-apportionment base cost;

■ 20% of proceeds received less expenditure incurred after 1 October 2001; and

■ the proceeds.

The legislation prescribes which valuation may be used depending on thecircumstances.

Market value at valuation date

The market value of an asset at valuation date will generally be the pricethat can be obtained between a willing buyer and a willing seller dealing atarm’s length in an open market. The market value of listed South Africanshares and unit trusts will generally be the average value of all transactionsin that financial instrument as traded during the five business days prior tovaluation date (these prices have been published in the GovernmentGazette 23037). In the case of foreign listed shares and units, the rulingprice on the last business day prior to valuation date is regarded as themarket value. The ruling price is the last sale price at close of business ofthe exchange, unless there is a higher bid or lower offer on that daysubsequent to the last sale, in which case the price of the higher bid orlower offer will prevail. If the ruling price is not determined in the abovemanner by the foreign exchange, it is the last price quoted (ie the averageof the buying and selling prices quoted) at close of business of the foreignexchange on the last day of September 2001.

Exceptions to the above general rules apply where a controlling interest (ie more than 35%) in a listed company has been disposed of and where alisted financial instrument was not traded during the last five days prior tovaluation date.

85

86

Taxpayers will have to obtain a valuation within two years from 1 October 2001. The valuation will have to be retained as proof of the basecost and be submitted when the asset is eventually disposed of. Thevaluation of the following assets must be submitted to the commissionerwith the first return submitted after 1 October 2003 (if the asset has notyet been sold) should the taxpayer wish to use a market value as thevaluation date value:

■ assets with a market value exceeding R10 million;

■ intangible assets (other than financial instruments) with a market valueexceeding R1 million; and

■ unlisted shares where the taxpayer’s total shareholding in a companyexceeds R10 million.

It must be remembered that the onus is on the taxpayer to prove the basecost of an asset. The taxpayer must ensure that a proper valuation isobtained; otherwise the commissioner can adjust the value.

Special rules also apply to the calculation of the market value on valuationdate in respect of the following assets:

■ long-term insurance policies – the greater of the surrender value of thepolicy on valuation date or the fair market value (according to theinsurer) thereof were the policy to run its remaining policy term;

■ fiduciary, usufructuary or similar interests in property – an amountcalculated similar to the market value of these interests for estate duty purposes;

■ property subject to a fiduciary, usufructury or similar interest – theamount by which the fair market value of the full ownership of theproperty exceeds the value of the interest determined as for estate dutypurposes; and

■ immovable property used for farming purposes – the Land Bank value or the price which could have been obtained upon a sale between a willing buyer and a willing seller dealing at arm’s length in an open market.

Time-apportionment

Before the taxpayer can make use of this method, he must have records ofall the expenses incurred in respect of the asset.

The base cost in terms of the time-apportionment method is determined inaccordance with the following formula:

Y = B + [(P – B) x N]/[T + N], where

B = allowable expenditure incurred prior to the valuation date

P = proceeds on disposal*

N = number of years asset was acquired prior to valuation date, to a maximum of 20

T = number of years from valuation date until disposal of asset

* where allowable expenses were incurred in more than one year of assessment,

P should be calculated as:

P = (T x B)/(A + B), where

P = proceeds in the above formula

T = proceeds on disposal

A = allowable expenditure incurred after the valuation date

B = allowable expenditure incurred prior to the valuation date

Rollover relief

Relief is provided in certain circumstances in the form of a deferral of thecapital gain to a later tax year. This relief is provided, subject to certainconditions, in the following circumstances:

■ Involuntary disposals: This is where an asset is involuntarily disposedof and compensation is received which is greater than the base cost,which compensation will be used to replace the asset disposed of.

■ Reinvestment in replacement assets: This is where certain qualifyingassets are disposed of for proceeds greater than base cost and theproceeds will be used to acquire replacement assets. This is limited toassets which qualify for capital allowances or deductions in terms ofsection 11 (e), 12B, 12C, 12E, 14 or 14b of the Income Tax Act.

■ Disposals between spouses.

87

■ Disposals of interests in unit trusts until the disposal of the unit by theunit holder.

■ Disposals in terms of certain:

– company formation transactions, which are defined as transactionsin terms of which a person, other than a trust which is not a specialtrust, transfers an asset to a resident company in exchange forequity shares of that company as a result of which that person holdsa qualifying interest in that company;

– share-for-share transactions, which are defined as transactions interms of which any person, other than a trust which is not a specialtrust, disposes of any equity share in a resident company to anyother resident company (“the acquiring company”) in exchange forequity share capital issued by the acquiring company;

– intra-group transactions, which are transactions in terms of whichassets are transferred between SA resident companies in the samegroup (75% holding);

– unbundling transactions between residents; and

– liquidation distributions by residents to their resident holdingcompanies (75% holding).

Exclusions

Certain capital gains and losses are excluded. The main exclusions are:

■ Primary residence: The first R1 million of any capital gain or loss onthe disposal of a natural person’s primary residence is excluded.

■ Personal use assets: Assets of a natural person that are used mainly forpurposes other than carrying on a trade.

■ Retirement benefits: Lump sum benefits paid from a South African orsimilar foreign pension, provident or retirement annuity fund.

■ Long-term insurance: Amounts paid in respect of specified insurancepolicies.

88

■ Small business assets: A “small business” is a business of which themarket value of all its assets at the date of disposal of the asset orinterest in the business does not exceed R5 million.

■ Compensation received by natural persons or special trusts for personalinjury, illness or defamation.

■ Gambling, games and competitions: This only applies to natural persons.

■ Non-property unit trust funds: Capital gains and losses of a unit trust –the unit holder will be liable for CGT upon disposal of any units.

■ Donations and bequests to a public benefit organisation.

Company distributions

Distribution of cash or assets in specie

A company is deemed to have disposed of assets for proceeds equal to themarket value of such assets where it makes a distribution of assets in specie.The shareholder is deemed to have acquired such assets at market value.

Where the shareholder of a company receives a capital distribution of cashor assets from that company, the base cost of his shares in the companywill be reduced by the amount of the capital distribution. A capital distri-bution is a distribution by a company that does not constitute a dividendfor purposes of the Income Tax Act or does constitute a dividend but is adividend distributed in the course of or in anticipation of liquidation orderegistration, and constitutes the distribution of profits derived during anyyear of assessment ended not later than 31 March 1993.

For example, a taxpayer purchased a share as a capital investment after 1October 2001 for R100. Two years later, the company in which the sharewas held then makes a distribution of profits earned prior to 31 March1993 of R20 in anticipation of deregistering. In the hands of theshareholder the share would have an original base cost of R100, but thisbase cost will be reduced to R80 after the distribution. If the share is thensold for R120, the sale will give rise to a capital gain of R40.

Where the capital distribution exceeds the base cost of the share, theamount by which the capital distribution exceeds the base cost must beadded to the proceeds on disposal of the share. Applying this to the aboveexample, but with the exception that the capital distribution amounted to

89

R110 per share, the base cost would be reduced to Rnil and R10 wouldneed to be added to the proceeds of R120. The capital gain wouldtherefore be R130.

Anti-avoidance measures apply to certain distributions where theshareholder is a connected person in relation to the company making thedistribution.

Capitalisation shares

The base cost of capitalisation shares issued by a company to itsshareholders is nil, except to the extent that the issue of such sharesconstitutes a dividend.

Record keeping

The onus is on the taxpayer to prove his capital gains or losses for the year.This means that it is essential for taxpayers to retain all records, which arerequired to determine the taxable capital gain or capital loss on thedisposal of each asset. Records include inter alia:

■ any agreement of acquisition, disposal or lease of an asset;

■ copies of valuations; and

■ invoices or other evidence of payment records such as bank statementsand paid cheques relating to costs claimed in respect of the acquisition,improvement or disposal of any asset.

2.4 Taxation on retirement funds

The Katz Commission (the commission of inquiry into certain aspects ofthe tax structure of South Africa) recommended, in its third interim report,certain proposals for reform of the taxation of the retirement fund industry.

Retirement funds can be divided into three categories:

■ statutory occupational retirement funds whereby employees andemployers are members of the same fund (these are private funds thatare approved by SARS and the Registrar of Pensions);

■ a non-occupational retirement vehicle, called a retirement annuity towhich only individuals belong (these funds are approved by SARS andthe Registrar of Pensions); and

90

■ funds created by specific statutes (these funds are generally establishedfor government employees).

These funds mentioned above are subject to taxation on retirement funds.

In his budget speech on 13 March 1996, the Minister of Financeannounced that government accepted a number of the principles thatshould be reflected in a new system of retirement fund taxation. In movingtowards the full implementation of the new system, an initial step wastaken in 1996 which altered the tax status of retirement funds.

2.4.1 Funds affected

The legislation defines the funds which it affects as being retirement fundsand the business carried on in an insurers’ untaxed policyholder funds inrespect of business carried on with retirement funds.

2.4.2 The effect

The effect of the legislation is that the affected funds are taxed on theirgross interest, plus their net rental income received or accrued, plus anyforeign dividends received or accrued on or after 23 February 2000, at arate of 25%.

Where, however, the market value of all the interest and rental-bearingassets of a retirement fund exceeds 50% of the market value of the totalassets of the fund, the taxable amount is limited by a prescribed ratio.

In addition, the tax does not apply to income from assets attributable toliabilities in respect of pensioners of a retirement fund or guaranteedannuities in the case of the untaxed policy holder fund of an insurer.

Income that is allocated by an insurer to a retirement fund will be taxed inthe retirement fund and not in the untaxed policyholder fund. The insurermust notify the retirement fund and the commissioner accordingly.

2.4.3 Payment of the tax

The tax is payable in respect of a six monthly period (tax period) whichcommences from 1 March 1996. The fund must make a first provisionaltax payment, calculated at 50% of the taxable amount of the prior period.This must be paid by 31 May or 30 November, for the periods 1 March to 31 August and 1 September to the last day of February,

91

92

respectively. A second provisional payment must be made within 25 daysof the end of the tax period and must, together with the first payment,equal not less than 90% of the final tax liability. The remaining amount ofthe tax outstanding must be paid within three months of the end of the taxperiod. The South African Revenue Services have issued specific forms forthese purposes.

The legislation provides for the payment of interest at the prescribed rate and a penalty of 10% of tax due when any tax is paid late. Thecommissioner may, however, remit the penalty if he considers it warrantedunder the circumstances.

2.4.4 Determination of the taxable amount

The legislation sets out a number of formulae which determine:

■ the income of the fund;

■ the taxable amount of the untaxed policyholder fund;

■ the taxable amount of the retirement fund; and

■ a limitation of the taxable amount subject to tax if the market value ofthe interest and rental-bearing assets of a retirement fund exceed 50%of the market value of all the assets of the fund.

2.5 The taxation of income derived from insurance business

2.5.1 Long-term insurers

2.5.1.1 Section 29

In September 1992, the Jacobs Committee issued its findings on ThePromotion of Equal Competition for Funds in Financial Markets in South Africa.

One of its recommendations, namely that long-term insurers be taxed onthe so-called “four-fund” approach, was introduced in terms of section 29of the Act in 1993. The principle underlying the approach is based on thetrustee principle and the recognition that long-term insurers hold andadminister funds on behalf of various categories of policyholders and eachcategory of policyholder should be taxed as a separate entity in accordance

with the applicable tax principles. Significant changes were made in 1999and a new section 29A was introduced effective for long-term insurerswhose years of assessment commence on or after 1 January 2000.

2.5.1.2 Four-Funds

Under the four-fund approach, insurers allocate their assets and liabilitiesto the following separate funds:

■ The untaxed policyholder fund (UPF): The assets and liabilities in thisfund represent business with tax exempt bodies as well as with pension,provident and retirement annuity funds, and business of a class which isknown as immediate annuity business.

■ The individual policyholder fund (IPF): This represents the businesswith policyholders who are not companies. The tax rate applicable tothis fund is 30%, which is purportedly representative of the averagerate of the tax applicable to individual policyholders.

■ The company policyholder fund (CPF): This represents business withpolicyholders who are companies and the tax rate applicable is thecorporate rate (currently 30%).

Each of the above funds are permitted to hold only sufficient assets havinga net value equal to the insurer’s liabilities to policyholders in that fund.Any surplus arising in a policyholder fund must be transferred to thecorporate fund (CF) and any deficit must be funded by a transfer in fromthe corporate fund.

■ The corporate fund (CF) represents the balance of the insurer’s assetsand will also be taxed at the corporate rate. This fund effectivelyrepresents shareholder’s funds.

The following are the main characteristics of section 29A:

In terms of the section, allowance for expenses will be determined in termsof a formula. Expenses, allowances and transfers allowed as a deduction inthe policyholder funds will be limited to the total of:

■ expenses and allowances directly attributable to the income of such fund;

■ a percentage of selling expenses determined by the formula set outbelow; and

93

94

■ a percentage of expenses not being expenses and allowances directlyattributable to the income of such fund (excluding expenses directlyattributable to any amounts received or accrued which are not income)determined in accordance with the formula:

Where:“Y” = the percentage to be applied to the amount“I” = the interest income of such fund“R” = the net rental income of such fund“D” = the dividend income of such fund

■ With the introduction of capital gains tax on 1 October 2001, theformula is amended as follows:

for the IPF:

for the CPF:

Where:“I” = interest income of such fund“R” = net rental income of such fund“F” = taxable foreign dividends income of such fund“L” = dividend income other than foreign dividends of such fund

It is proposed that these formulae are subject to a phasing-in approach.

■ the percentage (as determined by the above formula) of 50% of theexcess of market value of assets over liabilities, transferred from thepolicyholders fund to the corporate fund. This deduction cannot exceedthe balance of the amount of income of the policyholder fundremaining after taking into account the other deductions.

The proposed amendments are to reduce the allowable transfer to 40%of the excess.

(I+R) 100(I + 3R = 6D) 1

xY=

(I+R+F) 100(I+2,5R+4,75F+4,75L) 1

x

(I+R+F) 100(I+2R+3,5F+3,5L) 1

x

Transfer of profits to the CF will be a taxable event. No deduction will beallowed for the transfer from the policyholder funds other than as set outabove. Transfers from the CF to the policyholder funds will not be taxablein the policyholder funds or deductible from the CF. Return transfers fromthe policyholder funds to the CF from these so called “special transfer”will not be taxable in the CF.

The existing valuation method has been changed. The valuation ofliabilities in policyholder funds was previously based on the prescribedvaluation method laid down by the Financial Services Board. This hasbeen amended and the valuation of liabilities will in future be based on afinancial soundness valuation which is the method generally used forfinancial reporting purposes.

The change in the actuarial valuation basis will impact differently ondifferent insurers. Where the value of liabilities calculated in accordancewith the prescribed valuation method is greater than the value asdetermined in accordance with financial soundness valuation method,extra reserves will be released which will be taxed as profit. The transferin respect of this “transitional arrangement” is to be calculated on the firstday of the financial year commencing on or after 1 January 2000. This isas a result of transfers which will be required from the policyholder fundsto the CF. Where an insurer still has a balance on “special transfers”,unrecouped new business expenses, accumulated losses in the CF asdescribed in section 29, or selling expenses not deducted during the lastyear of assessment commencing before 1 January 2000, the transfer shallnot be included in the income of the CF to the extent of such balance onthe “special transfer”, unrecouped new business expenses, accumulatedlosses or selling expenses for the first year of assessment commencing onor after 1 January 2000.

2.5.2 Short-term insurance business

Short-term insurance business means any short-term insurance business(other than long-term insurance business) as defined in the Short-TermInsurance Act, 1998 (Act no.53 of 1998).

The taxable income of a short-term insurer is determined in accordancewith the normal provisions of the Income Tax Act.

Premiums received are taxable and claims paid out may be deducted fortax purposes.

95

The commissioner for the South African Revenue Services allows certainallowances to be deducted from the income of a short-term insurer. Theseallowances must be included in income in the subsequent year of assessment.These allowances are for unexpired risks, claims intimated but not paid andclaims not yet intimated or paid.

In addition to these allowances, a contingency reserve must be maintainedin terms of the Insurance Act. Movements to this reserve may be taken intoaccount for tax purposes. The Minister of Finance announced in his budgetspeech on 21 February 2001 that he intends to review the current practiceof allowing contingency reserves. It is anticipated that this allowance willbe disallowed in future years of assessment.

2.6 Current rates of taxation

Rates of taxation are subject to change, usually on an annual basis, bypronouncements made by the Minister of Finance in his budget speech. The relevant rates of tax applicable for any particular year are set out inKPMG’s annual South African taxation booklet. Copies of this booklet can be obtained, on request, from any of the KPMG offices in South Africa.It is also available on www.kpmg.co.za.

Some of the more important tax rates are:

2.6.1 Natural persons

Rebates of tax

96

Years of assessment ending 28 February 2003

Taxable income Rates of normal taxR R R R

0 - 40 000 18% of each R140 001 - 80 000 7 200 + 25% of the amount over 40 00080 001 - 110 000 17 200 + 30% of the amount over 80 000

110 001 - 170 000 26 200 + 35% of the amount over 110 000170 001 - 240 000 47 200 + 38% of the amount over 170 000240 001 + 73 800 + 40% of the amount over 240 000

Primary R4 860

Age 65 and over (additional to primary rebate) R3 000

2.6.2 Persons other than natural persons

2.6.3 Companies

2.6.3.1 Current rates of tax

Taxes for financial years ending during the period of twelve monthsending on 31 March:

Companies and close corporations (excluding long-term

insurers and companies mining for gold or natural oil and gas)

Secondary tax on companies (STC): On the net amount of

dividends declared

97

Years of assessment ending 28 February and 30 June 2002

Taxable income Rates of normal taxR R R R

0 - 100 000 + 32% of each R1100 001 + 32 000 + 42% of the amount over 100 000

2001 2002% %

Employment company (which includes a personal

service company) 35,0 35,0

Small business corporations:

■ First R100 000 of taxable income 15,0 15,0

■ Taxable income in excess of R100 000 30,0 30,0

Other companies and close corporations 30,0 30,0

Branch profits tax 35,0 35,0

2001 2002% %

prior to 14 March 1996 25,0 25,0

on or after 14 March 1996 12,5 12,5

2.6.4 Long-term insurance companies

Fundamental changes to the basis of taxation of long-term insurers wereintroduced in 1993.

Normal tax on taxable income derived from long-term

insurance business will be calculated at the following rates

STC – on the net amount of dividends declared

Dividends distributed by a long-term insurer out of profits derived duringany year of assessment which commenced prior to 1 July 1993 are,however, exempt from STC.

2.7.3 Mining companies

2.7.3.1 Gold mining companies

These companies may elect whether or not they wish to adopt the dualsystem of taxation and the consequent liability for STC. This electionmust be made by furnishing a notice in writing to the commissioner for

98

2001 2002

% %

prior to 14 March 1996 25,0 25,0

on or after 14 March 1996 12,5 12,5

2001 2002% %

With effect from the 2000 year of assessment the provisionsof section 29A are fully applicable to long-term insurers.

Normal tax on taxable income derived from long-terminsurance business will be calculated at the following rates

■ when determined under the provisions of section 29A(long-term insurance) in respect of

- the individual policyholder’s fund 30,0 30,0- the company policyholder’s fund 30,0 30,0- the corporate fund 30,0 30,0- the untaxed policyholder fund Nil Nil

SARS within six months after the date of commencement for mining for gold.

■ A gold mining company’s mining tax liability (as opposed to non-mining tax liability) is determined on a formula basis as follows:

– where it elected to follow the dual system, normal tax on incomederived from gold mining, in accordance with the formula:

y = 37 - 185/x

– where it has elected to be exempt from STC, normal tax on incomederived from gold mining, in accordance with the formula:

y = 46 - 230/x.

In both the above formulae:y = the percentage to be determined; andx = the ratio expressed as a percentage which the taxable income so

derived bears to the income so derived.

■ Non-mining income is taxed at the following rates:

– where an election to follow the dual system has been made:

– where an election has been made to be exempt from STC:

The terms “taxable income” and “income” specifically exclude so much asthe commissioner determines to be attributable to the inclusion in grossincome of the excess of amounts recouped over current and unredeemedcapital expenditure in terms of paragraph (j) of that definition in section 1 of the Act.

99

1999 2000 2001% % %

■ Normal tax on non-mining income 35,0 30,0 30,0

■ STC - on the net amount of dividends declared

- before 14 March 1996 25,0 25,0 25,0

- on or after 14 March 1996 12,5 12,5 12,5

1999 2000 2001

% % %

■ Normal tax on non-mining income 42,0 38,0 38,0

Each rand of the capital recoupments, included in gross income but specif-ically excluded from the above formulae, will be taxable at a rate equal tothe average rate of normal tax or 30%, whichever is the higher. Theaverage rate of normal tax is determined by dividing the total normal tax(excluding that to be determined in respect of recoupments for the currentperiod of assessment) paid by the company on its aggregate taxableincome from gold mining for the period 1 July 1916 to the end of theperiod assessed, by that aggregate taxable income.

Income from gold mining includes mining for silver, osmiridium, uranium,pyrites, or other minerals won in the course of mining for gold and anyincome which, in the opinion of the commissioner, results directly from gold mining.

2.6.5.2 Natural oil and gas mining companies

STC – on the net amount of dividends declared

Income from sulphur, salt or other minerals won in the course of miningfor natural oil is deemed to be income derived from mining for natural oil.

100

1999 2000 2001% % %

Normal tax 35,0 30,0 30,0

Additional tax of 40%, in respect of incomederived from mining for natural oil of the balanceremaining after deduction of normal tax - section 5(2A)

Y = 40 x 70 (Balance remaining after 100 deduction of normal tax) 26,0 28,0 28,0

Effective tax rate mining for natural oil 61,0 58,0 58,0

1999 2000 2001% % %

before 14 March 1996 25,0 25,0 25,0

on or after 14 March 1996 12,5 12,5 12,5

2.6.5.3 Mining companies other than those mining for gold or natural

oil and gas

STC – on the net amount of dividends declared

3. Indirect tax

3.1 Value-Added tax (VAT)

VAT is an indirect tax, which is largely directed at the domesticconsumption of goods and services and at goods and certain servicesimported into South Africa. The tax is designed to be paid mainly by theultimate consumer or purchaser in South Africa. It is levied at two rates,namely a standard rate (currently 14%) and a zero rate (0%). Supplieswhich are charged with tax at a zero rate are primarily supplies of goods orservices which are exported from South Africa. Certain farmers alsoqualify for the zero rating for supplies to them. Certain food stuffs qualifyfor the zero rating as well. Standard rated and zero rated supplies areknown as taxable supplies. Other supplies are known as exempt and non-supplies.

Very few business transactions carried out in South Africa are not subject toVAT. The tax is collected by businesses which are registered as vendorswith the South African Revenue Service, on all taxable supplies throughoutthe production and distribution chain. Sales or supplies by non-vendors arenot subject to VAT. Under the VAT system, vendors normally pay andreceive VAT on expenses (input tax) and charge VAT on supplies made(output tax). This mechanism therefore ensures that only the so-called“added-value” is taxed. Due to VAT being a self assessment system, theoutput tax collected may be reduced by the input tax paid. Thereafter the

101

1999 2000 2001% % %

Normal tax 35,0 30,0 30,0

1999 2000 2001% % %

■ before 14 March 1996 25,0 25,0 25,0

■ on or after 14 March 1996 12,5 12,5 12,5

net amount is payable to, or refundable by, the South African RevenueService. The self assessment returns are due regularly within prescribedperiods (tax periods).

VAT is imposed on three main categories of transactions:

■ taxable supplies of goods or services by registered vendors;

■ goods and certain services, imported by any person into South Africa; and

■ excise duties on locally manufactured goods which are sold at priceswhich exclude such duty.

Supplies by vendors are largely taxable supplies unless they are exempt.Supplies by non-vendors and exempt supplies are not taxable supplies. Theidentification of which supplies are taxable supplies and which are exemptsupplies is facilitated by the fact that there are a limited number of exemptsupplies. Irrespective of specified exempt supplies, the definition of“enterprise” also excludes the supply of certain goods and services, interalia, any activity carried on by a natural person as a hobby and the renderingof services by an employee to an employer for VAT registration purposes.

The following are all exempt supplies:

■ certain financial services – financial services include, inter alia, theprovision of, or transfer of ownership in a long-term insurance policy, a pension fund, retirement annuity fund or medical aid fund, theexchange of currency and the issue, allotment or transfer of ownershipin equity or participatory equities and the provision of credit;

■ rentals payable in respect of residential accommodation;

■ educational services and board and lodging supplied by registerededucational institutions;

■ fares in respect of transport of passengers by bus, taxi, or train; and

■ supplies of goods by associations not for gain, which were donated to them.

By implication, VAT is not payable on contributions to a medical aid fund, a pension fund, interest paid and received, and on train and bus fares.Similarly, no input tax incurred by the supplier of these exempt services

102

may be recovered. Taxi operators, for example, will therefore pay VAT onthe vehicle and the repairs, but will not charge tax on their fares (exemptsupply) and will not be in a position to recover the VAT incurred onacquisition or repair of the vehicle.

Unless a person is registered as a vendor, he cannot charge any VAT, andmoreover cannot recover any input tax. Registration as a vendor iscompulsory where a person carries on an enterprise in South Africa, orpartly in South Africa, continuously or regularly (whether for profit or not)and his turnover in respect of taxable supplies exceeds, or is expected toexceed, R300 000 per annum. Should his turnover in respect of taxablesupplies exceed R20 000 per annum, then the person may apply forvoluntary registration. Only in exceptional cases will registration as avendor be allowed if a person’s turnover is less than R20 000 per annum. Itfollows that a person who makes only exempt supplies cannot register as avendor for VAT.

It is important to note that a “person” registers for VAT and not anenterprise. For VAT purposes, the term “person” includes any naturalperson, a body of persons (whether corporate or unincorporated, ie apartnership or a club), any company whether resident in the Republic ornot, or a close corporation, a trust fund, local authorities, certain publicauthorities, and deceased or insolvent estates. It follows that where, forexample, a company trades through branches or divisions, and the totalturnover in respect of taxable supplies jointly exceeds the threshold ofR300 000, only one registration is required. In these circumstances,inter-branch or inter-divisional transactions will be disregarded. However,where such branches or divisions are clearly identifiable by their differenttrading activities or locations, provision exists for the separate registrationof branches and divisions, provided they maintain independent accountingsystems. In such circumstances inter-branch and inter-divisionaltransactions will be taxable. No provision exists for group registration.

Where a non-resident is required to register as a VAT vendor, he isrequired to appoint a VAT representative in South Africa, in circumstanceswhere the non-resident does not have a physical presence in South Africa.

3.2 Customs and excise duty

Duties in South Africa are governed by the Customs and Excise Act (Act 91of 1964). Parts of the Act, referred to as schedules, include:

103

3.2.1 Ordinary customs duties

Customs duties are levied on imported goods at rates applied ad valorem(on value) or specific (on a specialised unit of measure).

3.2.2 Additional customs duties

Additional specific and ad valorem customs duties are levied on certainimported and locally manufactured goods.

3.2.3 Excise duties and fuel levy

Excise duties are levied on locally manufactured tobacco, wine and beerwhile a fuel levy is imposed on petrol, diesel and other hydrocarbon fuel.

3.2.4 Anti-dumping duties

Certain products from certain nominated countries attract anti-dumping duties.

3.2.5 Industrial rebates of custom duties

Ordinary customs duties may under certain circumstances be rebated ifused to manufacture other goods.

3.2.6 Specific drawbacks and refunds of customs duties

Provision is made in specified instances, for example, subsequent export,for drawbacks and refunds of customs duties.

3.2.7 Rebates and refunds of excise duties

Provision is made for the rebate and refund of excise duty for certaingoods used in nominated industries.

3.2.8 General

Importers liable to Customs and Excise Duty are required to register withthe Department of Customs and Excise. Import control on certain productsis achieved by regulatory import permits issued by the Department ofTrade and Industry.

104

3.2.9 Trade agreements

South Africa forms part of one of the world’s oldest common customsareas with Botswana, Lesotho, Swaziland and Namibia.

South Africa has signed a preferential trade agreement with the EuropeanUnion and is in the process of finalising a preferential trade protocol withthe Southern African Development Community.

South African exporters can make use of preferential tariff treatment incountries, inter alia, the United States of America, Japan, Switzerland andthe European Union, in terms of their General System of Preferences(GSP). The United States of America is also offering preferential tarifftreatment to certain African countries, including South Africa in terms ofthe African Growth and Opportunities Act which was passed during 2000.South Africa has amended the Customs and Excise Act to make provisionfor the opportunities under this act.

4. Other taxes

4.1 Estate duty

Estate duty is levied at a flat rate of 20% after an abatement of R1 million from the net value of an estate.

4.2 Stamp duty

There are numerous rates of stamp duties that apply to varioustransactions. Details regarding stamp duty can be obtained from any ofKPMG’s offices in South Africa or from KPMG’s annual South Africataxation booklet, which is available on request or from www.kpmg.co.za.

4.3 Transfer duty – immovable property

Transfer duty on the transfer of immovable property is payable on thegreater of cost or market value at the following rates:

Persons other than natural persons, including %the estate of a deceased person and any trust 10

Natural persons:-■ on the first R70 000 1■ from R70 001 to R250 000 5■ excess over R250 000 8

105

No duty is payable by a natural person on the purchase of a dwelling orbuilding site for a dwelling, the costs of which do not exceed R70 000 and R30 000 respectively, if the transaction is concluded on orafter 1 April 1999. However, this exemption does not apply to packagedeal transactions, ie where vacant land is purchased together with acontract for the erection of a dwelling thereon. Furthermore, no transferduty is payable on transactions subject to VAT.

4.4 Skills development levy

In terms of the Skills Development Levies Act, every employee as definedin the Fourth Schedule to the Income Tax Act, 1962 (Act No. 58 of 1962)must pay a skills development levy of 1% (previously 0,5% from 1 April2000 to 1 April 2001) of the “leviable amount”.

The levy was introduced in 1999 with the funds being utilised to financetraining initiatives.

5. Budget Proposal

The most important changes announced in February 2002 by the Ministerof Finance include:

5.1 Rates of tax

The income levels on which the tax rates for individuals and certain trustsare calculated on a sliding scale, were increased resulting in lower effectivetax rates with effect from 1 March 2002.

Special trusts and testamentary trusts established for the benefit of minorchildren will be taxed at the individual tax rates with effect from 1 March2002. All other trusts will be taxed at a flat rate of 40%.

5.2 Primary rebates

The primary rebate for individuals has been increased to R4 860(previously R4 140) and the rebate for taxpayers who are 65 years or olderhas remained the same at R3 000.

106

5.3 Interest and dividend exemption

With effect from 1 March 2002, the interest exemption is to be increasedfrom R4 000 to R6 000 for individuals under the age of 65 and fromR5 000 to R10 000 for those who are 65 years and older.

Foreign interest dividends will only be exempt up to R1 000 out of thetotal exemption.

5.4 Provisional tax thresholds

The provisional tax threshold in respect of individuals below the age of 65earning non-employment income will be increased from R2 000 toR10 000 per year. Deemed foreign income where a taxpayer does notadequately report foreign assets, a deemed amount (calculated using theofficial rate of interest) will be included in the taxable income of thattaxpayer.

5.5 Accelerated depreciation allowance

New manufacturing assets acquired within three years from 1 March 2002will be allowed to be depreciated over four years. Forty percent of the costwill be deducted in the first year and 20% in the subsequent three years.The allowance will only apply to new plants and machinery which havenot been used before by any person and which are acquired and broughtinto use in the taxpayer’s manufacturing business from 1 March 2002.

5.6 Depreciation in respect of low cost assets

Currently, any asset costing R1 000 or less may be written off in the yearin which it is acquired. This threshold is to be increased to R2 000 forassets acquired on or after 1 March 2002.

5.7 Wage incentive

Draft legislation in respect of a wage incentive programme has beenreleased for public comment and it is expected that final legislation will beintroduced in August 2002.

5.8 Small business corporations

Small business corporations are currently taxed at 15% on the firstR100 000 of taxable income – it is proposed that this threshold be increased

107

to R150 000. The benefits applicable to small businesses currenly only applywhere the annual turnover is less than R1 million – it is proposed that this beincreased to R3 million.

5.9 Donations tax

Donations up to R30 000 (previously R25 000) for individuals and up toR10 000 (previously R5 000) for companies not considered being publiccompanies would be exempt from donations tax.

5.10 Excise duties

Duties in respect of alcohol (excluding sorghum beer), cigarettes andtobacco have increased. Duties in respect of mineral water and non-alcoholicbeverages have been reduced to nil.

5.11 Securities tax

Marketable securities tax and uncertified securities tax are to be removed inrespect of the repurchase of certain warrants.

5.12 Fuel levies

A fuel levy is to be introduced in respect of environmentally friendly fuels.The offshore diesel fuel concession is to be extended.

For further information, please visit www.kpmg.co.za or contact

Daniel Fölsher telephone +27 (11) 328 3000 daniel.folsher@kpmg.co.za

108

Chapter 8

Double Taxation Agreements

1. Introduction

Countries with which South Africa has comprehensive double taxationagreements are:

* (Under UK treaty)

In terms of the United States/South Africa treaty, a company resident inthe United States of America will be able to claim a foreign tax credit forSecondary Tax on Companies (STC) paid in relation to dividends receivedfrom a South African company.

Although the United Kingdom/South Africa treaty does not cover STC, theUK Revenue Authorities have confirmed that, subject to certain conditions,STC will be a creditable tax under UK domestic tax legislation.

AlgeriaAustraliaAustria BelgiumBotswana Canada CroatiaCyprusCzech RepublicDenmark EgyptFinland France Germany Grenada* Hungary IndiaIndonesia

IranIrelandIsrael ItalyJapanKoreaLesotho LuxembourgMalawi MaltaMauritius Namibia NetherlandsNorwayPakistanPeople’s Republic

of ChinaPoland

RomaniaRussian FederationSierra Leone*SingaporeSlovak RepublicSwazilandSwedenSwitzerlandThailandTunisiaUgandaUnited KingdomUnited States of

AmericaZambiaZimbabwe

109

Tax treaty negotiations/renegotiations are in progress with many countries.Details, as at 20 February 2002, are as follows:

In terms of the general agreements, industrial or commercial profits(excluding dividends, interest and royalties), rentals and remuneration forservices (with restrictions for temporary visits) generally incur liability fortax on a source basis for non-residents. South African residents are taxedon their worldwide income from years of assessment commencing on orafter 1 January 2001. Such items are as a rule taxable in the contractingstate in which they arise, but only if they arise through a permanentestablishment situated in that state. The state of residence either excludessuch income from taxation or grants a credit limited to the tax liability inthe state of residence. In the case of other income, such as royalties,taxation may be imposed in both the country of domicile and the countryof source. However, the maximum rate at which tax may be levied on suchclasses of income is limited to a stipulated figure.

South Africa does not levy withholding tax on the payment of dividends,management fees, service fees, rentals or interest.

Negotiated/renegotiated, not signed

BetaneBotswanaBulgariaEstoniaEthiopiaGabonGermanyKuwaitLatviaLithuaniaMalawiMalaysiaMoroccoMozambique

NetherlandsPortugalRwandaSpainSultanate of OmanSwazilandTanzaniaTurkeyUkraineUnited Arab EmiratesUnited Kingdom (new treaty)ZambiaZimbabwe

Signed, not ratified

Ratified in South Africa

Being negotiated not finalised

SeychellesNew Zealand

GreeceNigeria

BangladeshQatarSri Lanka

110

2. Rates of withholding tax in terms of South Africa’s double

taxation agreements

Rates of withholding Royaltiestax on payments totreaty countries:

Algeria 10% if the recipient is the beneficial owner of the royaltiesAustralia 10% if the recipient is the beneficial owner of the royaltiesAustria ExemptBelgium Exempt if the recipient is the beneficial owner of the royaltiesBotswana 15%Canada 6% if copyright royalties, royalties relating to software, patents

or know-how; 10% in all other casesCroatia 5% if the recipient is the beneficial owner of the royaltiesCyprus Exempt if the recipient is the beneficial owner of the royaltiesCzech Republic 10% if the recipient is the beneficial owner of the royaltiesDenmark Exempt if the recipient is the beneficial owner of the royaltiesEgypt 15% if the recipient is the beneficial owner of the royaltiesFinland Exempt if the recipient is the beneficial owner of the royaltiesFrance Exempt if subject to tax in another contracting stateGermany Exempt Grenada 12% (under UK treaty)Hungary Exempt if the recipient is the beneficial owner of the royaltiesIndia 10% if the recipient is the beneficial owner of the royaltiesIndonesia 10% if the recipient is the beneficial owner of the royaltiesIran 10% if the recipient is the beneficial owner of the royaltiesIreland Exempt if recipient is the beneficial ownerItaly 6% if the recipient is the beneficial owner of the royalties

(continued)

Rates of withholding Royaltiestax on payments tonon-treaty countries:Standard rate 12%. Note: The 12% withholding tax is not a final tax. On submission

of a South African tax return, the taxable income will be deemed tobe 30% of the amount of the royalty. The amount will be taxed at therate of tax applicable to the taxpayer. The difference between the12% withholding tax and the actual tax will be adjusted onassessment. For years of assessment commencing on or after 1 January 2001, the 12% withholding tax will be regarded as a finalpayment made on behalf of such other person to the commissioner, in respect of the other persons liability for tax. Certain exceptionsapply with respect to withholding tax. Furthermore, the treaty rate is subject to obtaining treaty clearance from the South AfricanRevenue Authorities.

111

Rates of withholding Royaltiestax on payments totreaty countries:(continued)

Israel Exempt except for royalties from cinematograph or televisionfilms which are all subject to tax at 15% x company rate of tax.10% if the recipient is the beneficial owner of the royalties

Japan 10% if the recipient is the beneficial owner of the royaltiesKorea 10% if the recipient is the beneficial owner of the royaltiesLesotho 10% if the recipient is the beneficial owner of the royaltiesLuxembourg Exempt if the resident is the beneficial owner of the royaltiesMalawi Exempt in the hands of the recipient if subject to tax in the

other contracting stateMalta 10% if the recipient is the beneficial owner of the royaltiesMauritius Exempt if the recipient is beneficial owner of the royaltiesNamibia 10% if the recipient is the beneficial owner of the royaltiesNetherlands ExemptNorway Exempt if the recipient is the beneficial owner of the royaltiesPakistan 10% if the recipient is the beneficial owner of the royaltiesPoland 10%Republic of China (Taiwan) 10% if the recipient is the beneficial owner of the royaltiesRomania 15% if the recipient is the beneficial owner of the royaltiesRussian Federation Exempt if the recipient is the beneficial owner of the royaltiesSeychelles 12% (under UK treaty)Sierra Leone 12% (under UK treaty)Singapore 5% if the recipient is the beneficial owner of the royaltiesSlovak Republic 10% if the recipient is the beneficial owner of the royaltiesSwaziland Exempt if taxed in the hands of the recipientSweden Exempt if the recipient is the beneficial owner of the royaltiesSwitzerland ExemptThailand 15% if the recipient is the beneficial owner of the royaltiesTunisia 10% if the recipient is the beneficial owner of the royaltiesUganda 12%United Kingdom Exempt if taxed in the hands of the recipientUnited States of America Exempt if the recipient is the beneficial owner of the royaltiesZambia Exempt in the hands of the recipient if subject to tax in the

other contracting stateZimbabwe Exempt in the hands of the recipient if subject to tax in the

other contracting state

112

113

Chapter 9

Incentive schemes

Scheme Institution

Competitiveness Fund Dept of Trade and Industry

To encourage South Africanfirms to be competitive, both asexporters and in defence of theirlocal marketplace. The fund isparticularly designed to assistsmall, medium and microenterprises (SMMEs) inimproving their competitivenesssince 60% of the available fundswill be allocated to these firms.SMMEs will also receive limitedfree consulting services fromskilled professionals employedat technikons, universities andprivate consulting firms.

Available to all South Africanprivate firms of all sizes. Fundsare allocated on a first-come,first-served basis. Firms shouldsubmit a realistic plan for thedevelopment of its businessactivities.

The fund will support theintroduction of technical andmarketing know-how andexpertise to firms. The schemewill insist on a 50% contri-bution by the firm itself andgrants will be paid on areimbursement basis.

Objective Access criteria Description

Glossary

DTI Department of Trade and Industry

NEDLAC National Economic, Development and Labour Council

BTT Board on Tariffs and Trade

BRID Board for Regional Industrial Development

IDC Industrial Development Corporation

CGIC Credit Guarantee Insurance Corporation

SARS South African Revenue Service

114

Short-term Export Finance Guarantee Facility CGIC

To accelerate development ofSMMEs exporters by reducingthe level of exporters’ risk whichthe financial institutions bear

• Available to SMME exportersin all sectors.

• Enterprise must be privatelyowned, and independently orco-operatively owned andmanaged and must not formpart of a larger enterprise, but may have more than one branch.

• The exporter must beregistered with the DTI.

Pre- and post- shipment exportfinance guarantees areprovided to SMME exporterswho lack the ability to securefinance from banks. Thisenables the banks to makeavailable export finance toSMMEs. Guarantees areissued by the CGIC andreinsured with the DTI.

Export Marketing and Investment Assistance Schemes DTI

(EMA)

To assist exporters withprimary export marketresearch, with trade missionsand with exhibitions. (Soon tobe extended to inward andoutward investment missions)

Available to all exporters, butwith special terms for SMMEs

Scheme consists of four parts,viz: primary market research,outward selling trade missions,inward buying trade missions,exhibition assistance.

Medium-term Loan Financing IDC

To encourage establishmentand/or expansion of existingindustries

Available to all independentindustrialists or groups with assets not exceeding R120 million

The scheme is available for theestablishment of newindustries or the expansion ofexisting industries at interestrates based on medium-termcapital market rates.

Sector Partnership Fund DTI

To form linkagesTo promote competitiveness and productivity

Available to any partnership offive or more organisationswithin South African manufac-turing that puts forward aqualifying programme.

To support sub-sectorpartnerships in preparation oftechnical and marketingprogrammes with the aim ofimproving the competitivenessand productivity of firms. Upto 65% of costs of projects upto R1,5 million are covered.

Scheme Institution

Objective Access criteria Description

115

Life scheme IDC

Multi-shift scheme IDC

Expansion of productioncapacity and creation ofemployment

It provides low interest ratefinance to companies withassets of more than R1 millionfor projects which add at leastone eight hour shift and leadsto greater employment.

Offers industrialists a chanceof expanding operationsthrough the implementation ofan additional production shiftof eight hours

Orchards scheme IDC

To establish orchards and otherfarming infrastructure likedams, canals, irrigationsystems etc

It makes provision for lowinterest loans to any individualfarmer or to any group offarmers for a joint schemewhich is administered by a co-operative or otheracceptable body.

Creation of job opportunitiesin rural areas

Promotion of exports The scheme provides lowinterest rate finance for thepromotion of exports and isavailable to industrialists orgroups with assets of morethan R1 million for financingprojects of which 30% or moreis directed towards exports.

Provision of low interest ratefinance for the promotion ofexports

Job scheme IDC

Creation of employmentopportunities

The scheme provides lowinterest loans to any companycreating at least 10 new jobs atR100 000 per job or less.

Creation of additionalproduction capacity which inturn will result in the creation of additional employmentopportunities

Scheme Institution

Objective Access criteria Description

116

Normal finance IDC

To promote growth Available to small and mediumsized industrialists

Designed to assist the smallerand medium-sized industrialistin the growth phase of theirdevelopment

Import finance IDC

To promote growth Available to small and mediumsized industrialists

Provides credit and guaranteefacilities to local industrialistsfor the importation of capitalgoods and services

Finance for export of capital goods and services IDC, CGIC, banks

Promotion of exports of acapital nature. Facilitation ofextended repayment terms atworld market related interestrates denominated in USdollars.

Available to industrialists/exporters who are able toexecute the particular projectof a capital nature

Credit facilities for capitalgoods and services exportedfrom SA enable exporters tooffer competitive terms toforeign purchasers

Eco-tourism scheme IDC

To promote development inconservation

Available to conservationauthorities and private gamereserves

Provides financing for thedevelopment of new projectsas well as the expansion ofexisting facilities

World player scheme IDC

Improvement of internationalcompetitiveness

The scheme is made availableto textile, clothing andfootwear manufacturers andmotor vehicle componentmanufacturers whose importtariff on competitive productswill fall by at least 10percentage points.

Finance available to manufac-turers for the acquisition andmodernisation of fixed assetsor establishment and expansionof existing industry

Scheme Institution

Objective Access criteria Description

117

Standard leased factory building IDC

To make it possible forindustrialists to utilise capitalfor more productive purposesand to increase their borrowingpowers and cash flow

Available to small and mediumsized industrialists

The IDC makes generalpurpose factory buildingsavailable for lease.

Economic empowerment scheme IDC

To assist entrepreneurs fromthe historically disadvantagedcommunities

Available to entrepreneurs from the historicallydisadvantaged communities

Manufacturing businessesusually require owners fundingof at least 33% to 40% of thetotal funding to ensure long-term viability. The schemeprovides for a reduced contri-bution with the IDC providinga larger than normal contri-bution of the project funding.

Venture capital scheme IDC

To stimulate development Available to small and mediumsized industrialists

To stimulate development of various products or theestablishment of new venturesfor products with good growth potential

General tourism scheme IDC

To promote tourism Available to institutionsproviding accommodation tobona fide tourists

The scheme is aimed atrenovations, refurbishment andextension of existingaccommodation facilitiesalthough selected fewdevelopments will also beconsidered.

Scheme Institution

Objective Access criteria Description

118

Support Programme for Industrial Innovation (SPII) IDC as agent for DTI

SPII is designed to promotetechnology development inmanufacturing industries inSouth Africa through supportfor innovation of competitiveproducts and/or processes.

All private sector enterprises inthe manufacturing industrythat submit a meritoriousproject proposal and whichhave the ability to develop andcommercialise the product

Assistance takes the form of a grant of 50% of the actualdirect cost incurred in the pre-competitive developmentactivity, reaching a maximumgrant of R1 million per project

Duty credit certificate scheme for exporters DTI

of textiles and clothing (DCCS)

To improve export awareness,productivity and training witha view to achieving interna-tional competitiveness

To exporters of certainprescribed textile and clothingproducts

It is a temporary kick-startmeasure to enhance exportcompetitiveness by offering duty credit certificates toqualifying exporters.

Motor Industry Development Programme (MIDP) DTI

To increase competitivenessand productivity

Available to motor vehicleassemblers and componentmanufacturers and exporters

MIDP enables local vehicleand component manufacturersto increase production runsand encourages rationalisationof the number of modelsmanufactured by way ofexports and complementingimports of vehicles andcomponents.

World place challenge NEDLAC

To improve the country’scompetitiveness andemployment creation

It is available to South Africanfirms of all sizes.

To enhance cooperationbetween workers andmanagement to boost thecountry’s competitiveness andemployment creation byimproving industrialperformance and productivity

Scheme Institution

Objective Access criteria Description

119

Small/Medium Manufacturing Development DTIProgramme (SMMDP) (available from 1 October 1996)

To encourage investment inmanufacturing, encouragesmall and medium-sizedmanufacturing and facilitate ahigher degree of labourabsorption.

Available countrywide to localand foreign firms investing notmore than R3 million in land,buildings plant and equipment.Legal entities as well as soleproprietors and partnerships(excluding trusts),incorporated after 1 October1996 and engaged in new,secondary manufacturingprocessing.

Note: The incentives, as wellas the foreign investment grantare tax-exempted in terms of section 10(1)(zH) of theIncome Tax (Act No. 58 of)1962.

The incentive packageprovides for:

• an establishment grant payablefor three years, calculated at10,5% of qualifying assets;

• profit/output incentive,calculated at 25% of profitbefore tax, payable for anadditional one year;

• an additional two years profit/output incentive provided theindustrialist can meet orexceed the human resourceremuneration to value addedratio of 55% measured in thefourth financial year; and

• a foreign investment grant tooverseas companies investingin new machinery andequipment to establish newprojects in the RSA.

Technology and Human Resources for Industry FRD as agent for DTIProgramme (THRIP)

THRIP is aimed at enhancingthe competitiveness of SouthAfrican industry through thedevelopment of appropriateskilled people and oftechnology and encourageslong-term strategicpartnerships between industry,research and educationalinstitutions and government.

Research groups in the naturalsciences, engineering andtechnology within educationalinstitutions can participate incollaboration with any privatecompany or consortium ofcompanies.

Contributions provided byindustry and government tofinance the research efforts ofthe academic partners providedthat such research projectsinvolve the training ofstudents. R1 for every R2 fromindustry, and if certain criteriaare met, R1 for every R1 fromindustry could be granted.

Scheme Institution

Objective Access criteria Description

120

Accelerated Depreciation SARS

To encourage investment inmanufacturing and expansionof existing plants

Available countrywide to localand foreign firms establishingnew manufacturing plants orexpanding existing plants

Provides for the depreciationof plant and machinery overthree years and land andbuildings over five years

Emerging Entrepreneur Scheme Khula Enterprise Finance Limited

To increase access to financefor SMMEs through banks

Accessible to SMMEs that areindependently owned withassets of less than R2 millionbefore financing: SMMEsmust meet the bank’s normallending criteria

To enable an entrepreneur toaccess funding from his/herbankers for the establishment,expansion or acquisition of a new or existing business – the maximum indemnity is60–70% – the maximumfacility is R75 000.

Standard Credit Guarantee Scheme Khula Enterprise Finance Limited

To increase access to financefor SMMEs through banks

Accessible to SMMEs that areindependently owned, withassets of less than R2 millionbefore financing. SMMEsmust meet the bank’s normallending criteria.

To enable an entrepreneur toaccess funding from his/herbankers for the establishment,expansion or acquisition of a new or existing business –the maximum indemnity is 60–70% – the maximumfacility is R600 000.

Scheme Institution

Objective Access criteria Description

Rebate provisions DTI / BTT

Promotion of manufacturingand exportation of goods

Available to all manufacturingindustries

Provision exists for a rebate ordrawback of certain dutiesapplicable to imported goods,raw material and componentsused in manufacturing,processing or for export

121

Business Loans for Retail Financial Intermediaries Khula Enterprise (RFIs) Finance Limited

To provide business loans toRFIs with funding for orlending to SMMEs.

Accessible to experienced andless experienced RFIs whomeet Khula’s development andinstitutional criteria. Lessexperienced RFIs mustdemonstrate credible plans foroperations, management, creditpolicy guidelines and operatingprocedures and indicateoperational sustainability within60 months. Experienced RFIsmust be in a position to selffund the envisaged programmefor a minimum of the first twomonths of implementation andmust indicate operationalsustainability within three yearsand financial sustainabilitywithin five years.

Loans to RFIs for on lending to SMMEs. Loan amounts forless experienced RFIs rangefrom R1 million to R10million. Loan amounts forexperienced RFIs range fromR5 million to R100 million.

Seed Loans for Retail Financial Intermediaries Khula Enterprise (RFIs) Finance Limited

To provide initial capital tonew organisations to initiatetheir portfolio; and to fundoperational expenses over apredetermined period.

To qualify, an RFI must:

• be legally constituted;• have clearly defined SMME

target markets;• have sound accounting and

financial systems;• have sound internal organisa-

tional guidelines, policies and procedures;

• have the capacity to carry outcurrent and proposed projects;

• have clear, achievable short andmedium term objectives; and

• have matching funds of at least15% of envisaged operatingexpenses.

The amounts range between R50 000 and R20 million.Seed loans are converted togrants once mutually agreedupon performance criteria are met.

Scheme Institution

Objective Access criteria Description

122

For further information please visit www.kpmg.co.za or contact

Daniel Fölscher telephone +27 (11) 328 3000daniel.folscher@kmpg.co.za

Capacity building support for Retail Financial Khula Enterprise (RFIs) Finance Limited

To provide capacity-buildingsupport to new RFIs to initiate a loan portfolio and to assistexisting RFIs to expand theirloan portfolios.

To qualify, an RFI must:• be legally constituted• have clearly defined SMME

target markets;• have the capacity to carry out

proposed projects in terms ofstaffing, administration,reporting and financialmanagement;

• have the capacity to carry outcurrent and proposed projects;and

• have clear and achievableshort-and medium termobjectives.

The amounts range betweenR500 000 and R20 millionSeed loans are converted togrants once mutually agreedupon performance criteria are met.

Scheme Institution

Objective Access criteria Description

Low interest rate scheme for the promotion of exports IDC

Promotion of new investmentwhich is directed as exports

Available to independent industrialists or groups withtotal assets of approximatelyR1m or more. Large companieswith total assets exceedingR120 million, only partiallyqualify.

Low interest finance is madeavailable to industrialists for the acquisition of fixed assets(machinery and equipment) topromote new investmentdirected at exports.

Chapter 10

Industrial relations

1. Introduction

South Africa has a system of employment law and industrial relationswhich goes a long way and, in some respects, meets or exceeds interna-tional standards as embodied in the International Labour OrganisationConventions. It is a system underpinned by a web of statutory enactments,the competing strengths of organised business and labour and the unfairdismissal and unfair labour practice jurisprudence of the Labour Court.

2. Statutory enactments

The most important labour statute is the Labour Relations Act, 1995 (the“LRA”) which came into effect on 11 November 1996. The predecessorsof the LRA introduced the unfair labour practice doctrine into SouthAfrican law. They also created, in some industries, a system of collectivebargaining forums in the form of “industrial councils”. The mostsignificant of these was the Industrial Council for the iron, steel,metallurgical and engineering industry. There were other influentialindustrial councils in the construction, motor and textile industries.

The parties to the industrial councils (employer organisations and tradeunions) met, usually on an annual basis, to negotiate minimum wages andconditions of employment, to set up pension, provident and sick pay funds,training funds and to deal with other matters of mutual interest in theindustry. These “industrial councils” continue as “bargaining councils”under new 1996 legislation examined in more detail later in this chapter.

The Wage Act, 1957, provides a mechanism whereby the state is enabledto stipulate minimum wages and terms and conditions of employment fortrades or industries where no industrial council existed. These are knownas “wage determinations”.

123

Although there are a number of bargaining council agreements and wagedeterminations, they do not by any means cover all employers andemployees. Employers and employees who are not affected by suchagreements or wage determinations do however have their minimum termsand conditions of employment laid down in the Basic Conditions ofEmployment Act. This statute deals with, for example, maximum weeklyordinary working hours, maximum spreadovers, meal intervals, overtime,work on Sundays and public holidays, annual leave, sick leave andtermination of employment.

The Occupational Health & Safety Act, 1993, brings the country’s legalframework for regulating occupational health and safety closer to interna-tional standards and contemporary approaches in other countries. This isparticularly true of the systems for worker participation and the definitionof the employer’s general duty which is to provide and maintain, as far asis reasonably practicable, a working environment that is safe and withoutrisks to health.

Finally, the Compensation for Occupational Injuries and Diseases Act,1993, provides a system of compensation for work related industries.

3. Trade unions

Because of their history, the most active and effective of the trade unionsare those whose membership comprises mostly black workers. The oldracial divisions are however beginning to break down with white workersbeginning to join what were previously black trade unions. Some of theunions are well-organised and effective and have been able to securesignificant improvements in the working conditions of their members.

Statistics do suggest that unionised workers and, in particular blackworkers, have, over the years, fared significantly better in wage incrementsthan their white or non-unionised colleagues. The black trade unions arepredominantly socialist in orientation and often focus more on the short-term wellbeing of their members than on the greater good of the economy.They have also at times put their political agenda ahead of workplaceissues. Strike action has been a ready tool.

The three main union federations reflect some of the political divisions inthe country. They are therefore rivals for membership in the workplace andare not always able to present a unified front.

124

The biggest of the trade unions, COSATU, has always been an ANCaffiliate. Clearly now, there are tensions between the ANC government andCOSATU which will be played out over the next few years.

4. The constitution

The constitution which was adopted in 1996 contains in Chapter 2 a bill of rights. Included in these rights is the right to strike for the purpose ofcollective bargaining.

5. The Labour Relations Act, 1995

It is within the framework of the Constitution that the Labour Relations Act,1995 (LRA) has been prepared. The rest of this chapter deals with the newstatute which was passed by Parliament late in September 1995 and cameinto force on 11 November 1996.

5.1 Introduction to the new act

The LRA resulted from a process of extensive consultation and discussion,the most important of which took place at NEDLAC, a forum consistingof the state, organised labour and organised business.

In many respects, the act codifies the existing law and practice and thechanges will not have immediate effects on the way in which employersconducts their industrial relations. However, there are some fundamentalchanges which will be made and these will probably lead to a radicalrestructuring of South African employer and employee relations over thenext few years.

5.2 Scope

The act applies to all employees, including those previously excluded fromthe scope of the 1956 Labour Relations Act such as, for example, farmworkers, domestic servants, civil servants and teachers and lecturers. Onlymembers of the National Defence Force, the National Intelligence Agencyand the South African Secret Service are still excluded.

Certain rights are also extended to job applicants.

In principle, the act applies to all employees, whether permanent ortemporary, full time or part-time, and whether engaged on a fixed termbasis or indefinitely. However, independent contractors are not covered.

125

5.3 Collective agreements

A feature of the statute is that it recognises the importance of employers andtrade unions regulating their own relationships. In a number of importantrespects, the act envisages that employers and employees will be entitled to contract out of its provisions by way of collective agreements.

5.4 Discrimination

The act prohibits any unfair discrimination, whether direct or indirect, on any arbitrary ground, including but not limited to race, gender, sex,ethnic or social origin, colour, sexual orientation, age, disability, religion,conscience, belief political opinion, culture, language, marital status orfamily responsibility. However, “discrimination” based on the inherentrequirements of the particular position will not be unfair.

An important aspect of the discrimination provisions is that applicants foremployment will be regarded as employees and are therefore subject to theunfair labour practice law.

Following the provisions of the new constitution, the new act permitsmeasures intended to redress past unfair discrimination. There is as yet no positive obligation on any employer to introduce a programme ofaffirmative action. It is clear, however, that the existence or otherwise of an affirmative action programme is increasingly becoming an issue whengovernment contracts are awarded. Legislation or employment equity is in the offing.

The present approach of the government to the affirmative action issueappears to be that employers should be encouraged to introduce their ownprogrammes and they will be required to report on these programmes andon progress. If significant progress is not made over the next five years orso, then further legislation is likely to be introduced.

5.5 Unfair dismissal

Every employee has the right not to be unfairly dismissed. The law relatingto dismissal has been substantially codified.

Dismissals related to participation in protected industrial action, lock-outdismissals, pregnancy or discrimination will be automatically unfair.

126

Other dismissals will be unfair if not for a fair reason based on:

■ the employee’s conduct or capacity; or

■ the employer’s operational requirements, not in accordance with a fair procedure.

The fair procedure requirements are clear. The act does not contemplatethat a full scale disciplinary enquiry will be held; rather it requires thatthere should be a proper investigation during which the employee isallowed the opportunity to respond to the allegations and to state his or hercase. A code of good practice, forming part of the act, gives guidance onthe procedures to be followed.

The onus of proving that a dismissal was for a fair reason and was inaccordance with a fair procedure rests on the employer.

The primary remedy for an unfair dismissal is reinstatement.Compensation may be ordered but there are limits on what may have to be paid depending on whether the dismissal was unfair for proceduralreasons only, for substantive reasons (one year) or fell into the category of an automatically unfair dismissal (two years).

5.6 Collective bargaining

The act contemplates essentially three levels of bargaining:

■ at the workplace, through ordinary collective bargaining withrecognised trade unions;

■ at industry level, through bargaining councils; and

■ at national or macro level, through NEDLAC.

NEDLAC is to play a critical role. It has a number of roles assigned to itunder the act, including a role in the appointment and removal of judges ofthe labour court.

Workplace forums are not seen as part of the collective bargaining process.

127

128

5.7 Trade union organisational rights

Much of the already existing law and practice relating to the recognitionof trade unions has been codified. Issues such as trade union access and the recognition of shop stewards are matters of right and not thesubject of bargaining and power play. An employer who already has an existing recognition relationship with a trade union is not likely to be much affected. The position of minority unions is somewhatunclear but it appears that, if anything, their position will become weaker for most purposes.

5.8 Closed and agency shop agreements

Provision is made for the recognition of closed shop and agency shopagreements. It is widely expected that these provisions will be challengedin the constitutional court as offending against the freedom of associationprovisions of the constitution. Even the drafters of the legislation appear to expect this.

5.9 Bargaining councils

The present industrial councils will continue to exist, at least for the timebeing, but will now be known as “bargaining councils”. The powers andfunctions of the bargaining councils will be similar to those of the presentindustrial councils.

It is the clear policy of the act that the system of bargaining councilsshould be extended to cover all industries and that they should be the realforum for collective bargaining, thereby removing adverse issues fromplant level to industry level.

Bargaining councils will play a much more active role in dispute resolution.

5.10 Workplace forums

This is perhaps the most important change contemplated by the act andgives expression to the government’s commitment to workplace democracyand empowerment. It is an area where many employers have expressedmost concern.

The irony is that the trade unions also seem to be having difficulty comingto terms with the idea. They are concerned that workplace forums willgreatly limit their right to strike and have the potential to undermine theposition of unions. Their concerns are undoubtedly justified.

Employers, on the other hand, are concerned about giving up areas of the management prerogative, the idea of joint decision-making and thedisclosure of information provisions.

The prime objective of workplace forums is to provide a vehicle forworker participation in the running of the enterprise. The idea is that theissues which workplace forums will deal with will be non-adverse in theirnature. The workplace forum is thus not a forum for collective bargaining.

The three main functions of the workplace forums relate to:

■ the sharing of information with the employer;

■ the right to be consulted by the employer about proposals relating to a range of matters such as restructuring the workplace (including theintroduction of new technology and new work methods), partial or totalplant closures, mergers and transfers of ownership, retrenchmentexercises, job grading, criteria for merit increases or the payment ofdiscretionary bonuses, and product development plans; and

■ the right to joint decision making with the employer on a range ofissues, the most important of which relate to affirmative action andsocial benefit schemes, such as pension or provident funds.

The negotiation of wages and other terms and conditions of employment is a matter for collective bargaining and is not a workplace forum issue.

The expressed intention of the act with regard to workplace forums is to provide workers with an institutionalised voice in managerial decision-making and to facilitate a shift from adverse collective bargaining to jointproblem solving and participation. The anomaly is that the workplaceforums are employee bodies in which senior management is not represented. Accordingly, the workplace forum functionsindependently of management and there are doubts as to whether theadverse nature of South African labour relations will change significantlyunless all parities concerned commit themselves wholeheartedly to thenew approach.

129

5.11 Disclosure of information

The act contains far-reaching provisions compelling employers to discloseinformation to employees for various purposes.

■ Trade union representatives must be given all relevant information toenable them to perform effectively the various functions assigned tothem under the act. They must also be given all relevant informationthat will enable them to engage effectively in consultation andcollective bargaining.

■ In connection with workplace forums, an employer must disclose to theworkplace forum all relevant information that will allow the workplaceforum to engage effectively in consultation and joint decision-making.This includes a regular report on the financial and employmentsituation of the employer, its performance since the last report and itsanticipated performance in the short-term and in the long-term. Alsorequired is an annual report along similar lines to all employees.

■ The employer must also disclose wide-ranging information relevant toa proposal to dismiss employees for reasons based on the employer’soperational requirements.

The grounds on which the disclosure of information may be refused are,both in law and in fact, narrow. However, the real issue will always bewhat is “relevant”. On this, the act gives little guidance and the scope andinterpretation of “relevant” will be developed over the years through thedispute resolving procedures of the act.

Any dispute about the relevance of information must be referred to theCommission for Conciliation, Mediation and Arbitration (CCMA) forconciliation. If the conciliator is unable to resolve the matter, the dispute isreferred for arbitration. The award of the arbitrator is final and binding andno appeal lies from it.

This is a vexed area of the act. Employers will need to consider carefullywhat steps they can take in order to protect the confidentiality ofinformation which may have to be disclosed. Any confidential informationwhich may have to be disclosed must be identified as being confidential.

130

5.12 Dispute resolution

In the absence of a private collective agreement establishing a disputeresolving procedure, or a bargaining council agreement, any dispute arisingmust be referred to the CCMA. A conciliator will be appointed and he or shewill try to resolve the dispute by mediation or other conciliation procedures.

If the dispute is not resolved:

■ Certain disputes will then be referred to compulsory arbitration by anarbitrator appointed by the CCMA. The arbitrator’s decision will befinal and binding.

■ Other disputes, usually those involving large numbers of employees,discrimination cases and industrial action cases, will be referred to thelabour court.

■ Disputes which are not referred to arbitration or the labour court, if notsettled by conciliation, will be legitimate grounds for protected strikesand lock-outs.

The industrial court has been substantially restructured and the new labourcourt, with a much improved status, has the potential to play a veryimportant role in shaping a coherent and sensible jurisprudence for labourrelations in South Africa.

An important feature is that a strike on any issue which the act providesshould be referred to arbitration or to the labour court will not be aprotected strike. Thus, for example, strikes on recognition, dismissals,retrenchment, and other types of unfair labour practices will be resolvedby arbitration or the labour court and not by industrial action.

At a practical level, it is the time taken to establish the CCMA whichdelayed the coming into force of the new statute. The delay was entirelyproper as there appear to be insufficient people in South Africa with thenecessary skills to adequately staff the commission in the short term. Thesuccess of the act and the labour dispensation it introduced, dependeddirectly on the success or otherwise of the CCMA. It is encouraging thatpolitical considerations in favour of bringing the act into full operation assoon as possible do not appear to have outweighed the need for thoroughpreparation in the establishment of the CCMA.

131

132

5.13 Industrial action

The right to strike enshrined in the constitution is given substance in thestatute. Workers who engage in a strike in conformity with the act (“aprotected strike”) may not be dismissed except where their strike makes itnecessary based on the economic, technological, structural or similarneeds of an employer. Previous drafts referred to a threat to the continuedviability of the business.

The employer must then deal with the striking employees in the same way itwould deal with them were it embarking on a retrenchment exercise. This isnot, in fact, very different to recent judgements of the labour appeal court.Strikers who engage in criminal activity during the course of the strike, andemployees who engage in a strike which is not in conformity with the act,may be dismissed after a fair procedure has been followed.

Secondary or sympathy strikes, picketing and protest action are alsorecognised, regulated and protected.

“Scab labour” may be hired except in a lock-out situation or where thebusiness has been designated as a “maintenance service” or as an“essential service”.

The employer’s recourse to a lock-out is provided for, but lock-outs cannotany longer take the form of a dismissal. This was enshrined in the interimconstitution but it seems that the lock-out provisions may not survive atrade union onslaught under the new constitution unless the constitutionalcourt accepts that the lock-out is an integral and legitimate part of anemployer’s collective bargaining right.

5.14 Conclusion

The labour relations act paved the way for a major restructuring of SouthAfrican employer and employee relations. Employers need to keep abreastof these and subsequent changes to legislation.

The input to the above chapter has been provided by Bell, Dewar & Hall,attorneys. For further information, please contact Lewis Rosen telephone +27 (11) 647 7845

lewis.rosen@kpmg.co.za Keith Rosmarin telephone +27 (11) 647 7489

keith.rosmarin@kpmg.co.za

Chapter 11

Black economic empowerment

Eight years after all South Africans voted in their first democraticelections, the biggest challenge facing government and the people is toincrease black participation in all sectors of the economy, a process that iscalled black economic empowerment (BEE).

For many decades, the previous apartheid government deliberatelydisempowered the country’s black majority through laws that preventedthem from getting access to land, capital, good quality education and evenbusiness premises and jobs.

The result today is that black people are at the periphery involved inactivities that add little value to the economy. More than 40% of blacks ofworking age are unemployed; they do not participate at all in the economy.Of those who are employed, a large proportion is involved in low value-added informal sector activities.

Black ownership of assets on the stock market – JSE Securities Exchange– and elsewhere in the economy, is still very small. And black peopleconstitute a minority of South Africans in the management structures offormal sector companies.

Since the 1994 national elections, the government has sought to reverse thehuge apartheid legacy and development backlogs within a framework ofprudent fiscal policies that have resulted in a significant reduction in thebudget deficit, from a high of 10% in 1993 to current levels of about 2%.

Despite the fiscal constraints, government has managed to cut taxes onpersonal incomes and company profits and significantly expand theprovision of goods and services – such as health, housing, electricity andwater – to the previously excluded black majority. This has been achievedmainly through significant improvements in the efficiency of tax collection.

133

134

At the same time, the Reserve Bank’s conservative monetary policies havebrought the official inflation rate down from mid-teens during theapartheid days to below 7%. The consensus forecast of economists beforethe rand devaluation in December 2001, was that the inflation rate woulddrop below 6% by the end of 2002, a level that is within the ReserveBank’s inflation target of 3 – 6% for the year 2002. It is now expected thatthe inflation rate will rise marginally to 7% in 2002.

South Africa’s monetary and fiscal policies have resulted in macro-economicstability. As a result, the country has been called the “safe haven of emergingmarkets” because it has weathered the storms of recent episodes of financialcontagion – from East Asia, Russia, South America and, more recently,Turkey and Argentina – relatively well over the past few years.

Despite the stable macro-economic environment, the country’s economicgrowth rate has been disappointing, with economists expecting an average3% growth for the next three years. The challenge therefore is to find waysof creating new employment opportunities and increasing the productivityof all South Africans, especially the previously excluded black majority.

Since 1994, the government has vigorously implemented a wide range ofpolicies to achieve these objectives through the process of BEE. The aimof these government policies is to increase the participation of blackpeople in the economy – as workers, consumers of goods and services, andowners of thriving enterprises.

The key elements of BEE include:

■ employment equity legislation that requires companies, excluding verysmall businesses, to submit reports to the Department of Labour onprogress made in implementing affirmative action policies; and

■ affirmative procurement policies within the public sector and state-owned enterprises that give preference to companies with black equitypartners when awarding tenders and licenses in areas such as telecom-munications and gambling. The preferences have also been appliedwhen outsourcing services and during privatisation exercises.

The private sector, partly in response to these policies, has soldshareholdings or partial control in new and established businesses to blackinvestor groupings. The aims of corporate BEE have been to increase thecredibility of the free enterprise system among a black majority thattended to associate capitalism with the horrors of apartheid, and to widenthe group of beneficiaries beyond the current white elite groups.

Some of the transactions have been high-profile, involving the sale of verylarge companies that are listed on the stock exchange to black investorgroups. Others have been small greenfield joint ventures betweenestablished and emerging companies.

The “first wave” of BEE took place during the bull market that lasted untilthe 1998 when the stock market crashed on the back of financial contagionfrom East Asia and Russia. This period saw black consortiums acquiringstakes in companies in the media, financial services, information technology,telecommunications, gaming and petroleum sectors of the economy.

The largest black investor group is the National Empowerment Consortiumthat controls Johnnic, a diversified technology media and telecommuni-cations (TMT) with a shareholding in M-Cell, the country’s second largestcellular network provider. Other large groups include Hoskens ConsolidatedInvestments, a trade union-controlled group, with investments in Vodacom,the country’s largest cellular provider and the media. Black-controlled NewAfrica Capital controls Metropolitan Life, a large insurance company whileNew Africa Media has various media interests. Other large companiesinclude Mvelaphanda, which is set to become a major platinum producer,and Wipcapital, a financial services company.

The “second wave” of BEE after the 1998 stock market crash has resultedin the delisting of companies by black investors and a new trend towardsinvestments in unlisted companies. The new financing models are tied tocompany cash flows and not share prices.

They emphasise black operational involvement and sector focus. There area number of relatively large black groups that are not listed on the stockexchange. They include Pamodzi, with interests in food and catering;Nozala, which controls the country’s largest catering group, and EyesizweMining in the coal mining sector.

In almost all instances, a BEE transaction involves a degree of facilitationby the established company entering into a joint venture or asset sale to ablack investor grouping. This is because few black investor groupings haveaccess to large amounts of capital or collateral because of their historicalexclusion from the economy.

The facilitation can take many forms such as selling shares at a discount,allowing for deferred payment and other creative financing mechanisms,and developing innovative programmes to transfer skills. However, the

135

136

opening up of the economy to blacks and the implementation of BEEpolicies has resulted in the emergence of a number of relatively large blackinvestor groupings with the financial muscle to enter into commercialtransactions with little facilitation.

Over the past few years, many companies have modified their models ofincreasing black participation in their businesses. There is a trend towardsmodels that develop mechanisms for black participation beyond theboardroom and equity levels.

But the main lesson that many South Africans have learned is that it iscritical for all parties participating in a BEE transaction to be brutallyhonest and to clearly articulate the expected value-add from all parties up-front. Black investor groupings can add value by:

■ providing access to information flows that established white businessesdo not have;

■ providing deeper insights into the dynamics of the country’s mainconsumer markets;

■ providing a deeper understanding of the dynamics of productivity andlabour relations at an operational level; and

■ providing a competitive advantage when exploring business opportu-nities within the public sector and state-owned enterprises that accountfor about 40% of gross domestic product.

The established business must show a genuine commitment to wider issues than just getting a government contract. These can include skillsdevelopment and transfer, affirmative action and creating mechanisms forthe operational involvement of black people at all levels of the business.

BEE is an important consideration, indeed a necessity, for many local andforeign companies operating in South Africa or those considering newinvestments. For local and foreign companies doing business with the publicsector, including state-owned enterprises, it is even more of an imperative.

For further information, please visit www.kpmg.co.za or contact

Tshidi Mokgabudi telephone +27 (11) 647 6735tshidi.mokgabudi@kpmg.co.za

Chapter 12

Corporate governance and accounting standards

1. Corporate governance

Corporate governance in South Africa is a priority for both the private andpublic sectors of the economy. The South African government has enactedlegislation to regulate key governance performance in the public sector.The private sector has been following the recommendations of the KingReport issued in 1994, supported by The JSE Securities Exchange listingrequirements. More recently, several leading corporations have moved theirprimary listings to the London Stock Exchange and the corporategovernance requirements, as established by the Combined Code andTurnbull Report, are shaping the current South African practices. The revision of the King Report in early 2002, is expected to follow theUK lead in recommended corporate governance practices.

The UK governance model underpins the South African practices wheredirectors, who are accountable to the company’s owners, direct and controlthe company in the owner’s stead.

Corporate governance is registered through statutory/legal frameworkslisting requirements, industry regulatory bodies, the South African ReserveBank and voluntary codes.

2. King II

The two most significant developments in corporate governance have beenthe adoption of the King Code in 1994 and the Public Finance andManagement Act of 2000 (PFMA). The King Report established aframework for corporate governance primarily in the private sector whereasthe PFMA has legislated the governance requirements in the public sector –although the King Code is upheld in the public sector.

137

138

The updated King Report, King II, addresses the current global focus areasof corporate governance such as:

■ Balance of power and unchecked CEO prerogatives: This separation ofchairman and CEO roles, senior non-executive directors where suchroles are not separate, independent and non-executive directors,number of executive directors on a board, nominations procedure andnumber of directorships non-executive directors should hold. Thecurrent recommendation is for there to be an equal number ofexecutive and non-executive directors with a sufficient number of thenon-executive being independent, for example, not representing theholding company.

■ Director accountability and remuneration: The perceived excessiveexecutive remuneration relative to corporate performance (immediatedisclosure of individual remuneration is recommended), the power ofthe remuneration committee, measurement of director performance anddirector conflict of interests. The proposed changes to King includereviews of all director performances (executive director servicecontracts should not exceed three years), the effectiveness of the boarditself and its committees, and skills of directors. The need to haveadequate information technology skills is specifically identified.Further, the board has to ensure adequate responsibilities are achievedthrough appropriate delegation of authority being established.

■ Risk management and assurance: Proof that the directors activelyconsider the question of risk management and the assurance they geton the effectiveness of such management activity, the role of the auditcommittee and risk committee in ensuring the true picture iscommunicated, embedding of risk management into the performanceactivities, and the ongoing activities to ensure the risk managementinformation remains relevant. The proposed changes to King include arequirement that disclosure be made of the risk management efforts.

■ Organisational integrity: As the world business becomes more global,business and investment is attracted to those that can be trusted. Bribes,kickbacks, abuse of power, and corporate theft are being tolerated lessand less. The adoption of an approach adopted in the USA throughtheir Federal Sentencing Guidelines is proposed. Further corporationsare urged to establish a whistle blowing function.

■ Non-financial disclosures: The company strategic conversation has togo beyond the numbers. Information on sustainability of the company’sperformance is needed in the areas that are not directly related to thefinancial results – for example, the quality of the people, the corporateimage, attention to the community and environment and AIDS.

■ The legislative framework has changed extensively since the issue of the King Report in 1994. Legislative changes in the governance area include the Employment Equity Act, Labour Relations Act, Insider Trading Act, Public Finance and Management Act and changesto the Companies Act and the Banks Act. Other changes anticipated are the legal backing for Generally Accepted Accounting Practice(GAAP) and reduced requirements for smaller corporations. The Kingrevision is also exploring ways in which adherence to propergovernance practices can be enforced. These include the Registrar ofCompanies keeping a delinquent director register.

■ Of interest to the accounting firms is the responsibility given to theaudit committee to advise the board on the impact on independence ofthe external auditors where they perform other services for thecompany. The draft recognises the dangers of preventing or limitingsuch activity and leaves the decision up to the company itself. This isdifferent to the Securities Exchange Commission (SEC) ruling in theUnited States of America.

The Code of Corporate Practices may be broadly summarised as:

2.1 Board of directors

A unitary board structure, as opposed to separate supervisory andmanagement boards, is the most common board structure in South Africa.Some parastatal organisations have separate supervisory and managementboards.

A board of directors should be balanced between executive and non-executive directors. The current considerations are for equal representationof executive and non-executive directors with sufficient of the directorsbeing classified as independent. Directors are expected to collectively haveadequate skills to consider all significant areas of the business, particularlyIT skills should be included in the board skills.

The board of directors is ultimately responsible for ensuring that thebusiness remains a going concern and thrives.

139

2.2 Chair

The roles of chairman and chief executive should be separated and thechairman should be a non-executive director.

2.3 Non-executive directors

Non-executive directors are essential to effective corporate governance asthey provide independent judgement on issues of strategy, performance,resources and standards of conduct. Independent directors are a thirdcategory being considered where such directors are not representative of any main shareholder and are able to exercise their duties free from any bias.

2.4 Appointments

Board nominations can be handled through a nominations committee andare ultimately the responsibility of the chairman. Executive directors’contracts, if any, should not exceed three years.

2.5 Directors’ remuneration

A remuneration committee should be appointed which should beresponsible for all elements of directors’ remuneration. The chair andmajority of the members of the remuneration committee should be non-executive directors. Decisions on remuneration should preferably be madeby parties who do not benefit from their own recommendations.

The following disclosures of directors’ remuneration should be made:

■ separate disclosure of the total of executive and non-executiveremuneration;

■ separate disclosure of salaries, fees, benefits, share options and bonuses; and

■ separate disclosure of each individual director’s remuneration.

2.6 Board meetings

Boards should meet at least once a quarter. The regularity of boardmeetings, and particularly the need for more regular meetings, shouldhowever be determined with reference to the specific circumstances ofeach company.

140

2.7 Professional advice

Directors should be supported by a company secretary.

In addition, directors should be able to seek independent professionaladvice at the expense of the company, if this is in the best interests of thecompany. Prior to seeking this advice, it is suggested that a director should,if appropriate, discuss the matter in question with either the chair or thecompany secretary.

2.8 Stakeholder communications

The board’s communications to stakeholders should be balanced,understandable, transparent and timeous. The information provided tostakeholders should be based on the principles of openness and substanceover form and should address material matters of interest and concern toall stakeholders.

Directors should cover the following specific matters in their annual report:

■ the directors’ responsibility to prepare financial statements that fairlypresent the state of affairs of the company as at the end of the financialyear and the profit or loss for the period;

■ the auditor’s responsibility for reporting on the financial statements;

■ the maintenance of adequate accounting records and an effectivesystem of internal controls;

■ the process by which risk management is assured by the board;

■ the consistent use of appropriate accounting policies supported byreasonable and prudent judgements and estimates;

■ adherence with applicable accounting standards or, if there has beenany departure in the interests of fair presentation, this should not onlybe disclosed and explained but quantified;

■ the belief that the business will be a going concern in the year aheador, an explanation of any reasons otherwise; and

■ whether the code of corporate practices and conduct has been adheredto or, if not, in what respects there has not been adherence.

141

2.9 Code of ethics

Organisations should demonstrate their commitment to organisationalintegrity through the following actions:

■ establish compliance standards and procedures (codes of conduct, etc);

■ assign high-level individuals to oversee compliance;

■ exercise due care in delegating discretionary authority;

■ communicate and train all employees regarding company values andcompliance procedures;

■ monitor, audit and provide safe reporting systems;

■ enforce appropriate discipline with consistence; and

■ respond to offenses and prevent reoccurence.

A revision to the code of corporate practices and conduct is presentlyunder discussion and it is expected that the revised code will enhancecorporate governance in line with best practice elsewhere in the world.

3. Accounting standards

Section 286(3) of the South African Companies Act provides that “… the annual financial statements of a company shall, in conformity withgenerally accepted accounting practice, fairly present the state of affairs ofthe company and its business as at the end of the financial year concernedand the profit or loss of the company for that financial year ...”

The South African Accounting Practices Board has approved for issue aseries of statements of Generally Accepted Accounting Practice (GAAP).These statements define GAAP in South Africa and it is expected that theywill receive specific legal backing in the foreseeable future.

The international comparability of financial information published by SouthAfrican companies is an essential ingredient in the recipe for attractingforeign investment and a necessary condition for the free flow of capital at its lowest cost to its most efficient users. In order to address the internationalcomparability of South African financial information, the South AfricanAccounting Practices Committee embarked on a harmonisation andimprovements project which had, as one of its objectives, that of bringing

142

statements of GAAP into line with the standards issued by the InternationalAccounting Standards Committee.

A significant proportion of South Africa’s Statements of GAAP are now inline with international accounting standards (in certain cases the SouthAfrican standards contain fewer alternatives than the correspondinginternational standards and in certain cases the effective implementationdates are later than in the corresponding international standards). SouthAfrica’s accounting standards are amended in line with developments ininternational accounting standards.

In order to address the needs of international investors, a number ofprominent South African groups currently prepare their financial statementsin accordance with International Accounting Standards. This basis ofpreparation generally also results in compliance with South Africangenerally accepted accounting practice as the “unharmonised” South Africanstatements, or local practice in the limited cases where a South Africanstatement has not been issued, usually include an alternative accountingtreatment which is in accordance with international accounting standards.

The South African accounting profession recognises the need for and iscommitted to compliance with International Accounting Standards. Thishas been and will continue to be evidenced by the increasing number ofSouth African companies whose financial statements are prepared inaccordance with International Accounting Standards.

An ethics survey (2002) and a corporate governance survey (2001) havebeen conducted by KPMG and various others, and provide moreinformation on the local corporate governance and ethics landscape. They are available from www.kpmg.co.za.

For further information on corporate governance please contact John McIntosh telephone +27 (11) 647 7053

john.mcintosh@kpmg.co.zaRob Newsome telephone +27 (11) 647 7133

rob.newsome@kpmg.co.za

For further information on accounting standards please contact Devon Duffield telephone +27 (11) 647 7063

devon.duffield@kpmg.co.zaIan Thomson telephone +27 (11) 647 7242

ian.thomson@kpmg.co.za

143

South Africa is a beautiful and fertile land. Below a group of workers are harvesting macadamian nuts.

Chapter 13

Technology

1. Introduction

South Africa tends to be an eager user of technology, rapidly embracingthe latest offerings, although price remains a factor as most costs in thisregard are dollar-based. The world’s dominant industry players are wellrepresented in South Africa, including:

■ Compaq;

■ Dell;

■ IBM;

■ Microsoft;

■ Oracle; and

■ SAP.

Certain South African businesses are in the forefront of global bestpractices and achievements for the effective and efficient use of leadingtechnologies. This is, for instance, particularly noticeable in the financialservices industry as well as in mining and healthcare.

Electronic commerce has created a brand new marketplace to operate in. Itis, in many ways, a marketplace without conventional rules, thatchallenges many of the more traditional or preconceived notions andpractices. It is also a marketplace that may seem to defy regulation. Yet, itrequires that one thinks carefully about its challenges and opportunities,for business, our communities, our country and our continent.

As technology expands to allow increased integration and participation ofall consumers in the economy, it may be that one of the most effectivemeans for achieving national economic growth is to focus public and

145

private resources on those population groups that have previously beenmost excluded from economic participation. Empowering disadvantagedcommunities and raising their living standards not only benefit those targetgroups directly, but also yield tangible benefits to the entire nationaleconomy. Such benefits include increased productivity, an expandedmarketplace for businesses, diversity of experience and ideas contributingto development, reduced costs of poverty and distress, and many otherpositive effects.

2. Telecommunications

One of the challenges especially relevant in South Africa relates to thetelecommunications infrastructure. Internationally, telephone call chargesare falling. In countries where the telecoms infrastructure has beenderegulated, there have been dramatic reductions in charges. This, togetherwith the new technologies that allow more data to be sent on the same line,will lead to more data traffic being generated and an increase in thenumber of users. There are also particular problems faced in the country,including the theft of telephone lines (copper cabling) and other trivialmatters that affect the industry greatly.

2.1 Telkom

Telkom has always been the leading communications operator in SouthAfrica and has further solidified its market position in recent years byrapidly modernising and expanding its national network. These networkmodernisation and expansion programmes have been supported by internaldrives aimed at entrenching world class customer service and performancelevels within the company. A host of new products, services and solutionscontinue to be made available to business and residential customers alike,supported by increasingly cutting-edge technology.

The sale of a 30% stake in Telkom by the South African government toUS-based SBC Communications Inc and Telekom Malaysia Berhad inMay 1997 brought a new infusion of skills, expertise and funding to thecompany. Telkom will continue to maximise the strengths of these equitypartners in meeting the stringent targets outlined in the license it wasawarded by the Ministry of Posts, Telecommunications and Broadcastingin 1997. The license grants the company the exclusive right to providepublic switched telecommunications services (PSTS) for a period of noless than five years. In return, Telkom is committed to modernising over a

146

million non-digital lines, adding 2,8 million new lines to its network anddelivering on demanding service quality targets part from being the onlyfixed line operator currently allowed to do business in South Africa,Telkom also owns 50% of the country’s leading cellular operator,Vodacom. [Source: www.telkom.co.za]

2.2 Cellular phone technology

Statistics from the cellular industry reveal great opportunities:

■ market size as of July 2001: 9.4 million users (80% of these are active users);

■ potential by 2005: 18 million users;

■ the industry is dominated by MTN and Vodacom who operate at GSM 900 Mhz;

■ together the two GSM networks cover more than 71% of thepopulation;

■ in February 2001, a third license was awarded to the Cell CConsortium which went live at the end of 2001; and

■ the SA market is currently worth R14 billion and is expected to growto around R23 billion by 2004.

Financial services firms have been keen to embrace mobile technology aschannels. Migration to the mobile and wireless environment is not a costlyaffair, since mobile devices can be integrated with banks' legacy systems,eliminate paper and even screens.

3. Internet

Access to the internet from South Africa is widely available but generallyslow. There are a number of Internet Service Providers (ISPs) with varyingpricing structures. At a price, it is possible however to secure the requiredaccess with more than acceptable response times, as certain businesseshave already chosen to do.

147

More recently, one of the country’s leading banks, ABSA, offered freeinternet access and this has received a great deal of press, with muchcomment on the business model as well as branding and CRM. Despiterevising their decision to only allow ABSA clients this access, it has hadpositive results for the ABSA brand. It is very positive for the SouthAfrican online market, especially considering that it has resulted in a netgrowth of customers.

Domain names for South African sites are typically suffixed “.co.za”,although many have also registered “.com” URL addresses.

South African specific search engines include:

■ http://www.ananzi.co.za; and

■ http://www.aardvark.co.za.

3.1 Impact on banking

A challenge banks are currently dealing with is the smart card revolution.It is understood that both Visa and Mastercard have mandated banks tohave all their point-of-sale card readers chip-compliant by 2004. This is acostly exercise, involving a great deal of capital expenditure.

Online commerce is not only restricted to retail banking. Businesses arealso moving heavily into the online environment to handle their financialservices requirements. Corporate appetite for web-based treasurytransacting, for example, has grown significantly in South Africa. Forinstance, the online treasury service, NetTreasury Services, hasexperienced month-on-month growth of up to 250% since the launch of itsflagship forex product in January 2001 [source: MD Linley Scorgie]. Thegrowth is being driven by corporates seeking to streamline their treasuryoperations through viewing a full spectrum of rates on a single, internet-based, platform.

The fact that banks and financial services firms have embraced theinternet and e-commerce illustrates an understanding on the part of theindustry for the need for multiple channels of access to financialmanagement services on a 24-hour basis.

148

4. Information security

In KPMG’s 2001 global information security survey, South Africacompared favourably with its international counterparts. This table givesan overview of South Africa’s performance:

149

South Africa International

Average loss per incident R575 000 R1,2 million($52 223) ($108 000)

New technology poses new threats- Companies allow staff to connect PDAs 50% 43%- Companies plan to implement control software 16% 20%

Large amounts are spent on IT security- Average spend on IT security R5,5 million R28 million

($496 000) ($2,6 million)- As a percentage of overall IT budgets 11% 10%

There is a difference between companies’ perceptions of threats and actual security breaches- Virus incidents 80% 60%- Low tech theft 63% 38%

(per incident) R180 000 R1,1 million($16 331) ($100 000)

Even those most confident of their security systems are vulnerable- Companies taking reasonable steps to

protect themselves 58%- No way of knowing that they were being

hacked until too late 52%

Firms are unable to tell how well they are doing in terms of security performance- No form of security violation reporting 40% 40%- Measuring and reporting security performance 35% 35%

Governance is lacking- Board level responsibility -50% -50%- Security staff have no formal qualifications 80% 73%

4.1 Thawte

Mark Shuttleworth is an African entrepreneur with a deep interest intechnology. He first hit newspaper headlines after selling his internetbusiness (Thawte) – which started in his parents’ garage – for $575m.

Subsequently, Mark has made headlines with his historic space trip. He isnow also involved in another e-opportunity, Here Be Dragons (HBD)which focuses on early-stage companies and recently announced fourinvestments in start-ups. He is also spearheading an e-city hub in the CapeTown CBD.

Thawte became the first company to produce a full-security e-commerceweb server that was available across the globe (US companies could notcompete with Thawte because of the way cryptography was regulated bythe US at the time). This brought Thawte to the world of public keyinfrastructure (PKI), which is the basis for all encrypted and authenticatedinternet transactions. Thawte developed a relationship with both Netscapeand Microsoft and captured 41% of the global market for web site certifi-cation. By the time it was acquired by US company VeriSign, Thawte hadbecome the fastest-growing Internet Certificate Authority (CA), and wasthe leading CA outside of the US.

5. Major industry players

South Africa is home to some of the more prominent IT companies in theworld, including Dimension Data and Idion Technology.

■ Dimension Data (www.didata.com)

Dimension Data is a leading global network and i-commerce servicesGroup. Listed on the London Stock Exchange (LSE), the company hasthe global reach and expertise to provide a comprehensive range ofround-the-clock network services and interactive commerce solutionsto global enterprises, telecommunications service providers and neweconomy companies.

Operating in over 30 countries on six continents, the Dimension DataGroup is one of the largest independent network and i-commerceservices businesses in the world, offering customers truly integrated,global solutions. The group is divided into the network services andinteractive commerce (i-commerce) divisions.

150

■ Idion Technology (www.idion.com)

Idion Technology Holdings is an information technology companylisted on the main board of the JSE Securities Exchange. The company has two subsidiaries: Idion Solutions and VisionSolutions Inc.

Idion is a client focused, entrepreneurial, enterprise solutiondevelopment company specialising in building digital businessecosystems. Idion aims to engineer success in its client’s dynamicventures through leadership, vision and technology capability. As an ITsolutions provider, Idion focuses on enabling businesses to gaincompetitive advantage through differentiation by effectively leveragingtechnology. This is achieved by developing innovative softwaresolutions to meet specific business requirements.

Founded in 1990, Vision Solutions Incorporated is a global leader inthe development and marketing of information availabilitymanagement solutions. These solutions include high availability anddata protection for the IBM AS/400 midrange computer, and datasharing between most databases on major platforms, includingWindows NT, UNIX and AS/400. Vision’s innovative products are usedto maintain the integrity and accuracy of data in a wide variety ofindustries such as banking/finance, government/education, healthcare,manufacturing, telecommunications, transportation and gaming. VisionSolutions head office is based in Irvine, California. Other officesinclude Luxembourg, Italy, Germany, Panama, Malaysia, South Africa and Japan.

151

152

South Africa offers one of the world’s ultimate eco-tourism experiences, hosting twotrans-frontier peace parks. The largest of these has incorporated the world-renowned

Kruger National Park and neighboring game reserves in Zimbabwe andMozambique. The development of luxury game lodges and facilities to host the ever-

growing demand by tourists has become an investment opportunity in itself.

Chapter 14

Tourism in South Africa

1. Introduction

Tourism is the world’s largest and fastest growing industry. The WorldTourism Organization (WTO) projects that world tourism arrivals willgrow at an average rate of 4,5% per annum between 2000 and 2010 witharrivals reaching over 1 billion by the end of that period. Internationalarrivals are expected to reach 1,6 billion by 2020.

The Australian National Tourism Strategy (1992) summarised theimportance of tourism as:

■ of growing economic importance around the world;

■ so woven into the economy that its significance goes unnoticed;

■ composed of many different products and services;

■ a 24-hour-day, seven-day-week industry, despite seasonal fluctuations;

■ labour intensive with employment opportunities at all skill levels;

■ consisting predominantly of small businesses, despite growinginvestment by larger companies;

■ contributing to the conservation of natural and cultural heritage, ifproperly managed;

■ an important medium for educational and cultural exchange, promotinginternational understanding and goodwill; and

■ although private sector driven, government shapes the operatingenvironment and provides much of the infrastructure needed byconsumers and the industry.

153

Tourism offers to South Africa the opportunity for employment creation,economic enhancement and the development of an image which facilitatestrade and investment. A strategic approach is required to capitalise uponstrengths and therefore maximise economic and social benefit.

2. Tourism in South Africa

South Africa has many characteristics of a world class tourist destination.Furthermore, the vast majority of the most important tourist attractionsoffered by South Africa are not man-made and have required little or nocapital investment on the part of government. For example, the naturalattractions, wildlife and culture with the country were not investmentsmade by public or private sector to stimulate economic growth or tourismdevelopment, but do require ongoing management and investment toprotect their resource value.

Europe is the major generator of international tourism to South Africa.Arrivals from this sector are expected to grow considering the concertedefforts of South African Tourism (SATourism) to market South Africa as apremier destination to the key source markets of the United Kingdom andGermany. In addition, the strength of the South African product portfolio,the convenience of a longhaul flight without the syndrome of jetlag andthe weakness of the rand against European currencies enhances SouthAfrica as a premier value for money destination.

South Africa must be careful not to “place all its eggs in one basket” andavoid dependence on the international market. Domestic tourism is animportant and relatively untapped area and it is essential that time andeffort is spent on educating and developing this market.

New product development is critical to the success of a destination.Government has been pro-active in identifying areas of tourismdevelopment as illustrated in the map on the opposite page.

Having identified areas of opportunity, the required infrastructuredevelopment must be implemented in order to ensure tourism benefits aremaximised. Government must take the lead in this regard in order toencourage private sector investment in potential development areas.

154

Aside from infrastructure development, a market led approach to tourismmust be adopted. Through building upon existing tourism flows,understanding market characteristics and requirements, responding in turnwith innovative product development and positioning, destinations acrossSouth Africa can begin to re-enforce, introduce, focus and/or directmovement of tourists. Investors will also be more able to make realisticdecisions on where to focus product development.

Areas of tourism development

The growth of tourism within South Africa is dependent on the continuedplanning, management and development of the infrastructure, attractionsand activities throughout the country. Investment and focus must be placedwithin areas of strength and those with potential to grow and attractdemand. Government and private sector must work together in order tomaximise tourism potential and in so doing create new opportunities fortourism development and investment.

155

3. Conclusion

South Africa is politically stable with a developing economy. Theinvestment climate is positive and government is actively positioning thecountry as the gateway to Africa. There is much work to be done and manychallenges that will have to be met. As with any emerging economy, thereare problems of social imbalance and lack of skills. Sanctions and politicalisolation brought a siege mentality that has taken time to overcome.Macro-economic planning has achieved desired results and there is now amovement towards project and service delivery of a micro-level. Themiddle class is growing and for the first time black incomes have risenabove white incomes.

The focused and aggressive approach to marketing being promoted bySATourism can only serve to benefit all participants within the tourismsector. The future of South African tourism is encouraging. Much of the“seed capital” has been provided by nature and the role of government andprivate sector is to build a world-class tourism sector on the base provided.This appears to be happening.

South Africa is now part of the global economy and appears ready to play its role as an African centre of excellence and the economic heart of the continent.

For further information please visit www.kpmg.co.za or contact

Andrew Nicholson telephone +27 (11) 647 7344 andrew.nicholson@kpmg.co.za

156

Chapter 15

More about KPMG

Who to contact at KPMG South Africa

157

National / Jhb officeTel +27 (11) 647 7111Fax +27 (11) 647 8000Tom Grieveunderstanding@kpmg.co.za

BloemfonteinTel +27 (51) 430 3221Fax +27 (51) 447 9351Nick van Niekerknick.vanniekerk@kpmg.co.za

Cape TownTel +27 (21) 408 7000Fax +27 (21) 418 2370Tim Bashalltim.bashall@kpmg.co.za

DurbanTel +27 (31) 327 6000Fax +27 (31) 365 6304Suresh Naidoosuresh.naidoo@kpmg.com

East LondonTel +27 (41) 581 2353Fax +27 (41) 581 2423Mike Smithmike.smith@kpmg.co.za

NelspruitTel +27 (13) 755 3858Fax +27 (13) 752 5891Jeremy van Niekerkjeremy.vanniekerk@kpmg.co.za

PietermaritzburgTel +27 (33) 394 6702Fax +27 (33) 394 3453Peter Henwoodpeter.henwood@kpmg.co.za

Polokwane (Pietersburg)Tel +27 (15) 295 6444Fax +27 (15) 295 6445Andre Vauqulinandre.vauqulin@kpmg.co.za

Port ElizabethTel +27 (41) 581 2353Fax +27 (41) 581 2423Mike Smithmike.smith@kpmg.co.za

PotgietersrusTel +27 (15) 491 3231Fax +27 (15) 491 3246Piet de Bruynpiet.debruyn@kpmg.co.za

PretoriaTel +27 (12) 431 1300Fax +27 (12) 431 1301Bryan Leithbryan.leith@kpmg.co.za

SecundaTel +27 (17) 634 2175Fax +27 (17) 634 7512Okkie Potgieterokkie.potgieter@kpmg.co.za

VanderbijlparkTel +27 (16) 931 1511Fax +27 (16) 981 8601Simon du Plooy simon.duplooy@kpmg.co.za

www.kpmg.co.za

158

KPMG core services and lines of business

KPMG’s wealth of experience in its core services – assurance, consulting, tax andfinancial advisory services – is tailored for the industry in which you operate.

These services are never provided in isolation. Instead, they are provided in consul-tation with KPMG’s five major industry-based groups, KPMG’s centres of specialistknowledge in your industry.

By listening and responding proactively to the subtle needs of your business industry,we are able to provide advice that is often the difference between winning and losing.

Financial Advisory Services

■ Corporate Finance■ Corporate Recovery■ Forensic ■ Liquidations■ Transaction Services

Other specialist business units

■ Environmental, Health and Safety Services

■ Executive Appointments■ International Advisory Services

Consulting

■ Services / Solutions: Strategy andOperations, ERP, Technology, Outsourcing

■ Industries: Public Services, Health Care,Consumer and Industrial Markets,Information, Communications andEntertainment, Financial Services,Energy and Utilities, Leisure and Tourism

■ Enterprise Transformation

core servicesAssurance

■ Attestation Services– Audit– e-Advisory Services

■ Business Advisory Services■ Information Risk Management■ Management Assurance Services■ Public Sector Advisory Services

Tax, Legal and

Human Capital Service

■ Corporate Tax■ Capital Gains Tax■ International Tax and Transfer Pricing■ Expatriate Tax■ Personal Tax, Remuneration and Wealth■ Value-added Tax and Customs Duties■ Corporate, Commercial and

Employment Law

159

Owner-Managed Businesses

Fiinancial Services

Industrial Markets

Consumer Markets

Infrastructure and Government Assu

ranc

e

Tax,

Leg

al a

nd H

uman

Cap

ital S

ervi

ce

Fina

ncia

l Adv

isor

y Se

rvic

es

Consumer Markets

■ Consumer Products– Building and Construction– Food and Drink– Healthcare– Real Estate Investments– Retail and Distribution– Transportation

■ Information, Communication and Entertainment– Broadcasting– Hardware and Software– Leisure and Hospitality– Media and Entertainment– Telecommunications

Infrastructure and Government

■ Educational Institutions■ Emerging Business Markets■ Funding Organisations■ Local, Provincial and National

Government■ Public Entities■ Research and Non-profit Organisations

lines of businessFinancial Services

■ Banking ■ Investment Management and Funds■ Insurance

Industrial Markets

■ Agriculture and Fishing■ Automotive■ Chemicals■ Electronics■ Engineering■ Forestry■ Funding Agencies■ Industrial Products■ Manufacturing■ Mining■ Oil and Gas■ Power and Utilities

Owner-Managed Businesses

Cons

ultin

g

160

161

Government Departments

Department of AgricultureDepartment of Arts, Culture, Science and TechnologyDepartment of Communications"Old" Constitutional Development siteDepartment of Correctional ServicesDepartment of DefenceDepartment of EducationDepartment of Environmental Affairs and TourismEnvironmental Information and reporting siteDepartment of FinanceDepartment of HealthDepartment of HousingDepartment of Justice and Constitutional DevelopmentDepartment of LabourDepartment of Land AffairsDepartment of Minerals and EnergyDepartment of Provincial and Local GovernmentDepartment of Public EnterprisesDepartment of Public Service and AdministrationDepartment of Social DevelopmentNational Population UnitDepartment of Sport and RecreationDepartment of Trade and IndustryDepartment of TransportDepartment of Water Affairs and Forestry

Parliament

Parliament of South AfricaNational Council of Provinces

Commissions and Statutory Bodies

Agricultural Research CouncilThe Auditor-GeneralCommission for Conciliation, Mediation and ArbitrationCompensation CommissionerCouncil for GeoscienceDevelopment and Planning CommissionFilm and Publications BoardFinancial Services BoardHeath Special Investigating UnitIndependent Complaints DirectorateIndependent Development TrustMunicipal Demarcation BoardNational Economic Development and Labour Council(NEDLAC)National Research FoundationNational Year 2000 Decision Support CentreNational Youth CommissionPan South African Language BoardSea Fisheries Research InstituteSouth African Bureau of StandardsSouth African Law CommissionSouth African National Parks BoardSouth African Qualifications AuthoritySouth African Tourism BoardSouth African Weather Bureau

Chapter 16

Internet sites

The following government departments can be found at www.gov.za

162

Telephone number search

For business telephone numbers: www.yellowpages.co.za

For residential telephone numbers: www.telkom.co.za

South African search engines

www.aardvark.co.zawww.amanzi.co.zawww.iafrica.com

Other internet sites:

The next step

163

KPMG South Africa is fully equipped to assist with every aspect of your plannedinvestment in South Africa, however large or small it may be.

We invite you as a potential investor to complete the following questionnaire andsubmit it to Tom Grieve, KPMG senior partner, at fax +27 11 647 8000 so that wemay be in a position to more readily assist you.

We look forward to sharing the future with you.

Company / Investor name

Contact person

Designation

Telephone ( ) Fax ( )

Email

Postal address

Main shareholders

Turnover Total assets

Current markets Number of employees

1 Details of investor

Type of business required

2 Proposed investment

Anticipated approach:

Establish a new operation

Acquire an existing operation

Enter a joint venture with a South African partner

Black economic empowerment interest

164

Location preference in South Africa

Management skills required

Intended market focus

Export potential required

Other requirements

3 Financial criteria for investment

4 Proposed operating contribution by investor

Profit before tax

Purchase price

Cash available to invest

Interest required – percentage

Turnover minimum maximum

Management inputs

Production inputs

Technology, patents and brands

International market access

International funding access

Competitive advantages

Other opportunities

165

5

E-business

Market research

Strategic industry review

Preliminary business plan

Acquisition / joint venture / strategic alliance negotiation

Operations set up

Strategic planning

Organisational structuring

Human resources management

Business plan

Business development and accounting systems

Treasury systems

Assurance

Information risk management

Management assurance

Forensic accounting

Tax advice

Tax planning

Management consulting

Other

Assistance sought from KPMG South Africa

Location

Preferred date and time

KPMG services of interest

Meeting in South Africa to discuss your plans

Should you wish to provide additional information in respect of

this application, then please do so on a separate sheet.

We look forward to doing business with you!

166

Please complete this questionnaire, which should not take more than five minutes,and email to understanding@kpmg.co.za or fax to +27 11 484 0524.

Your honest response will ensure that we improve our communication with you. Allquestionnaires will be treated confidentially and analysed by an independentresearch company. Should you have any queries in this regard, please contactAntoinette Panton on telephone +27 11 647 8407 or email clarity@kpmg.co.za

What do you think?

Contact details

Name

Postal address

Telephone number (work) ( )

1 Have you ever received a copy of Investment in South Africa?

Yes (5-)

No

Not sure

2 How much of this guide did you read? Please tick.

Entire guide (7-)

Some of it

Did not read it at all

3 Which section/s of this guide did you find the most interesting/ helpful?

Note on the Republic of South Africa

Chapter 1: Investment in South Africa

Chapter 2: South Africa: A brief survey

Chapter 3: Forms of business enterprise

Chapter 4: Companies and close corporations

Chapter 5: Exchange control

Chapter 6: Banking and finance

Chapter 7: Taxation in South Africa

Chapter 8: Double taxation agreements

Chapter 9: Incentive schemes

167

Chapter 10: Industrial relations

Chapter 11: Black economic empowerment

Chapter 12: Corporate governance and accounting standards

Chapter 13: Technology

Chapter 14: Tourism in South Africa

Chapter 15: More about KPMG

Chapter 16: South African government internet sites

Why?

4 What kind of information would you like to see more of?

5 Which section/s of this guide did you find the least helpful?

Note on the Republic of South Africa

Chapter 1: Investment in South Africa

Chapter 2: South Africa: A brief survey

Chapter 3: Forms of business enterprise

Chapter 4: Companies and close corporations

Chapter 5: Exchange control

Chapter 6: Banking and finance

Chapter 7: Taxation in South Africa

Chapter 8: Double taxation agreements

Chapter 9: Incentive schemes

Chapter 10: Industrial relations

Chapter 11: Black economic empowerment

Chapter 12: Corporate governance and accounting standards

Chapter 13: Technology

Chapter 14: Tourism in South Africa

Chapter 15: More about KPMG

Chapter 16: South African government internet sites

168

6 In what format would you prefer this document?

7 If you were the editor of this guide, what would you do to improve thepublication or the distribution thereof?

Printed

Electronic

Notes:

169

Notes:

170