PRESENTATION TO THE PARLIAMENTARY COMMITTEE ON FINANCE (PCOF) AND THE SELECT COMMITTEE ON FINANCE (SCOF)

1
PRESENTATION TO THE PARLIAMENTARY COMMITTEE ON
FINANCE (PCOF) AND THE SELECT COMMITTEE ON
FINANCE (SCOF)

• National Treasury
• 8 May 2007
• Parliament, Cape Town

2
AIM OF THE PRESENTATION

• Brief background on SADC
• Overview of Finance Investment Protocol (FIP)
  process
• Key priorities of FIP (Annexes)
• Ratification by Parliament

3
HISTORICAL BACKGROUND

• Regional cooperation and integration begun with
  the security initiative of the Frontline States
  in the 70s (Angola, Botswana, Mozambique,
  Tanzania Zambia)
• Then in 1980 SADCC formed in Tanzania (Arusha
  Conference) to focus on economic cooperation and
  independence from South Africa
• SADC replaced SADCC in 1992 in Windhoek to
  strengthen regional integration through protocol
  development

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KEY SADC OBJECTIVES

• List of key objectives for SADC in SADC Treaty as
  amended, (Article 5)
• To use regional integration as instrument for
  sustainable and equitable growth for poverty
  alleviation and a higher standard of living for
  the region (Article 5 (1) (a))
• Encourage development through self-reliance by
  and interdependence of Member States (Article 5
  (1) (d))
• Achieve these main objectives through creation of
  institutions and mechanisms for the mobilization
  of resources and implementation of SADC
  programmes (Article 5 (2) (c))

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STRUCTURE
To indicate the structures responsible for
driving the FIP
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INSTITUTIONAL REFORM

• 2001 Extra-Ordinary Summit in Windhoek approved
  formation of Directorates
• (Trade, Industry, Finance and Investment Food,
  Agriculture, and Natural Resources
  Infrastructure Services and SHDSP)
• Aim to strengthen capacity to deliver on its
  mandate e.g. SADC Secretariat to coordinate and
  strategize
• Align with African Unions regional integration
  programme
• Consolidated sector coordination units
• To expedite the ratification and implementation
  of protocols, which are legal instrument binding
  to all Member States who ratify and accede

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STRATEGIC DIRECTION

• Reform process led to the adoption of Regional
  Indicative Strategic Development Plan
• Highlights key targets over 15 years
• Free Trade Area (2008),
• Customs Union (2010),
• Common Market (2015),
• Diversification of industry and exports (2015),
• Single currency (2016) and
• Monetary zone (2018)
• Prioritize regions strategic imperatives e.g.
  economic regional integration and its
  coordination
• Provide alignment with other multilateral
  initiatives e.g. NEPAD, Millennium Development
  Goals, etc.
• Puts the region at the implementation phase

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CHALLENGES

• Deepening regional integration and accelerating
  economic growth and development
• Building strong infrastructure linkages (roads,
  rail, energy, ports, ICT, etc)
• Adopting policies to unemployment and halving the
  incidence of poverty
• Improving fiscal reforms and public debt
  reduction
• Developing regional industrial policy mechanisms
  to diversify economies
• Ensuring effective resource mobilization through
  financial markets and donor coordination
• Promoting the development of relevant skills

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SADC Protocol Process
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PROTOCOL PROCESS

• Regional integration within SADC driven by
  protocols in SADC Treaty, Article 22 (1-11)
• Developed for each area of cooperation
  (environment, trade, movement of people, gender,
  etc)
• Outline objectives, scope, and institutional
  requirements
• Summit approves protocols
• Binding to those who ratified or acceded
• Two-thirds majority to enter into force

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NATURE OF THE PROTOCOL PROCESS

• SADC Finance Ministers responsible for FIP
• Bottom-up approach adopted driven by
  subcommittees Lessons rejection of the top-down
  approach used for e.g. Trade Protocol
• Consensus through non-binding MOUs (voluntary)
• Vetted by SADC legal team for consistency with
  international laws and agreements
• Legal process of SADC signature, ratification
  accession
• Legal opinion from Justice, DFA and Treasury
• FIP has developed between 1998 and 2006
• Structure-wise general principles/declarations
  of intent to which various annexes are affixed

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FINANCE AND INVESTMENT PROTOCOL

• Technical Committees overseeing the process and
  reporting to MoFs
• Committee of Senior Treasury Officials
• Committee of Central Bank Governors
• Finance Ministers approval in July 2006 first
  signing in by Heads of States (August 2006) and
  later South Africa (October 2006)
• 10 countries signatories (Botswana, DRC, Lesotho,
  Madagascar, Mauritius, Mozambique, South Africa,
  Swaziland, Tanzania and Zimbabwe)
• FIP to be subject to the internal processes
  within member states i.e. parliament, civil
  society, etc (domestification)
• Cost implications indeterminate, but should be
  quantified through a national budgeting process

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SADC Finance and Investment Protocol (Annexes)
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Annex 1 Cooperation on Investment (1)

• MOU objectives
• Development of a SADC Investment Zone to
  attract investment
• Harmonization of investment policies and laws
• Ensure fairness, equity and transparency in
  treatment of investors
• Support for local and regional entrepreneurs to
  increase regional productive capacity
• Encourage cooperation amongst investment
  promotion agencies and guarantee investment
  protection

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Annex 1 Cooperation on Investment(2)

• Creation support mechanisms (market access, etc)
  for the least-developed countries
• Adherence to international agreements e.g.
  Multilateral Investment Guarantee Agency (MIGA)
  Convention (1985) and International Centre for
  the Settlement of Investment Disputes (1965)
• Other issues double taxation agreements, trade,
  investment industrial policies
• Action Plan adopted on 30 January 2007 under the
  Investment Subcommittee

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Annex 2 Macroeconomic Convergence (1)

• MOU Objectives
• Promote stability-orientated policies
• Article 3 outlines macroeconomic convergence
  indicators in terms of inflation, fiscal deficit,
  public debt current account deficit in relative
  terms
• Establish surveillance unit (Monitoring,
  Surveillance and Performance Unit) to monitor
  convergence and to
• develop database using data from Member States
• coordinate macroeconomic planning capacity
  within Member States (technical assistance)
• submit assessments on the regions convergence
  status to a Peer Review Panel, (Article 7)
• refine procedure for peer review mechanism
• Member states submitted annual macroeconomic
  convergence programmes in Mauritius, Nov 2006
• Peer Review Panel to issue an explanatory
  communique on its assessments

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Annex 2 Macroeconomic Convergence (2)
Target 2008 2012 2018
Inflation rate lt10 lt5 lt3
Budget deficit/GDP lt5 lt3 lt3
External debt/GDP lt60 lt60 lt60
Current account/GDP lt9 lt9 lt3
External reserves (imports cover) gt3 mnths gt6 mnths Sustainable
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Annex 3 Taxation Cooperation and Related Matters
Tax MoU

• Signed by SADC Committee of Ministers for Finance
  Investment in August 2002
• MOU subsumed into Draft FIP as Annex 3
• Seeks to promote coordination of tax policy
  admin
• Underpins objectives of formulating
  coordinating sound policies towards
• Good tax policy design practices in support of
  economic growth FDI
• Improve efficiency of tax collection
• Safeguard respective Member States tax bases
  (training of tax officials, treaty network,
  seeking to eliminate juridical double taxation
  assist in reducing fiscal evasion through robust
  exchange of information)
• Reduce obstacles to intra-SADC trade and
  investment

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Annex 3 Taxation Cooperation and Related Matters

• Key document very ambitious in terms of
  coordinating tax policies, thereby affecting
  Member States fiscal sovereignty
• Is the public good of an economically more
  integrated region more beneficial than individual
  country sovereignty? political economy debate
• Just 6 substantive articles
• Art 2 Development of SADC tax database
• Art 3 Capacity building - development of
  professionalism expertise of tax officers
• Art 4 Cooperation to achieve common approach to
  tax incentives
• Art 5 Develop common approach to tax treaty
  negotiation
• Art 6 Coordination harmonisation of indirect
  taxes
• Art 7 Give consideration to introducing
  mechanisms for settlement of tax disputes between
  Member States

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Annex 3 Taxation Cooperation Tax Database

• Comprehensive, publicly accessible database on
  SADC website - it is an essential analytical /
  research tool
• Provides Tax Subcommittee with tax system
  information so that different tax systems can be
  coordinated
• Inform investor community about SADC member
  states tax systems incentives
• Include details of
• All direct and indirect taxes levies, including
  rates, dates, exemptions allowances
• All tax incentives
• All tax treaties between Member States outside
  SADC
• Statistics on revenue collection
• Annual update as a minimum requirement
• or current product will deteriorate into
  fruitless expenditure (it was last updated in
  2003)
• Database was launched on SADC website in 2005

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Annex 3 Taxation Cooperation Capacity building

• Develop professionalism expertise of tax policy
  officials and administrators by
• Provide support for life-long training in tax
  design, policy development and revenue
  administration
• Effectively equipping people to protect tax bases
  (avoidance or evasion)
• Introducing, developing, maintaining
  engendering good practices
• Member States undertake to
• Actively support initiatives skills best
  practices, exchanges of personnel information,
  mutual assistance, training workshops, seminars,
  and training events
• Provision of training resources
• Recognise importance of IT and digital
  revolution
• E-Commerce, E-Billing, or E-Customs clearance
• Impact these new media may have on tax revenue
  collection and on the flow of goods services

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Annex 3 Taxation Cooperation Implementation of
tax incentive application

• Main aim is to operationalise implement FIP
  Annex 3, ensuring appropriate use of tax
  incentives between SADC member states, including
  avoiding harmful tax competition by the following
  steps
• Endeavour to achieve a common approach
• Ensure tax incentives are only reflected in tax
  legislation -
• No discretionary tax incentives
• No investment centre tax incentives
• Little scope for specific business deals
• Part of SADC Tax Database implementation to check
  how many tax incentives introduced by member
  states are issued by tax legislation, are
  discretionary or are issued by investment centres

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Annex 3 Taxation Cooperation Tax incentives
defined

• Tax incentives may include
• Investment allowances, full depreciation
  allowances
• Investment tax credit - addition to normal
  depreciation
• Full cost of acquisition allowed as deduction
  from the taxable profits accelerated depreciation
  allowances
• Declining balance depreciation allowances
• Tax privileged export processing or enterprise
  zones
• Tax holidays
• Endeavour - To avoid harmful tax competition as
  may be evidenced by
• Zero or low effective rates
• Lack of transparency
• Lack of effective exchange of information
• incentives to particular tax payers especially
  non-residents
• Incentives as vehicles for tax minimisation
• Absence of substantial activity in the
  jurisdiction

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Annex 3 Taxation Cooperation Implementation
of tax incentive coordinationWhat does it mean
for individual member states?Who will enforce
the Protocols provisions?Or is it gradualism
through moral suasion

• Endeavour to avoid introducing legislation that
  prejudices other member states (!)
• Develop Guidelines for SADC member states
• Assist competition policy through the fiscal
  framework
• Effectiveness in achieving goals
• Revenue costs
• Absence of tax sparing arrangements in DTAs that
  reduce the effectiveness of incentives
• Impact on costs/burden on tax administrations in
  SADC
• Effect on overall distribution of member states
  tax burden
• How to deal with disputes? Annex language
  non-committal doubtful how disputes may arise
  (compare to ECJ)

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Annex 3 Taxation Cooperation Implementation of
tax incentive article most problematic and
potentially divisive

• This area needs top level political guidance!
• EU example tax coordination driven by ECJ on the
  back of legally binding EU competition policy,
  state aid rules and code of conduct re. business
  income tax
• SADC has none of these institutions or framework
  policies yet
• Tax Subcommittee can continue to commission
  reports, adopt these but to what effect? For
  example ?
• 2 consultancy studies were adopted or are in the
  process of becoming official SADC policy
  documents which strongly caution against
  aggressive use of tax incentives
• SADC Study on the Effectiveness Economic
  Impact of Tax Incentives in the SADC Region
  (Bolnick Research Report)
• Ongoing consultancy on Guidelines and Tax
  Expenditure Budgeting Framework Design (Ogley
  Research Report)
• But since 2002 there is proliferation of tax
  incentives in Community

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Annex 3 Taxation Cooperation Implementation
of tax treaty policies

• Intended output Create for both direct
  indirect taxes a network of SADC-specific tax
  agreements to minimise on juridical double
  taxation, address fiscal evasion through
  facilitation of exchange of information mutual
  assistance in tax administration
• Note Tax Agreement are bilateral only, but a
  state begins negotiation on basis of a model
  treaty (OECD, UN or SADC)
• Common negotiation policy both inside outside
  SADC
• Strive for speedy negotiation, conclusion,
  ratification implementation
• Comprehensive treaty network in SADC -
• Exchange of information, mutual agreement and
  co-operation
• Develop a model tax treaty for SADC including
  guidelines for -
• Effective exchange of information
• Mutual assistance and co-operation procedures

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Annex 3 Taxation Cooperation Harmonisation of
indirect taxes

• Effective co-ordination harmonisation of
  administration
• WTO compliance - substituting import taxes with
  broad-based consumption taxes
• Explore areas of co-ordination for policy
  formulation administration on excise taxes
  (e.g., recently released Book Excise Taxes
  Admin in Southern Africa, SATI, 2006)
• Tobacco products
• Alcoholic beverages
• Non-alcoholic beverages
• Fuel products
• Luxury goods
• Co-ordination co-operation on policy
  administration of VAT /sales tax (minimum
  standard rate, SADC VAT forum)
• Minimise smuggling/counterfeiting in support of
  tax base
• Harmonise rates for tobacco, alcohol fuel
  (long-term goal)
• Provide mutual assistance in collection
• Bilateral multilateral agreements for exchange
  of information on VAT

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Annex 3 Taxation Cooperation Indirect tax
harmonisation implementation

• Most advances could be made in area of mutual
  assistance in tax admin, reducing compliance
  burden at fiscal frontiers, etc.
• Member states are agreed that there is a huge
  cooperation need in areas of Administration
• Tax design cooperation coordination very
  problematic due to developmental diversity in
  member states
• To drill down into it each individual tax
  instrument
• Evaluate benefits cross border agreements
• Possible evaluation of excise smuggling,
  especially tobacco
• Possible cross-border VAT agreements on admin
  assistance
• VAT Study on admin design problems re VAT in
  SADC ongoing
• Questionnaires on administrative capacity
• Will be workshopped and hopefully adopted
• Possible workshop on tax gap
• Possible in country diagnostic and tailor made
  interventions

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Annex 3 Taxation Cooperation Settlement of tax
disputes (this issue has been deferred)

• Give consideration to introducing mechanisms
  procedures for settlement of tax disputes,
  including a SADC body for tax dispute settlement
  purposes
• Given non-binding / non-committal nature of
  incentive language in Annex 3, the Tax
  Subcommittee would like to defer implementation
  on this article
• Further political guidance needed and
  implementation delay will have to be reviewed on
  a needs basis or if member states wish to flag
  disputes

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Annex 3 Taxation Cooperation Operationalisation
of FIPs Tax Annex

• Important to remember SADC principles of variable
  geometry differentiated speed of integration,
• laggards do not determine speed of tax
  coordination
• Big question is MOU language appropriate for
  Protocol? (Non-binding vs. binding)
• In tax e.g.
• Endeavour to avoid harmful tax competition- or
• Shall avoid harmful tax competition This has
  raised fundamental questions of commitment to
  MOU, to FIP indeed to fundamental SADC aims of
  integration
• Some see loss of fiscal sovereignty as an
  inevitable acceptable price to pay for
  benefits of integrated economies
• Others see it as too ambitious but MOU has been
  ratified
• Hence, political level must seek to inform what
  variable geometry differentiated speed will
  mean for tax coordination?

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Annex 9 Cooperation of Development Finance
Institutions (1)

• Objective of MOU
• Cooperating in capacity building through training
  programs, management secondment and mentoring
  programs
• Pooling resources for the finance and risk
  assessment of development projects, mainly
  infrastructure e.g. water, energy, transport,
  etc.
• DFIs critical for achieving regional integration
  through resource mobilization (SMMEs,
  agriculture, financial intermediation, etc)
• Strengthening governance codes and ensuring
  compliance with best practice for credit risk
  management and project appraisals
• Offering policy research capability and advisory
  services to DFIs
• Promoting the development of capital markets
  through issuance of long term financial
  securities such as bonds
• Assisting in broadening DFI mandates across
  national frontiers

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Annex 9 Cooperation of Development Finance
Institutions (2)

• Articles 2 establishes a DFI Network under
  subsidiarity
• Article 8 creates the Development Finance
  Resource Centre (DFRC)
• Network consists of DFIs CEOs or representative
  at general meetings
• DFRC is a standalone organ with its own
  management structure and Board of Trustees drawn
  from CEOs of DFIs
• Network will investigate the feasibility of a
  regional insurance guarantee facility
• Advanced development of a Project Preparation and
  Development Facility

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Annex 10 Non-banking Financial Institutions and
Services

• MOU Objective
• Annex creates a general framework for cooperation
  amongst CISNA regulatory authorities
• Specifically, to develop financial services
  industry, protect consumer rights, explore
  opportunities for joint financial products,
  liberalize market integration and access and
  harmonize regulations and laws
• Ensure compliance with international standards
  i.e. IOSCO, IAIS, IOPRS)
• Authorities concluded bilateral MOU on
  information exchange
• Implementation and monitoring framework developed
  for CISNAs strategic plan
• Finalizing a report on capital market integration
  in SADC

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Annex 11 Cooperation in SADC Stock Exchanges

• MOU Objective
• Vision is an integrated real-time network of
  national securities markets in SADC for transfer
  of skills, intelligence and technologies
• Improve the depth and breadth of securities
  markets to enhance liquidity and tradeability of
  financial instruments
• Ensure fair and transparent trading rules and
  operations (listing requirements, etc)
• JSE provides secretariat functions

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Input by the Representative from the CCBG
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Outstanding MOUs

• Anti-money laundering
• Project preparation and development facility
  (PPDF)
• Accounting and Auditing Standards
• SADC Banking Association

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What is the Role of the South Africa?
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SOUTH AFRICA AND THE SADC REGION

• RSA joined SADC in 1994
• National Treasury and FISCU in 1995 (another
  sector in health)
• Coordinated the formulation of broad principles
  as a basis for the integration of SADCs finance
  and investment sector
• Since restructuring, sector coordinating units
  consolidated in Gaborone
• Huge challenges in terms coordination due to
  severe capacity constrains within the SADC
  Secretariat

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Going Forward

• RSAs ratification will be signaling factor for
  other SADC Member States to expedite such a
  process
• Continue to operate within the ambit of the RISDP
  by focusing on deepening regional integration
• To position ourselves as strong champions of
  the FIP priorities based on viable internal
  cooperation (private sector involvement
  imperative)
• To continuously undertake cost benefit analysis
  of engaging within the region
• Key process towards implementation and
  enforcement
• Allow RSA to embark on a communication and
  information dissemination exercise to create
  awareness and cooperation with local stakeholders
  (workshops, targeted delivery, etc)

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CONCLUDING REMARKS

• FIP creates a cooperation framework within the
  finance and investment sector
• FIP is now a public document and needs
  comprehensive buy-in by various stakeholders e.g.
  business organizations, academics, politicians,
  etc
• Provides a challenge for a leadership role for
  South Africa given the extent of the countrys
  development in financial systems
• Need for the development of a dissemination
  strategy towards a country-specific
  implementation plan for the Protocol

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Usuku Oluhle