Obsolete laws may be contributing to South Africa's offshoring problem

The draining of talent and wealth from the South African economy to international markets is an issue that appears to be persistent in its intensity. According to analysts at Tax Consulting SA, the exchange control practices in the country might be contributing to the issue.

Analysts from the public and private sectors in South Africa are looking to determine the best way forward for economic growth in the country, and one of the biggest obstacles thus far is that there is a tendency for talented and wealthy South Africans to either move abroad themselves, or transfer their wealth abroad.

Various conditions exist that contribute to this scenario, ranging from an inefficient and constrained business environment to high taxes. Public coffers in South Africa have been under considerable strain in recent years in light of sluggish economic growth, and increasing tax and interest have been the go to strategies for the South African Revenue Services (SARS) and the South African Reserve Bank (SARB).

As a result, wealthy South Africans have come under risk of losing a substantial share of their earnings to taxes, which has prompted them either to move themselves and their business abroad, or to shift their wealth to tax havens. To mitigate the former tendency, the government introduced the expat tax to heavily charge wealthy South Africans living abroad.

However, the issue of migrating wealth to offshore locations where tax regulations are more lenient remains pertinent. Analysts at Tax Consulting SA have been monitoring this situation, and have noticed an increase in the frequency of efforts to move wealth abroad, and the primary cause is the lack of security on investments within South Africa. 

One of the major issues, according to Legal Manager for Financial Emigration at Tax Consulting SA Jonty Leon, is that a number of South Africans are still subject to foreign exchange controls, which regulate investment in and selling of foreign currencies. The regulation was enacted in 1933.

“In my opinion, this law is quite antiquated. Over the past few years and for the foreseeable future, this law will continue to be phased out and simplified, but the process has been slow,” says Leon. Investors in South African currency are also subject to the act, which forces them to consider a number of factors when investing.