SADC Finance and Investment Protocol

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Finance and Investment Protocol

          Presentation by the National Treasury
         to the Portfolio Committee on Finance,
                            11 September 2007
                             Context of presentation

• SADC has its genesis in the political liberation of the
• Increasingly focused on mobilising and strategically
  utilising resources for the benefit of Southern Africa
• Purpose of the FIP is too harmonise the finance and
  investment policies of Member States – align with
  SADC objectives
• Presentation provides an overview of SADC, covers
  the Protocol process and elaborates on the FIP

                                          SADC – a brief history

                                     SADC adopts its
SADCC                                Regional
formed by                            Indicative                SADC Free
frontline  SADC     South Africa     Strategic                 Trade Area
states    formed    joins SADC       Development Plan

1981        1992         1994          1999                       2008

Key objectives, include:
• To use “regional integration” as instrument for sustainable and equitable
  growth for poverty alleviation and a higher standard of living for the region
• Encourage development through self-reliance
• Achieve these main objectives through institutions and mechanisms for
  the mobilization of resources and implementation of SADC programmes
                                              Institutional reform

• 2001 Extra-Ordinary Summit in Windhoek approved formation of
  SADC Directorates
    – Trade, Industry, Finance and Investment; Food, Agriculture, and
      Natural Resources; Infrastructure & Services; and Social and Human
      Development and Special Programmes
    – Aim to strengthen capacity to deliver on its mandate
• Align with African Union’s regional integration programme, esp.
    – Strengthening regional economic (communities) integration towards
      continental integration
• To expedite the ratification and implementation of protocols, which
  are legal instrument binding on all Member States who ratify and

                                               Strategic direction

   • Reform process leads to the adoption of Regional Indicative
     Strategic Development Plan
       – Deepening integration agenda - accelerating poverty eradication and
         attaining other economic and non-economic development goals
       – Covers HIV/AIDS, infrastructure, gender, etc
   • Key targets over 15 years iro trade, economic liberalisation
     and development:

                Customs      Common         Single         Monetary
                 Union        Market       currency         Zone

    2008        2010          2015          2016           2018

Macroeconomic             Macroeconomic                 Macroeconomic
 convergence               convergence                   convergence
    targets                   targets                       targets
                            Challenges of RISDP, and FIP

• 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
• Improving fiscal reforms and public debt reduction
• Developing regional industrial policy mechanisms to diversify
• Ensuring effective resource mobilization through financial
  markets and donor coordination
• Promoting the development of relevant skills
SADC Protocol Process
               Protocol – how they work in SADC

• 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,
• Outline objectives, scope, and institutional
• Summit approves protocols
• Binding on those who ratified or acceded
• Two-thirds majority to enter into force

                     Finance and investment protocol

• MoFs approved in July 2006
• SA signed in October 2006                                  n
• Botswana, DRC, Lesotho,
  Madagascar, Mauritius,                 Signature,
  Mozambique, SA, Swaziland,                 and
  Tanzania and Zimbabwe –                accession
  signed FIP
                                     Legal opinion by
• Two technical subcommittees           national
  overseeing process – report to
                                   Vetted by SADC
   – Committee of Senior             legal team
     Treasury Officials
   – Committee of Central Bank
        Finance and Investment Protocol covers

• Creating a favourable investment climate
• Achieving macroeconomic stability and convergence
• Collaborating on tax matters
• Several areas of monetary collaboration:
   – exchange control policies
   – legal and operational frameworks
   – payment, clearing and settlement systems
   – supervision

• Cooperating in the activities of DFI

       Finance and Investment Protocol covers,

• Co-operating in non-banking financial institutions
  and services
• Facilitating development of capital markets
• Co-operating in SADC stock-exchanging
• Co-operating in anti-money laundering
• Co-operating in Project Preparation and
  Development Fund

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

• Development of a “SADC Investment Zone” to attract
• 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

                                      Annex 1:
                     Cooperation on Investment

• Creating support mechanisms (market access,
  etc) for 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
• Action Plan adopted on 30 January 2007 under
  the Investment Subcommittee

                                                     Annex 2:
                                    Macroeconomic Convergence
     Overall purpose is to promote economic stability-oriented policies

                 Target                2008              2012             2018
Inflation rate                         <10%              <5%              <3%
Budget deficit/GDP                      <5%              <3%              <3%
External debt/GDP                      <60%            <60%               <60%
Current account/GDP                     <9%              <9%              <3%
External reserves (imports cover)     >3 mnths       >6 mnths         Sustainable

•   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
      – submit assessments on the region’s convergence status to a Peer Review

•   Peer Review Panel to issue an explanatory communiqué on its assessments
                                        Annex 3:
         Taxation Cooperation and Related Matters

• MoU signed by SADC Committee of Ministers for Finance &
  Investment in August 2002
• Seeks to promote coordination of tax policy & admin
• Underpins objectives of formulating & coordinating sound policies
   – Good tax policy design practices in support of economic growth &
   – 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
   – Reduce obstacles to intra-SADC trade and investment

                                          Annex 3:
           Taxation Cooperation and Related Matters

•   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
     – 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

                                      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
                                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
    – 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                                                         19
                              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
                                       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
                              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
                                  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

                             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
•   Tax design cooperation & coordination very problematic due to
    developmental diversity in member states:

• 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:
• Possible workshop on tax gap
• Possible in country diagnostic and tailor made interventions

Annexes 4 to 8 covered by SARB
                 Annex 9: Cooperation of Development
                                 Finance Institutions

•   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
•   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
             Annex 9: Cooperation of Development
                             Finance Institutions

• Articles 2 establishes a DFI Network under “subsidiarity”
• Article 8 creates the Development Finance Resource Centre
• Network consists of DFIs CEOs or representative at general
• DFRC is a stand-alone body 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 – based at DBSA

                      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,
• Authorities concluded bilateral MOU on information exchange
• Implementation and monitoring framework developed for CISNA’s
  strategic plan
• Finalizing a report on capital market integration in SADC
           Annex 11: Cooperation in SADC Stock

• 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
• Ensure fair and transparent trading rules and
  operations (listing requirements, etc)
• JSE provides secretariat functions
                           Outstanding MOUs…

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

                                                 Way forward…

• RSA’s ratification will be a signal to other SADC Member States to
  expedite 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
• 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)

                              Thank you

  +27 12 315-5949

  +27 12 315-5884

  +27 12 315-5706


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