SADC Finance and Investment Protocol Presentation by the

SADC 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 region • 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 2

SADC – a brief history SADCC formed by frontline SADC states formed 1981 1992 South Africa joins SADC 1994 SADC adopts its Regional Indicative Strategic Development Plan 1999 SADC Free Trade Area 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 3

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 accede 4

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 Union 2008 Macroeconomic convergence targets 2010 Common Market 2015 Macroeconomic convergence targets Single currency 2016 Monetary Zone 2018 Macroeconomic convergence targets 5

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 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 6

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, etc) • Outline objectives, scope, and institutional requirements • Summit approves protocols • Binding on those who ratified or acceded • Two-thirds majority to enter into force 8

Finance and investment protocol • Mo. Fs approved in July 2006 Implementation • SA signed in October 2006 Signature, ratification and accession Le ga l pr oc es s • Botswana, DRC, Lesotho, Madagascar, Mauritius, Mozambique, SA, Swaziland, Tanzania and Zimbabwe – signed FIP • Two technical subcommittees overseeing process – report to Mo. Fs – Committee of Senior Treasury Officials – Committee of Central Bank Governors Legal opinion by national authorities Vetted by SADC legal team 9

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 10

Finance and Investment Protocol covers, cont. • 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 11

SADC Finance and Investment Protocol… (Annexes)

Annex 1: Cooperation on Investment • 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 13

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 (1965) • Action Plan adopted on 30 January 2007 under the Investment Subcommittee 14

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% External debt/GDP <60% Current account/GDP <9% <3% >3 mnths >6 mnths Sustainable External reserves (imports cover) • 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 Panel • Peer Review Panel to issue an explanatory communiqué on its assessments 15

Annex 3: Taxation Cooperation and Related Matters • Mo. U 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 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 16

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 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 17

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 18

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 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 20

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 21

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 22

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 23

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: • 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 24

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 mobilization • 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 26

Annex 9: Cooperation of Development Finance Institutions • 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 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 27

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 CISNA’s strategic plan • Finalizing a report on capital market integration in SADC 28

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 29

Outstanding MOUs… • Anti-money laundering • Project preparation and development facility (PPDF) • Accounting and Auditing Standards • SADC Banking Association 30

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) 31

Thank you • Neil. Cole@Treasury. gov. za Ø+27 12 315 -5949 • Matodzi. Rathumbu@Treasury. gov. za Ø+27 12 315 -5884 • Martin. Grote@Treasury. gov. za Ø+27 12 315 -5706 32