"Intellectual Property (IP) intensive industries such as South Africa's growing technology sector face various challenges with respect to cross-border transactions, including access to offshore markets for the commercialisation of IP, as well as financing and security for such transactions. Chief among these challenges is South Africa's stringent exchange control regime, in terms of which the transfer and licensing of South African-owned IP is subject to restrictive exchange controls. However, recent policy statements made in National Treasury's 2020 Budget Review are indicative of an intention to relax restrictive export controls administered by the South African Reserve Bank in respect of South African-owned IP. These exchange controls regulations have long served as a hindrance to cross-border transactions involving South African IP and have restricted the ability of South African residents to maximise the commercial potential of their IP.
The current position is that both the licensing and transfer of South African-owned IP to a non-resident, whether related or not, requires approval from either an authorised dealer or the South African Reserve Bank, depending on the circumstances. South Africa's restrictive exchange control regime is uncommon in foreign jurisdictions and is therefore off-putting to foreign investors.
A policy statement in the 2020 Budget Review, made in the context of an announcement of broader reforms in the South African exchange control regime, expressly provides that "the export of intellectual property for fair value to non-related parties will not be subject to approval". This suggests that the overly restrictive nature of onerous exchange controls that inhibit low risk cross-border IP transactions between unrelated parties may soon be alleviated.
The potential relaxation of South Africa's exchange control regulations is a welcome development, particularly given that South Africa follows an international tax regime and there are existing tax measures, such as transfer pricing rules, to ensure that value is received for IP in South Africa. This renders the extra layer of red-tape in the form of South African Reserve Bank approval largely superfluous. For instance, the auditor's letter, confirming the basis of the calculation of the value of the IP or the license fee, which is required in order to obtain approval for cross-border transfers of IP or the licensing of IP out of South Africa, is an onerous administrative burden, particularly because auditors are reluctant to issue such letters as there are no auditing standards regulating the valuation of IP in South Africa.
Such a relaxation of the exchange control regulations may also allow for increased investment into South Africa as technology and other IP-intensive companies might feel more confident that they can deal with the transfer of IP assets that are developed in South Africa with more certainty and less restriction.
The policy statement is not yet law and will first need to be officially implemented through circulars issued by the SARB's Financial Surveillance Department. National Treasury has, however, indicated that the exchange control reforms will be rolled out over the next 12 months. We eagerly await further communication from government in this regard, and will report on the new policy once it has been implemented."
Originally published Apr 28, 2020.
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