State levies – tax or regulatory charge?
03 July 2015
Posted by: Author: PwC South Africa
Author: PwC South Africa
The application by billionaire Mark Shuttleworth to obtain a refund of a levy imposed on him in order to remit funds abroad has been rejected by our courts. The Constitutional Court recently reversed the decision of the Supreme Court of Appeal in which it declared that the 10% levy imposed on emigrants who wished to transfer funds in excess of the mandated levels had not been properly enacted.
Shuttleworth had attacked the validity of the charge that had been imposed. The basis of his claim was that the charge that he had incurred was a tax and that it had been imposed in a manner that was inconsistent with the Constitution of the Republic of South Africa and with the Currency and Exchanges Act, 1933. He had argued further that the whole system of exchange control was inconsistent with the Constitution and should be declared invalid.
In the matter of South African Reserve Bank and Another v Shuttleworth and Another ZACC 17 (18 June 2015), the crisp issue facing the Court is set out in paragraph  of the judgment of Moseneke DCJ, with which the Court (Froneman J dissenting) concurred:
"In this Court too, the decisive question is whether the exit charge, as Mr Shuttleworth contends, was a tax imposed for the purpose of raising revenue for the State or, as the Reserve Bank and Minister submit, a regulatory charge whose main object was to disincentivise the export of capital. If the charge was a tax – a revenue-raising mechanism – then the regulation that authorised the exit charge would be invalid. This would be so because the exit charge had not been enacted in accordance with prescribed constitutional and statutory strictures.”
The legal framework
Section 9 of the Currency and Exchanges Act ("the Act”) grants power to the President to make regulations relating to currency, banking or exchanges. The Exchange Control regulations had come into effect in 1960 through the exercise of that power. Regulation 10(1)(c) provides:
"No person shall, except with permission granted by the Treasury or by an authorised dealer and in accordance with such conditions as the Treasury or the authorised dealer may impose—
. . .
(c) enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”
The entire dispute therefore revolved around whether the regulation was a money bill or whether the 10% levy was calculated to raise revenue. It was common cause that the procedures applicable to money bills or to regulations calculated to raise revenue had not been followed.
The term "Treasury” in the regulations is defined as meaning the Minister of Finance.
Section 9(4) of the Act provides that regulations made by the Minister must be tabled in Parliament within a prescribed period and, if the regulation is calculated to raise revenue, he must attach to the regulation a statement of the revenue that he estimates will be raised within 12 months of the regulation coming into force. Every regulation calculated to raise revenue ceases to have force and effect from a date one month after it has been tabled unless it has before that date been approved by both houses of Parliament.
The Constitution contains provisions outlining the procedures that must be followed for the valid enactment of legislation. Section 77 deals with "money bills”. A money bill is a bill which, inter alia, imposes national taxes, levies, duties or surcharges. Section 77(3) requires that all money bills must be considered in accordance with the procedure established in section 75, which, in turn, sets out the procedure by which a bill passed by the National Assembly should be dealt with in the National Council of Provinces before it may receive Presidential assent.
The entire dispute therefore revolved around whether the regulation was a money bill or whether the 10% levy was calculated to raise revenue. It was common cause that the procedures applicable to money bills or to regulations calculated to raise revenue had not been followed. If an affirmative answer were to be given to either of these issues, the appeal of the Reserve Bank would fail.
Did the regulation impose "national taxes, levies, duties or surcharges”?
The starting point was to identify the meaning of the term "national taxes, levies, duties or surcharges”. After concluding that a literal meaning of any of the terms was "less than useful”, Moseneke DCJ applied the principles of interpretation (paragraph ):
It was agreed by both parties (paragraph ) that a law other than a money bill could be passed authorising government to impose a regulatory charge. So, the question to be answered was:
"We must resort to the context within which the term is used and the purpose for which the tax, levy, duty or surcharge has been imposed.”
It is necessary, Moseneke DCJ said (paragraph ), to look beyond the words themselves:
"…how does one distinguish a regulatory charge from a tax that may be procured only through a money Bill?” (paragraph )
The Court found (paragraph ):
"So, aside from mere labels, the seminal test is whether the primary or dominant purpose of a statute is to raise revenue or to regulate conduct. If regulation is the primary purpose of the revenue raised under the statute, it would be considered a fee or a charge rather than a tax. The opposite is also true. If the dominant purpose is to raise revenue then the charge would ordinarily be a tax. There are no bright lines between the two. Of course, all regulatory charges raise revenue. Similarly, "every tax is in some measure regulatory”. That explains the need to consider carefully the dominant purpose of a statute imposing a fee or a charge or a tax.” (Footnotes removed)
Moseneke DCJ therefore concluded (paragraph ):
"Here we are dealing with exchange control legislation. Its avowed purpose was to curb or regulate the export of capital from the country. The very historic origins of the Act, in 1933, were in the midst of the 1929 Great Depression, pointing to a necessity to curb outflows of capital. The Regulations were then passed in the aftermath of the economic crises following the Sharpeville shootings in 1960. The domestic economy had to be shielded from capital flight. Regulation 10’s very heading is "Restriction on Export of Capital”. The measures were introduced and kept to shore up the country’s balance of payments position. The plain dominant purpose of the measure was to regulate and discourage the export of capital and to protect the domestic economy.” (Footnotes removed)
"The exit charge was not directed at raising revenue. The uncontested evidence of the Minister is that the exit charge was part of the regulation directed at easing in the dismantling of exchange controls. The economy was on a better footing and could afford the export of some capital provided it was not wholesale. The charge or levy was expected to slow down the extent and the frequency of capital externalisation.”
It was therefore held that the 10% levy was not a national tax, levy, duty or surcharge but a regulatory charge. The regulation therefore was not subject to the procedural requirements of a money bill.
Was the charge, levy or tax calculated to raise revenue?
The regulation may nevertheless have been invalid under the provisions of section 9(4) of the Act if the measure was calculated to raise revenue.
Moseneke DCJ rejected the argument that the word "calculated” should be interpreted as "likely”. Instead, he held (paragraph ):
"I have already found that the exit charge did not have revenue-raising as its primary object. It was not calculated to raise revenue. It was directed at curbing or discouraging export of capital. I am not persuaded by the submission that the wider import of the word "likely” is to be preferred in this instance over the ordinary meanings of "calculated”, which include "intended”, "designed”, "planned”, or "considered”. Section 9(4) of the Act is directed at allowing Parliament to scrutinise fiscal measures that are planned or designed to gather income for the fiscus. The section is not directed at every administrative or regulatory levy, charge, fee, or surcharge found in ample legislation.” (Footnotes removed)
In any event, it was held, regulation 9(4) was an anachronism (paragraph ):
"I merely point out that with the advent of the Constitution, the procedural requirements of section 9(4) have become anachronistic. They have been superseded by the Constitution. If the exit charge was directed at raising revenue and therefore was a national tax, it would be hit by the formalities for adopting a money Bill. On the other hand, if the exit charge was not calculated to raise revenue and thus was not akin to a money Bill, it would not have to comply with section 9(4).”
The second issue was therefore also decided in favour of the Reserve Bank.
Moseneke DCJ had, in the course of his judgment (paragraph ), quoted from the announcement of the relevant exchange control measure by the Minister of Finance in the Budget Speech of 2003, where the Minister said:
The Court must have identified from the passage quoted that the exit charge was not the only measure that would apply to any application to externalise funds. Approval would involve a timetable or schedule for remittance of funds. It is questionable whether the charge was a deterrent to persons who had already left the Republic and intended to externalise their capital.
"Holders of blocked assets wishing to exit more than R750 000 (inclusive of amounts already exited) must apply to the Exchange Control Department of the SA Reserve Bank to do so. Approval will be subject to an exiting schedule and an exit charge of 10% of that amount.”
Moseneke DCJ came to his conclusion that the charge was not calculated to raise revenue on the evidence of the Minister that the charge was "part of the regulation directed at easing in the dismantling of exchange controls” (paragraph ).
While Moseneke DCJ quoted (at paragraph ) from the 2003 Budget Speech in setting out the history of exchange controls, he was apparently unaware that, in the same speech, the Minister of Finance had announced the formation of a R10 billion fund to support empowerment initiatives, in respect of which the Minister had then stated:
"This will in part be financed from the extraordinary proceeds of the exchange control measures announced today.”
The above statement would seem to contradict the conclusion of Moseneke DCJ that the exit charge was not calculated to raise revenue. The funds that would be raised from the exchange control measures that were to be announced (which included the exit charge) were intended to provide finance for a specific government initiative. It cannot be ascertained whether this issue was canvassed in the proceedings.
This comment may be moot, in view of the further observation, obiter, in paragraph  of the judgment that the procedural requirements of section 9(4) of the Act have been superseded by sections 75 and 77 of the Constitution. This further observation raises issues in relation to other legislation.
The other issue of concern is how the dictum that any measure that is intended to raise revenue should be processed as a money bill should be applied in practice.
In determining that the exit charge was a regulatory charge, the Court placed reliance on the dominant purpose of the legislation. It found that the dominant purpose of the Act was to shore up the country’s foreign currency reserves. This begs the question: "What is the position with a levy imposed under legislation whose dominant purpose is to raise revenue?”
The judgment (at paragraph ) confirmed an earlier decision that:
Environmental levies are imposed under the Customs and Excise Act. Are they to be considered as a national tax, levy, duty or surcharge or as a regulatory charge? It is undeniable that the levies are intended to inform or regulate behaviour, yet they are an element of a fiscal statute. May they only be imposed or amended under a money bill?
"…although the regulatory aspect of customs and excise legislation served an important public purpose, the statute was ‘essentially a fiscal piece of legislation’.”
While we agree that the principle is correct that the context must be taken into account to determine whether a charge imposed under a law is a tax or a regulatory charge, the context should include not only the legislative framework but information known to the persons responsible for the legislation.
Sight should never be lost of the purpose of sections 77 and 75 of the Constitution, namely that it is desirable that taxes should be approved by the persons elected to govern – there should be no taxation without representation.
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This article first appeared on pwc.co.za.