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The Reserve Bank reels from Shuttleworth’s victory in the Supreme Court of Appeal for the repayment

Tuesday, 04 November 2014   (0 Comments)
Posted by: Author: PwC South Africa
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Author: PwC South Africa

In 1999 Mark Shuttleworth, a South African born entrepreneur, sold his internet consultancy company for $575 million. He then formed a venture capital company that was to compete in the world-wide marketplace. He also founded the Shuttleworth Foundation, a non-profit organisation that supported social innovation in education, to which he donated R180 million. In 2001 Shuttleworth emigrated to the Isle of Man, a tax-efficient jurisdiction, and said that he had emigrated because the system of exchange control in South Africa was severely restrictive and impeded investment outside its borders.

The imposition of the ten per cent exit levy

When Shuttleworth emigrated, South Africa’s Exchange Control Regulations, which had been published in the Government Gazette on 1 December 1978 in terms of section 9 of the Currency and Exchanges Act 9 of 1993, had the effect of blocking the expatriation of his assets. At that juncture, his blocked loan accounts were valued at over R4 billion.

The Reserve Bank granted him permission to remit interest on his blocked loan account out of South Africa, but there could be no transfer of capital without separate Reserve Bank permission.

When he applied to the Reserve Bank to transfer R1.5 billion of his blocked loan account (an application that he could not make directly, but that had to be made through an authorised dealer bank, which was Standard Bank in this case), his application was granted subject to the payment of a ten per cent exit levy.

The payment of the exit levy was made under protest

At the time, Shuttleworth believed that this exit levy was lawful. However, when he decided to transfer his remaining funds out of South Africa, he applied to the Reserve Bank to do so under protest, in order to preserve his right to challenge the imposition of the exit levy (which amounted to some R250 million) in respect of those funds.

In imposing the ten per cent exit levy, the Reserve Bank relied exclusively on Exchange Control Circular D375 of 26 February 2003 which, at that juncture, explicitly provided that any approved transfer of funds in excess of R750 000 would be subject to a ten per cent exit charge.

The legal challenge to the constitutionality of the exit levy

Shuttleworth challenged the constitutionality of the ten per cent exit levy, first in the North Gauteng High Court and then on appeal to the Supreme Court of Appeal. The judgment of the Supreme Court of Appeal was delivered on 1 October 2014.

In response to Shuttleworth’s challenge, the Reserve Bank (see para [12] of the Supreme Court of Appeal judgment) stood by the aforementioned Exchange Control Circular as the basis for its decision to impose the levy.

Also significant was Reserve Bank ruling Section B 5(E)(iii)(e) of the Exchange Control Rulings as reflected in Circular D380, which reads –

Any other assets belonging to the emigrants at the time of their departure or accruing to them thereafter will require to be brought under the control of an Authorised Dealer. The Exchange Control Department of the South African Reserve Bank will, on application, consider requests for the unblocking of the emigrant’s remaining assets. Any approval will be subject to an exiting schedule, at the discretion of the Exchange Control Department of the South African Reserve Bank, and an exit charge of 10%.

It was common cause that the ten per cent exit levy was applied by the Reserve Bank on a generalised basis and without any exercise of discretion. Shuttleworth’s counsel argued that the exit levy therefore ‘operated as a generally applicable revenue raising mechanism’ – which the Reserve Bank (see para [13]) of the judgment ) denied, though it admitted that, as a matter of history, there had been no instance in which it had not imposed the exit levy.

The basis of the constitutional challenge to the exit levy

The core of the argument advanced by Shuttleworth’s counsel (see para [15]) was that the exit levy was a tax and that taxation can be imposed only in terms of an Act of Parliament, which must be passed in accordance with the special procedure required by the Constitution for a ‘money bill’.

It was further argued (see para [15]) that the regulation relied on by the Reserve Bank did not authorise the raising of revenue because it had not been approved by Parliament. Nor, it was argued, did the regulations in question provide that the powers of the Minister that had been delegated to the Reserve Bank must be exercised in accordance with the requirements of procedural fairness, thus creating an unbridled discretion inconsistent with the constitutional right to procedurally fair administrative action.

The High Court had not been persuaded by these arguments; Legodi J held that the ten per cent exit levy did not amount to a revenue-raising mechanism but was intended to be a disincentive to the exporting of capital from South Africa and that there was a legislative underpinning to its imposition in the form of the regulations.

Shuttleworth’s counsel argued (see para [132]) that the regulations in question infringed everyone’s constitutional rights because the prohibition contained in the regulations on transactions involving currency, gold or other foreign currency interfered with everyone’s right to deal with his property as he chose and infringed on the freedom to trade in placing a limit on the transactions that can be undertaken in relation to his property and in the pursuit of his trade.

The decision of the Supreme Court of Appeal

The Supreme Court of Appeal judgment noted (see para [21]) that Shuttleworth did not challenge the principle of exchange control, for he accepted that controls were necessary; rather, he contended that many facets of the exchange control regime were unconstitutional.

The Reserve Bank defended the flat rate exit levy of ten per cent on the basis, inter alia (see para [23]) that the levy was imposed at a flat rate in the interests of consistency and certainty. The Reserve Bank rulings and circulars, it was argued, were administrative measures that did not have the force of law, but facilitated the application of the legislation and the execution of the policy directives of government.

In the Supreme Court of Appeal, the Reserve Bank (see para [26]) relied exclusively on regulation 10(1)(c) as the basis of its professed enabling power to impose the exit levy. This regulation provided that –

No person shall, except with permission granted by the Treasury and in accordance with such conditions as Treasury may impose enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.

The Court ruled in this regard that, even though this regulation ‘served a legitimate purpose’, it did not follow that it could be used as a revenue- raising mechanism for the collection of revenue; taxes or levies had to follow a prescribed procedure.

Given that the imposition of a ten per cent exit levy was applied rigidly and as a blanket condition that did not involve Treasury in ‘assessing the peculiar facts of the application before it’ and that it involved a mechanical application of the policy decision of the Minister, it followed, said the court (at para 28]), that –

It can thus hardly be in dispute that the levy was a revenue-raising mechanism for the State.

Consequently, said the court, regulation 10(1)(c) would be intra vires only if it legitimately authorised the raising of revenue for the state. In this regard, it was not in dispute (see para [29]) that the regulation had not been approved in terms of section  9(4) of the Currency and Exchanges Act, which reads as follows –

The Minister of Finance shall cause a copy of every regulation made under this section to be laid upon the Table of both Houses of Parliament within fourteen days after the first publication thereof in the Gazette . . .

Every such regulation calculated to raise any revenue shall cease to have the force of law from a date one month after it has been laid on the Table unless before that date it has been approved by resolution of both Houses of Parliament.

It was undisputed, said the court (at para [29]), that regulation 10(1)(c) had not followed the procedure for the imposition of tax prescribed by section 9(4) of the Currency and Exchanges Act, quoted above. The court said that –

A founding principle of Parliamentary democracy is that there should be no taxation without representation and that the executive branch of government should not itself be entitled to raise revenue but should rather be dependent on the taxing power of Parliament, which is democratically accountable to the country’s tax-paying citizenry.

The court went on to point out (see para [30]) that ‘Our constitution is careful to ensure that the power of taxation is tightly controlled in that section 77(1) of the Constitution defines what constitutes a ‘money bill’ and section 73(2) provides that only the Minister of Finance may introduce a money bill in the National Assembly’. Thus, said the court –

the ordinary power of the National Assembly and the National Council of Provinces to initiate and prepare legislation does not extend to the initiation or preparation of money bills . . . . All of these constitutional provisions thus render it unconstitutional for taxes or levies to be raised by delegated legislation which is not specifically authorised in a money bill enacted in accordance with the money bill provisions of the Constitution.

The court noted (at para [31]) that the exit levy raised revenue for the state and that while it was in force it had generated approximately R2.9 billion. The court went on to say that –

The levy thus fell within the category of ‘taxes, levies or duties’ contemplated by sections 75 and 77 of the Constitution. The reference in regulation 10(1)(c) to the power of Treasury to impose conditions on the export of capital from the Republic cannot be construed to include the power to impose a tax or levy on such export of capital. It must follow that the imposition of the ten per cent levy was inconsistent with sections 75 and 77 of the Constitution and invalid and ultra vires regulation 10(1)(c).

The court concluded (at para [38]) that –

In the light of the conclusions reached it follows that the appeal in relation to the imposition of the ten per cent exit levy must succeed.

Shuttleworth’s right to repayment of the exit levy

Having established that the imposition of the ten per cent exit levy was unconstitutional, the court turned to the question whether Shuttleworth had a legal right to repayment. Such a claim is categorised as a condictio indebiti, and the issue was whether the legal prerequisites for such a claim were, in the circumstances of this case, satisfied.

In this regard, it was of critical importance that Shuttleworth had paid the levy under protest, thereby reserving the right to seek a reversal of the payment.

The Supreme Court of Appeal held (at para [35]) that there was no legal bar to the court’s making an order that the exit levy be repaid to Shuttleworth with interest, and proceeded (at para [39]) to make such an order.

The implications for other persons who have paid in the past

Whilst the ten per cent exit levy was in force (see the judgment at [31]), it raised approximately R2.9 billion for the fiscus. Clearly, therefore, many people have, over the years, paid a levy that has now, in hindsight, been declared unconstitutional and therefore invalid.

It is unlikely, however, that any of these other persons have a legal claim for repayment.

Firstly, the exit levy was abolished as from November 2010 – some four years ago – as part of the liberalisation of exchange controls. Claims for the repayment of any exit levy imposed whilst it was in force will thus have prescribed (which is to say that the right to claim repayment will have been extinguished by the effluxion of time, the prescriptive period in this case being three years) unless legal proceedings for repayment had been instituted before the claim prescribed. Even then, no legal claim for repayment will lie unless the claimant had paid the levy under protest.

The wider implications of the judgment

The judgment did not hold – and indeed Shuttleworth did not argue – that exchange controls are per se unconstitutional. Nor did the Supreme Court of Appeal rule that the regulations in terms of which the exit levy was imposed were inherently unconstitutional – their flaw was that the levy constituted a tax and that the legislation in terms of which the regulations had been issued had not been passed in the manner required by the Constitution in respect of a money bill.

It is clear from the judgment that any levy imposed by the Reserve Bank or other organ of state will be, in substance, a tax and consequently will be unconstitutional unless the empowering legislation was passed in the manner required of a money bill.

So long as a levy imposed by an organ of state is categorised as a revenue-raising measure, and thus as a tax (in other words, any levy for the benefit of the fiscus) that is imposed on a blanket basis – that is to say, without the exercise of a discretion that takes account of the individual circumstances of the applicant – it will not be constitutionally valid unless two conditions are satisfied. Firstly, the relevant regulation (such as regulation 10(1)(c) in relation to the exit levy in issue in the Shuttleworth litigation) will have to be approved in the manner required by section 9(4) of the Currency and Exchanges Act, as explained in para [28] of the judgment. Secondly, the legislation underpinning the regulation in question will have to have been passed in accordance with the process applicable to a money bill.

Conversely, any current or future levy that is sanctioned by ordinary legislation (that is to say, legislation that has not been passed as a money bill) and is imposed on a discretionary basis – that is to say, a levy that is imposed on the basis of a discretionary decision by the Reserve Bank or National Treasury or its agents on the basis of the circumstances of the particular applicant – will be constitutionally valid if the empowering legislation has been passed by Parliament in the ordinary way, that is to say, not in the particular manner required for a money bill.

Further appeal to the Constitutional Court

The Reserve Bank is no doubt mulling over whether to take the Supreme Court of Appeal judgment on further appeal to the Constitutional Court, which has the power to overturn that judgment and substitute its own.

It is reported that, for his part, Shuttleworth is considering mounting a separate and frontal constitutional challenge to exchange control itself. He is reported as saying that –

exchange controls benefit banks, but stifle the economy making products more expensive and causing the most vulnerable to suffer. It is more expensive to work across South African borders than almost anywhere else on Earth, purely because the framework of exchange controls creates a cartel of banks authorized to act as the agents of the Reserve Bank in currency matters. We all pay a very high price for that cartel, and derive no real benefit in currency stability or security for that cost.

This article first appeared on

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