Regulatory Briefing to Members - SAVCA...Sep 29, 2015 · 1.1 FSB: FAIS Richard Flett 8 minutes 1.2 NT: Draft Retirement Reform Richard Flett 8 • AIFMD J-P Fourie 5 • Taxation

Regulatory Briefing to MembersSAVCA Regulatory Sub-Committee

29 September 2015

Agenda

• Regulation/FSB/Other

1.1 FSB: FAIS Richard Flett 8 minutes

1.2 NT: Draft Retirement Reform Richard Flett 8

• AIFMD J-P Fourie 5

• Taxation Policy/ National Treasury

3.1 Section 23N, 23M Craig Dreyer 8

3.2 Section 8C Income Tax Act Craig Dreyer 8

3.3 Trusts (Davis Commission) Richard Flett 8

• Tax and other reporting, to SARS and others

4.1 DWT & IWT Craig Dreyer 8

4.2 FATCA & CRS Richard Flett 8

• BEE: DTI codes and FSC Codes Danny Hatfield 15

• Competition Regulation (SA and COMESA)

Shawn van der Meulen 8

2015 Regulatory Briefing

FAIS LicensingRichard Flett

New License Category for Private Equity

Timeline

• June 2011: New license category mooted by FSB for PE fund managers following

issues with pension fund regulator around investment by SA pension funds

• Dec 2011: SAVCA drafted and submitted a specific Code of Conduct (CoC) to the

FSB for consideration

• May 2012: FSB’s target date for implementation of new CoC (stated Jan 2012)

• Nov 2013: Meeting held with new FAIS registrar; project re-invigorated

• Mar 2014: FSB proposed a completely redrafted CoC for SAVCA’s consideration

• June 2014: SAVCA submitted an extensive mark-up

• Mar 2015: New draft finally received from FSB;

– many of SAVCA’s earlier amendments rejected

– some new rules added, borrowed from the EU’s AIFMD

– Creeping tendency toward regulating the fund, not the manager

• May 2015: SAVCA submitted an extensive mark-up

What’s in The Latest Draft?

New Principles

• Establishes separate risk management function and risk limits for each fund

– Definitions, ambit and purpose unclear

– Functional and hierarchical separation difficult for smaller managers

• Disclosure of aggregate Manco staff remuneration & policies to investors

Open Issues

• Which entities must be licensed: GP/Trustee or Manco, or both?

– S13(1)(c) issues with appointing the GP/Trustee as Representative of Manco

– SAVCA has asked FSB to consider group licensing and/or compliance reporting

• Unclear if financial advice is included

– Some managers may still want/need a Cat I license

• FAIS Fit & Proper requirements:

– academic qualifications, experience, regulatory exams, solvency & liquidity

• Grandfathering of existing PE funds

Interim Exemptions

Category

Exemption New Expiration Date FSB Notice Regist-ration Required

I & II Level 1 regulatory exams No expiry(to be determined by Registrar)

BN102 of 2012

Yes

II S5(1)(c) – Existing fund “mandate” must contain a statement on risk

No expiry FN71 of 2015

Yes

II S5(1)(j) - 60 day notice for “mandate” cancellation

No expiry Idem Yes

II S9(4)(c) - FSP’s liquid assets > 8/52 annual opex

30 June 2016 Idem Yes

I & II S13(1)(c) - Juristic Rep cannot contract or render financial services in its own name

30 June 2016 FN70 of 2015

Yes

SAVCA successfully lobbied the FSB to extend Cat II exemptions by one year and grant a S13(1)(c) exemption

Twin Peaks

• Establishes two regulators to oversee banking, insurance, financial services:

– Prudential regulation: SARB

– Market conduct regulation: FSCA (Financial Sector Conduct Authority)

• Second draft of Financial Sector Regulation (FSR) bill published Dec 2014

• SAVCA provided comments to NT in Feb 2015 requesting:

– A distinction be drawn between retail and institutional/sophisticated investors

– A lighter touch regime for PE fund managers servicing institutional investors

• FAIS regulations likely to become “standards” under Twin Peaks

– New CoC for PE fund mangers would therefore be incorporated

– Existing FAIS licenses should roll over into the new regime

• Unclear if PE/VC fund will also be regulated – bill references “pooled funds”

• Introduction timing uncertain


PFA Draft Retirement ReformRichard Flett

Default Investment Portfolio

Regulations

• July 2015: NT issued draft default regulations for public comment by 30 September

• Will oblige retirement fund trustees to offer a default investment portfolio to the fund’s members:

• Regulation 37: Default Investment Portfolio

• Regulation 38: Default Preservation & Portability

• Regulation 39: Default Annuity Policy

• Members can opt out from the default option in writing, but how many will?

• SAVCA currently preparing a response on principal concerns

Three Principal Concerns for PE

• Reg 37(2)(h): no service provider (may) receive fees or charges in respect of the assets held in respect of the default investment portfolio that depend on the return earned in respect of those assets

• Is carried interest considered a “performance fee”?

• Reg 37(2)(k): members may instruct the fund to transfer their retirement savings from the default investment portfolio into any other investment portfolios….at intervals not exceeding three (3) calendar months……

• Will this restrict a default portfolio from investing in illiquid assets?

• Reg 37(2)(d): all fees and charges, whether borne directly by the fund or paid directly

or indirectly out of assets…….as well as the impact that such fees and charges will

have on members’ actual and prospective benefits, are disclosed on a regular basis

to members……;

• Who will do this? Will trustees want to include PE funds if the admin burden is excessive?


AIFMDJ-P Fourie

AIFMD

• No major progress since details presented last year

• In quick update:– FSB now willing to issue assentation letters, as required by some

country specific AIFMD requirements, these letters are issued by the FSB directly to the EU regulator concerned and confirm that the FSB it is able to effectively comply with the cooperation agreement between that FSB/NT and the local EU regulator concerned

– EU regular, ESMA, has not made significant progress on third country passport approvals – only approved Guernsey and Jersey, awaiting final approval of Switzerland and have declined USA, Hong Kong and Singapore

– SAVCA members raising commitments from the EU still hence need to apply and comply with the country specific AIFMD specific regulations (National Private Placement Regimes)


Section 23N, 23MCraig Dreyer

Section 23N: Limitation of interest

deduction in portfolio companies

• Caused by debt directly or indirectly funding purchase of asset in terms of a re-organisation

• An acquisition transaction

• S45: inter group transaction

• S47: liquidation

• Also applies if debt is re-financed

This presentation does not constitute tax advice, but is intended to create awareness of various topics.



• Limitation starts from date of re-organisation or acquisition or debt

re-finance for next 5 years

• Arrive at adjusted income:

Say adjusted income is R400

40% limitation 160

Plus interest received/accrued 20

Less interest paid (non-S23N debt) (40)

Interest deduction limitation on S23N debt R140



• Adjusted income attempts to take you to EBITDA; adjusts for interest received, paid, depreciation of assets

• Indexing adjustment is available which increases the 40% deduction as repo rate increases

• If all the interest under S23N investments is not claimable, you can’t carry forward disallowed amount

• SAVCA lobbying with National Treasury in this respect

A= B x C/D

B= 40

C= Average Repo Rate

D= 10

A is limited to 60%

Section 23M – Limitation in respect of

Debts Owed to Pension not subject to

tax

• Effective January 2015

• Limited amount of interest deduction that is payable to non-resident if

– Creditor is in a controlling relationship with debtor

– Creditor obtained funding from person in controlling relationship with the debtor

– And interest is not taxed in SA

• Use same formula as S23N

• Note: Here disallowed interest is carried forward


Section 8C Income Tax ActCraig Dreyer

Section 8(c) – Taxation of Directors and

Employees on Vesting of Equity

Instruments

• Effective post October 2004

• 8(c) is triggered by the vesting of an equity instrument

• Applies to gains and losses made by tax payer in respect of:– The vesting

– Of an equity instrument

– Which was acquired by tax payer

– By virtue of employment

• The equity instrument vests in the case of restricted equity instrument, when the earlier of:– When all restrictions cease

– Before tax payer disposes of instrument

• The gain or loss is a revenue gain or loss and not a capital one

• Watch Outs:– Private Equity carry vehicles may have vesting arrangements

– Portfolio company management SPV may have vesting arrangements


Davis Tax CommitteeRichard Flett

Proposed Changes To Trust Taxation

• DTC issued First Interim Report on Estate Duty in July for public

comment by 30 September.

• Proposed reforms include a heavy attack on trusts

• Local trusts: removal of ‘conduit” principle, all income & gains to be taxed in trust

• Offshore trusts: all distributions to SA residents to be taxed as income

• No distinction drawn between vesting, bewind and discretionary trusts

• Would severely impact trusts used as PE fund vehicles, co-investment

vehicles, carry vehicles

• SAVCA submitted comments 16 September requesting that conduit

principle be retained for vested local trusts, or failing that

• A 10 year exemption be granted for existing vested trusts, or failing that

• A period of transition until 1st March 2018 be allowed to restructure existing trusts


DWT & IWTCraig Dreyer

Dividend Withholding Tax

• Dividends paid by SA company must have withholding tax of 15%

deducted if paid to:

– An individual

– A trust

– A foreign person/entity

• Withholding tax can be deducted by intermediary (subject to rules)

• Tax paid to SARS in next month

• Declaration form on exempt status of shareholder to be passed to

entity doing withholding

• Entity withholding must report – per DTR01 Dividends Tax Return on

eFiling

– Reporting done per shareholder. DTR02 form self generated. Need to submit

both forms.

• Consider impact of DTAs and possible exemptions

• 64K(8) provides that any person who is involved in management of

financial affairs of an unlisted company that is liable to withhold

dividends tax is personally liable for said tax plus penalties and

interest

Interest Withholding Tax

• Effective 1 March 2015

• 15% withholding tax

• Paid to foreign person (i.e. not registered for tax in SA)

• Withholding is date of interest payment and not accrued date

• Several exemptions, including interest paid on listed debt

• Declaration forms need to be completed by interest recipient and passed to entity who withholds tax – i.e. stating exempt status

• Entity doing withholding to file WT002 form via eFiling

• Requirement to submit IT3s

• Penalties for non-compliance

• Effect on DTAs and exemptions

• Problems determining beneficial owner per DTA i.e. non-resident partnerships, fund of funds


FATCA & CRSRichard Flett

FATCA

• RSA-USA IGA finally gazetted 13 Feb 2015, entry into force 28 Oct 2014.

• All SA fund managers should by now have registered on IRS portal and filed

an initial report for eight months to 28 Feb 2015

• Next report due by 31 May 2016 for y/e 28 Feb 2016

• Reportable data includes:

• Demographic data of US based investors (account holders)

• Account balances, interest, dividends, gross proceeds from sale of financial assets

• SARS only accepting reports via 3rd party data submission channels in

prescribed formats:

• No eFiling

• No paper submissions

• Service providers have developed solutions to convert Excel based data

into the required format and handle submission to SARS – for a fee

• SARS insisting on nil returns even when there are no “reportable accounts”:

• SARS kindly made available a “simplified” nil return procedure

• Workshop held for SAVCA members in June

CRS (Common Reporting Standard)

• “FATCA on steroids”

• Multilateral agreement developed by the G20 & OECD

• Over 100 jurisdictions already signed up (notable exception: USA)

• Requires automatic exchange annually of non-resident account holder

information between tax authorities of participating countries

• Specific KYC due diligence procedures required, not entirely aligned

with either FATCA or FICA

• Reportable data similar to FATCA

• Demographic data of foreign account holders

• Account balances, interest, dividends, gross proceeds from sale of financial assets

• But also TIN number from account holder’s country of residence

• Not clear which entity has to report: Advisor or GP/Trustee or Fund

• No “sponsor” regime as per FATCA

South African Implementation

• Enabling legislation going to parliament in October

• First report covering 1 Mar 2016 to 28 Feb 2017 due by Sep 2017

• Very little guidance issued by SARS so far

• BRS in development, based on existing FATCA BRS

• More PE funds will have reportable accounts under CRS than under

FATCA due to inclusion of European & Asian investors

• Data submission challenges exactly the same as for FATCA

• Some kind of technology solution will be needed, possibly from the same service

providers who are introducing FATCA reporting solutions


B-BBEE (FSC) UpdateDaniel Hatfield

How did we get to this point?The current FSC Charter alignment process comes at the end of a long

history of proactive transformation by the sector, starting in 2004

Alignment of FSC to generic code by Oct 2015– changes to be applicable from Jan 2016

Generic code Revised released in final form Oct 2013 – live from May 2015

FSC released under section 9(1) Oct 2012-applicable from 2013

What is SAVCA’s role in the FSC Council?

• SAVCA is an Associate member to the FSC Council

– No seat on the FSC Council

– Representation on any FSC Reporting Working Committees (“RWC”) e.g.

Charter

• RWC participation enables us to:

– Table proposals for change in the Charter alignment process

– Debate / discuss any other constituency proposals

– Put forward a draft FSC for approval by council for submission to the

Minister of Finance

Although only an Associate member, SAVCA has been able to have

significant influence on the FSC Charter alignment process

ELEMENT

OLD FSC NEW DTI SUGGESTED NEW FSC

Life offices

and banks

Short Term

Insurers

AM &

Other

BONUS

POINTSMain

BONUS

POINTS

Life

offices

and banks

Short

Term

Insurers

PE, AM &

Other

Bonus

points all

OWNERSHIP 14 14 14 3 25 0 20 20 20 5

MANAGENT CONTROL 8 8 8 119 0 20 20 20 0

EMPLOYMENT EQUITY 15 15 15 3

SKILLS DEVELOPMENT 10 10 10 20 5 15 15 15 4

PROCUREMENT 16 16 1640 4

15 20 204(9)ENTERPRISE & SUPPLIER

DEVELOPMENT5 15 15 0 15 15

EMPOWERMENT FINANCING

(INCLUDES SD) 15 0 0 0 25 0 0 5(0)

ACCESS 14 14 2 0 12 12 0 0

SOCIO ECONOMIC

DEVELOPMENT3 3 3 5 0 5 5 5 4

100 95 83 7 109 9 112 107 95 22

Priority elements

What are the differences to the old FSC?

The priority pillars, weightings and targets will be largely in line with the

current generic Codes

What have been our ‘wins’?

• General (All):

– Inclusion of SAVCA members within the ambit of the FSC

– Alignment of the Qualifying Small Financial Institution definition with the QSE (R50m turnover)

• Private Equity structures (PE Investors):

– 25% ownership threshold measured post investment (not pre)

– Aligning the use the Modified Flow Through principle to the Generic Codes

– Time to ramp up the portfolio to 50% > 25% black owned

– Ensuring the entity where the majority of economic interest and decisioning resides is the entity rated for Black Ownership

• Enterprise & Supplier Development (Impact Investors):

– Only divide grant based programmes (not funding) by the number of years that the programme runs

– Clarify that an Supplier Development beneficiary is a sub set of Enterprise Development beneficiaries

– Cap the amount of bad debt write-offs that can be used for ED grant portion

– Standard interest rate lending should not qualify as Supplier Development funding

– Increasing turnover thresholds for SMEs being grown through ESD

We have achieved a number of good outcomes for the SAVCA members

(both PE Funds & Impact investors) and for transformation in general

What are the key outstanding issues?

• The five matters still to be addressed by the RWC:– Private Equity ownership definition

– Turnover threshold for SMEs

– Lending rates for the SD recoverable spend

– Management Control EAP formula methodology

– Empowering Supplier definition

• The three matters still to be addressed by the Trade Associations and ABSIP, via the bilateral process:– Empowerment Financing targets

– Once Empowered Always Empowered (OEAE) principle

– Risk Capital Fund

There are essentially 8 outstanding issues that the RWC is looking to

resolve by mid-October 2015

What are the time-frames?

• Address outstanding issues through bi-laterals (RWC: mid-Oct)

• Finalise FSC draft (RWC: end-Oct)

• Approval by council and submission to minister (FSC: end-Oct)

• Agreement on draft for 9(5) gazetting (Ministry & DTI: end-Nov)

• Publishing for public comment (DTI: end Nov)

• Public comment consolidation and development of final draft (RWC:

end-Feb)

• Approval by council and submission to minister (end-Feb)

• Publishing 9(1) gazette (DTi: end-Mar)

The final FSC is not likely to be gazetted before March 2016, with the

measurement thereof likely to kick-off almost immediately thereafter

What does this mean for SAVCA members?

• Going forward, look to get a rating agency that understands the FSC

(& can rate you accordingly)

• Prepare yourself to get rated on the new FSC if your financial year

ends post 28 Feb 2016

• If transformation is important to your business start working on the

priority pillars (using the generic Codes as a guideline)

– Ownership,

– Skills development,

– Enterprise & Supplier Development,

– Procurement

• Once the new PE structure ownership clause is finalised, work to

understand effect on your structures

Start working on the priority pillars anticipating that from 2016 your

business will be governed by the revised FSC


COMESA Competition CommissionShawn van der Meulen

CCC - update

• COMESA covers 19 member states

• Merger guidelines have been in force

since 14 January 2013:

– There was no minimum threshold

– Filing fees were high

• Amendments brought in 8 April 2015

CCC – the amendments

• Where both the acquiring firm and the target firm, or either the acquiring

firm or the target firm, operate in two or more COMESA Member States,

a merger is notifiable if:

– the combined annual turnover or combined value of assets,

whichever is higher, in COMESA of all parties to a merger equals or

exceeds USD50m; and

– the annual turnover or value of assets, whichever is higher, in

COMESA of each of at least two of the parties to a merger equals or

exceeds USD10m, unless each of the parties to a merger achieves

at least two-thirds of its aggregate turnover or assets in COMESA

within one and the same COMESA Member State.

• The maximum filing fee has been substantially reduced – the filing fee

is now the higher of 0.1% of the combined annual turnover or combined

asset value in COMESA, capped at a maximum of USD 200,000.

Thank youwww.savca.co.za

Documents

Regulatory Briefing to Members - SAVCA...Sep 29, 2015 · 1.1 FSB: FAIS Richard Flett 8 minutes 1.2 NT: Draft Retirement Reform Richard Flett 8 • AIFMD J-P Fourie 5 • Taxation