National Treasury 8 May 2007 Parliament, Cape Town

1. PRESENTATION TO THE PARLIAMENTARY COMMITTEE ON FINANCE (PCOF) AND THE SELECT COMMITTEE ON FINANCE (SCOF) National Treasury 8 May 2007 Parliament, Cape Town

2. AIM OF THE PRESENTATION… Brief background on SADC Overview of Finance & Investment Protocol (FIP) process Key priorities of FIP (Annexes) Ratification by Parliament

3. HISTORICAL BACKGROUND… Regional cooperation and integration begun with the security initiative of the Frontline States in the 70s (Angola, Botswana, Mozambique, Tanzania & Zambia) Then in 1980 SADCC formed in Tanzania (Arusha Conference) to focus on economic cooperation and independence from South Africa SADC replaced SADCC in 1992 in Windhoek to strengthen regional integration through protocol development

4. KEY SADC OBJECTIVES… List of key objectives for SADC in SADC Treaty as amended, (Article 5) To use “regional integration” as instrument for sustainable and equitable growth for poverty alleviation and a higher standard of living for the region (Article 5 (1) (a)) Encourage development through self-reliance by and interdependence of Member States (Article 5 (1) (d)) Achieve these main objectives through creation of institutions and mechanisms for the mobilization of resources and implementation of SADC programmes (Article 5 (2) (c))

5. STRUCTURE… To indicate the structures responsible for driving the FIP

6. INSTITUTIONAL REFORM… 2001 Extra-Ordinary Summit in Windhoek approved formation of Directorates (Trade, Industry, Finance and Investment; Food, Agriculture, and Natural Resources; Infrastructure & Services; and SHD&SP) Aim to strengthen capacity to deliver on its mandate e.g. SADC Secretariat to coordinate and strategize Align with African Union’s regional integration programme Consolidated sector coordination units To expedite the ratification and implementation of protocols, which are legal instrument binding to all Member States who ratify and accede

7. STRATEGIC DIRECTION… Reform process led to the adoption of Regional Indicative Strategic Development Plan Highlights key targets over 15 years: Free Trade Area (2008), Customs Union (2010), Common Market (2015), Diversification of industry and exports (2015), Single currency (2016) and Monetary zone (2018) Prioritize region’s strategic imperatives e.g. economic regional integration and its coordination Provide alignment with other multilateral initiatives e.g. NEPAD, Millennium Development Goals, etc. Puts the region at the implementation phase

8. CHALLENGES… 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

9. SADC Protocol Process…

10. PROTOCOL PROCESS… 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 to those who ratified or acceded Two-thirds majority to enter into force

11. NATURE OF THE PROTOCOL PROCESS… SADC Finance Ministers responsible for FIP Bottom-up approach adopted driven by subcommittees Lessons: rejection of the top-down approach used for e.g. Trade Protocol Consensus through non-binding MOUs (voluntary) Vettedby SADC legal team for consistency with international laws and agreements Legal process of SADC: signature, ratification & accession Legal opinion from Justice, DFA and Treasury FIP has developed between 1998 and 2006 Structure-wise: general principles/declarations of intent to which various annexes are affixed

12. FINANCE AND INVESTMENT PROTOCOL… Technical Committees overseeing the process and reporting to MoFs: Committee of Senior Treasury Officials Committee of Central Bank Governors Finance Ministers approval in July 2006; first signing in by Heads of States (August 2006) and later South Africa (October 2006) 10 countries signatories (Botswana, DRC, Lesotho, Madagascar, Mauritius, Mozambique, South Africa, Swaziland, Tanzania and Zimbabwe) FIP to be subject to the internal processes within member states i.e. parliament, civil society, etc (“domestification”) Cost implications indeterminate, but should be quantified through a national budgeting process

13. SADC Finance and Investment Protocol… (Annexes)

14. Annex 1: Cooperation on Investment… (1) MOU objectives: 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

15. Annex 1: Cooperation on Investment…(2) Creation support mechanisms (market access, etc) for the 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) Other issues: double taxation agreements, trade, investment & industrial policies Action Plan adopted on 30 January 2007 under the Investment Subcommittee

16. Annex 2: Macroeconomic Convergence… (1) MOU Objectives: Promote stability-orientated policies Article 3 outlines macroeconomic convergence indicators in terms of inflation, fiscal deficit, public debt & current account deficit in relative terms 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 (technical assistance) submit assessments on the region’s convergence status to a Peer Review Panel, (Article 7) refine procedure for peer review mechanism Member states submitted “annual macroeconomic convergence programmes” in Mauritius, Nov 2006 Peer Review Panel to issue an explanatory communique’ on its assessments

17. Annex 2: Macroeconomic Convergence… (2)

18. Annex 3: Taxation Cooperation and Related Matters – Tax MoU • Signed by SADC Committee of Ministers for Finance & Investment in August 2002 • MOU subsumed into Draft FIP as Annex 3 • 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

19. Annex 3: Taxation Cooperation and Related Matters • Key document – very ambitious in terms of coordinating tax policies, thereby affecting Member States’ fiscal sovereignty • Is the “public good” of an economically more integrated region more beneficial than individual country sovereignty? = political economy debate • 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

20. 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

21. 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

22. 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 taxlegislation - • 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

23. 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

24. Annex 3: Taxation Cooperation – Implementation of tax incentive coordination:What does it mean for individual member states?Who will enforce the Protocol’s provisions?Or is it gradualism through moral suasion • Endeavour to avoid introducing legislation that prejudices other member states (!) • Develop Guidelines for SADC member states • Assist competition policy through the fiscal framework: • Effectiveness in achieving goals • Revenue costs • Absence of tax sparing arrangements in DTAs that reduce the effectiveness of incentives • Impact on costs/burden on tax administrations in SADC • Effect on overall distribution of member state’s tax burden • How to deal with disputes? Annex language non-committal & doubtful how disputes may arise (compare to ECJ)

25. Annex 3: Taxation Cooperation Implementation of tax incentive article most problematic and potentially divisive • This area needs top level political guidance! • EU example: tax coordination driven by ECJ on the back of legally binding EU competition policy, state aid rules and code of conduct re. business income tax • SADC has none of these institutions or framework policies … yet • Tax Subcommittee can continue to commission reports, adopt these but to what effect? For example  • 2 consultancy studies were adopted or are in the process of becoming official SADC policy documents which strongly caution against aggressive use of tax incentives: • SADC Study on the ‘Effectiveness & Economic Impact of Tax Incentives in the SADC Region’ (Bolnick Research Report) • Ongoing consultancy on ‘Guidelines and Tax Expenditure Budgeting Framework Design’ (Ogley Research Report) • But since 2002 there is proliferation of tax incentives in Community

26. 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

27. 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

28. 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: • To drill down into it each individual tax instrument • Evaluate benefits – cross border agreements • 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: • Questionnaires on administrative capacity • Will be workshopped and hopefully adopted • Possible workshop on tax gap • Possible in country diagnostic and tailor made interventions

29. Annex 3: Taxation Cooperation –Settlement of tax disputes (this issue has been deferred) • Give consideration to introducing mechanisms & procedures for settlement of tax disputes, including a SADC body for tax dispute settlement purposes • Given non-binding / non-committal nature of incentive language in Annex 3, the Tax Subcommittee would like to defer implementation on this article • Further political guidance needed and implementation delay will have to be reviewed on a needs basis or if member states wish to flag disputes

30. Annex 3: Taxation Cooperation –Operationalisation of FIP’s Tax Annex • Important to remember SADC principles of variable geometry & differentiated speed of integration, • ‘laggards’ do not determine speed of tax coordination • Big question – is MOU language appropriate for Protocol? … (Non-binding vs. binding) • In tax – e.g. • “Endeavour to avoid harmful tax competition”- or • “Shall avoid harmful tax competition” This has raised fundamental questions of commitment to MOU, to FIP & indeed to fundamental SADC aims of integration • Some see loss of fiscal sovereignty as an inevitable & acceptable price to “pay” for benefits of integrated economies • Others see it as too ambitious but MOU has been ratified • Hence, political level must seek to inform what variable geometry & differentiated speed will mean for tax coordination?

31. Annex 9: Cooperation of Development Finance Institutions… (1) 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 (SMMEs, agriculture, financial intermediation, etc) 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

32. Annex 9: Cooperation of Development Finance Institutions… (2) 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 standalone organ 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

33. 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

34. 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

35. Input by the Representative from the CCBG…

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

37. What is the Role of the South Africa?

38. SOUTH AFRICA AND THE SADC REGION… RSA joined SADC in 1994 National Treasury and FISCU in 1995 (another sector in health) Coordinated the formulation of broadprinciples as a basis for the integration of SADC’s finance and investment sector Since restructuring, sector coordinating units consolidated in Gaborone Huge challenges in terms coordination due to severe capacity constrains within the SADC Secretariat

39. Going Forward… • RSA’s ratification will be signaling factor for other SADC Member States to expedite such a 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 (private sector involvement imperative) • 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)

40. CONCLUDING REMARKS… • FIP creates a cooperation framework within the finance and investment sector • FIP is now a public document and needs comprehensive buy-in by various stakeholders e.g. business organizations, academics, politicians, etc • Provides a challenge for a leadership role for South Africa given the extent of the country’s development in financial systems • Need for the development of a dissemination strategy towards a country-specific implementation plan for the Protocol

41. Usuku Oluhle…