10-11 May 2012

2. IFA Conference Mauritius 10-11 May 2012 • Ernie Lai King • Tax Executive: Edward Nathan Sonnenbergs Inc.

3. Topics • Chinese SOEs investing in SA and the region – a personal experience • Africa Rising • SA’s regional headquarter company regime

4. Chinese SOE's investing in SA and the region – a personal experience • Factors for success when Chinese SOEs invest in SA • take sound proactive legal advice e.g. employment law, tax law; • understand that doing business in SA is different to operating in the rest of Africa; • find a SA partner with the right credentials; • anticipate the problems caused by the language and cultural differences; • anticipate how legal firms operate in SA;

5. Chinese SOE's investing in SA and the region – a personal experience • The South African environment is very different - - it has a well developed and in many respects a 1st world legal and regulatory environment; - SA ranked fifth out of 52 African countries on governance by The Mo Ibrahim Foundation; • the International Standards of Accounting and Reporting body gave SA a top global ranking out of 24 emerging markets

6. Chinese SOE's investing in SA and the region – a personal experience - a fiercely independent judiciary and press, • a very vocal opposition party; • a very active labour union, inflexible labour laws; • country specific black economic empowerment rules; - a very aggressive South African Revenue Service; - a difficult Home Affairs Department re: work permits; - A first world private sector especially - but 3rd world public sector

7. Chinese SOE's investing in SA and the region – a personal experience • The language and cultural barriers are particularly high. • Cultural differences e.g. in negotiating styles cause frustration and misunderstanding. • Chinese companies are very often, short on the detail - conclude the deal and worry about the problems afterwards. • A certain amount of negative perception that requires management – “the new colonialists of Africa” • Finding the right SA partner that can bridge the gap - very important

8. AFRICA RISING

9. Africa’s Improving Brand May 2000 December 2011

10. Africa of Today $1.6 trillion - Africa’s collective GDP in 2008, roughly equal to Brazil’s or Russia’s $860 billion - Africa’s combined consumer spending in 2008 316 million the number of new mobile phone subscribers signed up in Africa since 2000 60% - Africa’s share of the world’s total amount of uncultivated, arable land 52 African cities with >1 million people each 20 African countries with revenues of at least $3 bio. Source: McKinsey

11. Africa of Tomorrow Africa’s collective GDP in 2020 - $2.6 trillion Africa’s consumer spending in 2020 - $1.4 trillion Number of African households with discretionary income in 2020 - 1.1 billion Africans living in cities by 2030 - 50% Source: McKinsey

12. Africa’s Frontier Markets are Looking Up

13. The Economist’s Top Growers 2001-2010 Source: Economist and IMF forecast

14. The Economist’s Top Growers 2011-2015 Source: Economist and IMF forecast

15. The Investment Relationship • Growth in China’s outbound FDI flows (2003-2008) • FDI to Africa has been increasing rapidly but from a very low base • By 2006, 800 Chinese companies in Africa, dominated by activity of SOEs • By 2008, 2,000 Chinese companies in Africa including also countless small private businesses Source: Ministry of Commerce of PRC, National Bureau of Statistics of PRC, State Administration of Foreign Exchange, 2009

16. Africa’s Rising Trade with Asian Economies Select Asian countries’ share of African trade (2000 & 2009) Source: OECD (2011), Frontier Advisory analysis

17. Africa’s Trade with Asian Economies Africa’s exports and imports to key Asian economies in US$ terms (2009) Source: OECD (2011), Frontier Advisory analysis

18. The China-Africa Growth Coupling Almost an absolute correlation after 1999 – Coincided with China’s New Africa Policy No correlation in growth trends between China and SSA prior to 1996 African growth tracked downwards China’s as fixed asset investment spend was cutback from Q4 2007 Africa’s growth is tracking the V-shaped recovery of China since Q1 2009 Africa’s growth has been robust on back of strong resource demand from the PRC 1999-2008: Growth correlation of 0.919972! Source: IMF, EIU; Frontier Advisory analysis

19. S.A. REGIONAL HEADQUARTER CO

20. Regional Headquarters Regime S. A. is an ideal location for regional HQ companies due to its - large economy sophisticated financial services sophisticated legal, banking and accounting sectors extensive DTT network

21. Regional Headquarters Regime Growing interest in Africa as the investment destination of the future A successful HQ regime will provide major economic spin offs for South Africa Have to grow the tax base - need new money Response to jurisdictions like Mauritius

22. Regional Headquarters Regime The major barriers to SA becoming a regional HQ company jurisdiction included – the Controlled Foreign Company ("CFC") rules, the charge on outgoing dividends, viz. the new dividend tax; the thin capitalisation rules; SA exchange control; the new withholding tax on interest.

23. The CFC rules impose a double administrative tax burden on foreign shareholders of a South African holding company if their home jurisdiction also has CFCs rules. CFC rules don't make sense if the bulk of the holding company’s funds originate from abroad. Regional Headquarters Regime

24. CFC Rules – s.9D Regional Headquarters Regime Application of CFC rules Offshore shareholder Application of CFC rules South Africa co 100% Foreign co1 Foreign co2

25. The new dividend tax adds a 15% cost Regional Headquarters Regime Offshore shareholder Dividends South Africa co Dividends 100% Foreign co1 Foreign co2

26. SA Transfer pricing rules – s.31 Regional Headquarters Regime Offshore Shareholder Loan Funding South Africa co Loan Funding Loan Funding Foreign co1 Foreign co2

27. A South African HQ co means any SA resident co with specified asset and income requirements. SA resident co. must elect to be a HQ co. Once so elected, it will be a HQ co. from the beginning of that tax year. The HQ co. must submit an annual report to the Minister of Finance (anti-avoidance measure) Regional Headquarters Regime

28. A South African HQ co means any SA resident co with specified shareholding and asset and income requirements. SA resident co. must then elect to be a HQ co. Once so elected, it will be a HQ co. from the beginning of that tax year. Must submit an annual report to the Minister of Finance (anti-avoidance measure) Regional Headquarters Regime

29. Specified shareholding requirements – each shareholder or together with any other "group“ company must hold 10 per cent or more of the equity shares of the SA resident co; for the duration of that tax year and of all previous tax years; Regional Headquarters Regime

30. Specified asset requirements – 80 per cent or more of the cost of the total assets (excl cash or bank deposits) of SA resident co. must comprise: equity shares in any foreign co (at least 10% equity and voting rights); any amount loaned to any foreign co; any intellectual property (s,23I(1)) licensed to any foreign co. Regional Headquarters Regime

31. Specified income requirements – where annual gross income (excl forex differences) of the SA co exceeds R5 million: 50 per cent or more of that gross income (excl forex differences) must comprise: rental, dividend, interest, royalty, or service fee, from its foreign investment companies; or proceeds from the disposal of equity shares in its foreign co’s or any intellectual property licensed to such co’s Regional Headquarters Regime

32. Qualifying SA HQ Company Regional Headquarters Regime • * specified shareholding • * specified asset requirements • specified income requirements • must elect • must report annually South Africa HQ co at least 10% equity and voting rights Foreign co1 Foreign co2

33. Advantages – SA CFC rules do not apply , refer s. 9D(2) S.31 SA transfer pricing rules do not apply CG Participation exemption on disposal by the SA HQ co of equity shares in foreign co’s; Exemption from interest withholding tax, refer s.37 Exemption from dividend withholding tax, refer s.64E; Relaxation of SA exchange control rules Regional Headquarters Regime

34. Caveats – Change of residence on becoming headquarter company, refers.9H where an existing SA co becomes a headquarter co it is treated as having: disposed of each of its assets (apart from certain specified assets); and reacquired those assets immediately after becoming a headquarter company Ring-fencing of interest expenditure provided by non resident Regional Headquarters Regime

35. Interest ring fencing Regional Headquarters Regime Non-Resident Resident Parent co1 Parent co2 Interest Loan incurs int R140 000 70% 30% South Africa HQ co Loan incurs int R140 000 100% Interest Foreign sub 1 SA HQ interest income and interest expense ringfenced

36. The qualifying holding company definition came into effect on 1 January 2011 and will apply in respect of any year of assessment beginning on or after that date. Regional Headquarters Regime