A213: The Exchange Control laws and rules for South Africa are clear and well established, however exporters may always apply – either to their bankers or, if the bank lacks authority and at the bank’s discretion, to the SARB – for a concession or an exemption.
But barring specific relief, all exports to countries outside the Common Monetary Area (the CMA of South Africa, Namibia, Lesotho, and eSwatini) must be paid in full and in foreign exchange (forex), or Rand from a non-resident Rand account.
SA exports within the CMA may certainly be paid for in forex too but this would be unusual, requiring Central Bank approval, and more commonly payment will be made from any one of Namibia, Lesotho, or eSwatini.
However, as the CMA currencies are not considered to be forex, SA exports to countries outside the CMA may only be paid for in forex and not from within the CMA.
In both models a simple and key compliance indicator is the Balance of Payment (BoP) declaration.
When foreign proceeds are received by a South African bank, and before the funds are released to the resident entity to whom the funds are addressed, the entity must make a declaration to the bank that in part informs the bank of the reason why the funds have been received in the country.
This is done using specific category codes, with the codes 101 and 103 being the commonest used to indicate the receipt of export funds.
Provided that the BoP process is undertaken correctly, the resident may safely assume that the underlying payment is Exchange Control compliant.
It is therefore the process of the BoP declaration that validates the transaction rather than the currency involved.
Compare this to a domestic bank transfer (EFT) where there is no bank intervention required to ‘release’ the payment.
An EFT transaction is the movement of funds already resident within South Africa between two domestic bank accounts, and it therefore fails to meet the required criterion of a non-resident payment.
Very simply (but accurately); if cargo goes out of the Republic then a corresponding payment must come into the Republic to compensate for this.
It follows that the exporter is most exposed if payment is received after the export has taken place. This is a hidden (and quite serious) risk when offering unsecured credit to non-residents.
Consider a completed export that is settled on an agreed future date but by means of a domestic EFT. These funds cannot be accepted in settlement of the export debt, but the leverage of withholding the cargo until the payment is corrected has been lost.
The absence of a clear statement that an Exchange Control compliant payment is a suspensive condition of the contract is a common failing of export agreements. In such cases, refusing a local payment post facto often gives rise to disputes and commercial friction.
(It is perhaps a commoner omission that there is no formal contract drawn up in the first place, but that observation – however accurate – is not the subject of this Q&A.)
There is a versatile export VAT model, described in the following example, that readily illustrates the concepts around Exchange Control.
South African company A places an order on South African company B, with a request that B delivers directly to A’s foreign buyer C, somewhere in C’s country (a port, an airport, or a place).
For VAT purposes this is considered to be a Direct Export in that B pays the carrier the international carriage to a foreign address, and accordingly B’s supply to A is at the zero-rate for VAT purposes, as is A’s supply to C.
What is important in this model (referred to as a “Special Supply”) is that B will function as exporter of record and will create the UCR (Unique Consignment Reference) that will be used to track the receipt of a compliant non-resident payment, although A will locally pay B
In this model it is A that intends to receive the forex.
Company B must therefore manage the risk that A will in fact receive an Exchange Control compliant payment, and further, that they will report the receipt of these funds as a “third party payment” on behalf of B, declaring and acquitting B’s UCR in the process of their BoP reporting.
Although A undertakes the administrative side of the BoP reporting it is B, as exporter of record, that is responsible for the Exchange Control compliant payment to be received and reported.
The local payment B accepts from A is insufficient to otherwise acquit B’s UCR, and should A fail to be paid or fail to report B’s UCR, it is B that is held to account.
(Note that B’s transaction value will be less than A’s inward proceeds on the assumption that A will uplift B’s selling price.)
Although a high-risk for B, the Special Supply model illustrates a legitimate example of the named exporter being paid in local funds, but apart from this example, as a general proposition, otherwise accepting a local payment as export proceeds would always require prior bank approval.
If you are offered (or receive) an unexpected local payment for your export supply, speak first and promptly with your bankers. Be guided by your banker.
The cornerstone to managing this risk is firstly to ensure that the buyer is aware of your need to comply with Exchange Control and secondly, wherever possible, to not offer unsecured payment terms.
One last point: the exporter ‘must’ be paid, and ‘must’ be paid within 6-months of the export entry being released by customs. The exporter may not write off a bad debt without bank approval, and that means in turn that as vendor they may not credit their tax invoice without the same Exchange Control process being followed first.
This process requires that the exporter reports any non-payment (full or partial) to their bank within 14-days of the expiry of the six-month maximum credit period. Thereafter, they will be guided by the bank with regards to extensions and/or necessary actions they must take to recover the debt.
Permission to write-off the debt should never be assumed and Treasury has wide ranging powers that include the assignment to the bank of the exporter’s interests in the cargo and / or the debt.
Thereafter, the exporter bears the operational costs of the bank or Treasury should they secure any value under the assignment.
If the exporter has credit insurance against a default they must bring this to the bank’s attention. Substituting the Exchange Control obligation to receive full foreign currency proceeds with a local credit insurance settlement requires the approval of the bank in order to acquit the outstanding UCR.
Prepayment allows the exporter to control what happens next and even secured credit periods (for example through LCs or bank guarantees) reduce the risk of default.
It is only by offering unsecured credit that the SA resident runs the risk of falling foul of the applicable Exchange Control regulations, both with regard to being offered a non-compliant local settlement or experiencing a partial or total default.
Contracts are wonderful, but money is wonderfuller. Unsecured credit terms may make selling easier, but business is not just about making a sale; business is about being paid.
The next course on Exchange Control and VAT for Exports will be held over two-days on the 20th and 21st of May in Gauteng.
If you’d like to book or require more information email me: [email protected]