FINANCIAL EMIGRATION 2021: WHERE TO NOW?

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South Africans who have emigrated or plan to permanently leave South Africa have until 28 February 2021, to effect Financial Emigration in its current form, or be faced with a more stringent process. National Treasury (“Treasury”) has laid down the new law and made it clear – the consequence otherwise is your retirement money will be locked in for three years, you are not allowed to touch it, and best apply it to your personal circumstances.

On Tuesday 13 October 2020 in Parliament, Treasury and SARS presented to the Standing Committee on Finance on a number of proposed amendments to legislation, which amongst others, would directly affect South Africans who have already moved abroad, or are planning on moving abroad. The feedback to stakeholders, specifically around the withdrawal of retirement funds upon financial emigration, was certainly one which was foreseen after it was proposed in the draft Taxation Laws Amendment Bill (“TLAB”) in July 2020.

These changes are outlined in more detail below.

Retirement funds and emigration

Treasury confirmed that it plans to change rules around financial emigration and the ability to withdraw one’s retirement funds, upon the conclusion thereof, replacing it with a new three-year lock-in period. The change is set to be introduced from 1 March 2021.

Over recent years, there has been a substantial increase of South Africans formalising their status as “non-resident” from both a tax and exchange control perspective, by using the Financial Emigration process, said Jonty Leon, Expat Legal Manager at Tax Consulting South Africa and Director of Financial Emigration.

With this, many had decided to withdraw their retirement funds from South Africa and invest in a more stable economy.

In its response, Treasury said that the three-year rule is a mechanism to ensure that there is a sufficient lapse of time for all emigration processes to have been completed with certainty, without affecting such workers whose residence status changes for reasons other than emigration.

“The current system of financial emigration imposes lot of strictures, not least its requirement that individuals close bank accounts and credit cards and repatriate funds that are taken out above the limits if return to the country before five years has elapsed.”

“The envisaged system as a whole will have much lower compliance burdens overall for those looking to move abroad, and therefore it is not useful to focus on the three-year requirement in isolation of the overall policy change.”

“Modernisation” or Something More Sinister 

According to Leon, the comments from Treasury have been that the system is being “modernised”. A term which has yet to be fleshed out by Treasury, with only simple explanations that provide no sense of understanding, such as, “One of the main objectives of the reform is to modernise the capital flow oversight system in a manner that balances the benefits and risks…”.

With the various submissions made by stakeholders on the issues foreseen with the proposed changes, Treasury provided little feedback on the important issues raised, often providing no explanation but for a one sentence response. “Government’s unwillingness to budge on the lock-in, incites fears of the looming worries of taxpayer’s retirement funds falling into the hands of government to fund social infrastructure in SA, changes to Regulation 28 and perhaps even an easy target for higher taxes on pensions or a wealth tax”, warns Leon.

This concern was brought up by National Treasury previously, where it was denied that the so-called “modernisation” and lock-in had any link to this possibility. However, with the unwavering determination to lock-in retirement funds from 1 March 2021, this becomes less believable. There is clearly a massive downside to anyone having their retirement funding captured in a system; so the question remains unanswered what corresponding benefit National Treasury plans to achieve by keeping retirement under state control.

The Time is Now

Treasury’s announcement appears to be the final warning – South Africans leaving SA have until 28 February 2021 to financially emigrate under the current dispensation, and thereafter to withdraw their retirement funds, before it is locked in for 3 years minimum.

“We are heading into unchartered territory, with a complete transformation of the financial emigration process – those that have been left behind will undoubtedly have tougher terrain to navigate come 1 March 2021”, reiterates Leon.

 

Source: https://www.taxconsulting.co.za/financial-emigration-2021-where-to-now/

 

 

 

 

Using business as a catalyst for positive social change

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The Vumela Fund has announced the provision of a significant debt facility to Letsema Consulting and Advisory, positioning Letsema to take advantage of growth opportunities, furthering their significant economic and social impact in South Africa.

Letsema, founded in 1996, is a 100% black-owned management consulting firm at the heart of a diversified investment group, providing a wide range of management consulting and advisory services to both the public and private sector in South Africa. Letsema has a history of strong performance and resilience in a very competitive environment. The broader Letsema group’s three divisions – Consulting, Investments and Foundation – work closely with high impact programmes to promote positive social change in their spheres of influence and emphasising the importance of values-based leadership. Letsema is a supplier to First National Bank (FNB).

“The gap between long term sustainable businesses and SMEs in an extended growth phase can be closed by increasing agility. The ability for small to medium enterprises to quickly respond to opportunities is hindered by access to capital,” says Vuyiswa Nzimande, Edge Growth Lead Deal Maker. “We believe in the long-term sustainability of the diverse and quality service offering Letsema has consistently provided over many years.”

The Vumela Fund was established in 2009 by FNB Business Banking and Edge Growth to help alleviate poverty in South Africa by creating jobs through supporting the growth of SMEs. FNB is committed to procuring from and supporting majority black owned SMEs.

Vumela currently has R588m under management, from FirstRand and the Jobs Fund, and to date has deployed R280M to more than 20 early stage businesses, creating almost 2000 permanent jobs.

“The Vumela fund continues to be an important vehicle through which FNB expresses its determination towards ensuring the sustainable growth of SMEs. With Letsema being a supplier to FNB, this deal illustrates yet again how our SME development strategy has been able to catalyse funding, market access opportunities and business development support. We look forward to the continued growth of Letsema and its continued contributions towards job creation and economic growth,” says Heather Lowe, SME Development Head at FNB.

The Vumela funding is expected to unlock operating cash flow over the term of the investment. This will enable Letsema to focus on organic growth and allow them the opportunity to pursue larger projects, training up young professionals whilst delivering quality engagements to its clients.

“In partnering with Edge Growth and the Vumela Fund, Letsema will be able to take advantage of very real market opportunities and scale appropriately to enable us to continue delivering real value to our partners and clients. We are grateful to the Vumela Fund for trusting us and feel privileged to be working with Edge Growth, the leading ESD fund manager in South Africa, says Derek Thomas, CEO of Letsema Consulting & Advisory.

“As our discussions advanced, I cannot overstate the excellent working relationship that has been formed between our two organisations, a partnership we hope to further explore in the years to come.”

The word “Letsema” is of Sotho origin, meaning people coming together to work for a common purpose. This partnership mirrors that core value which founder Isaac Shongwe positioned back in 1996 when he started Letsema. It will continue to guide Letsema into the future.

 

Source: https://www.bizcommunity.com/Article/196/839/210142.html

 

 

 

12 TAX LAW CHANGES TO DISCUSS WITH YOUR ACCOUNTANT POST COVID-19

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While the country was under lockdown, it appears SARS and National Treasury have been hard at work, using this time to refine the law in SARS’ favour. These changes do not refer to the Covid-19 tax relief changes but are aimed at closing tax loopholes and to simply give SARS and the National Prosecuting Authority more teeth. Ask your accountant or tax advisor to help you understand the amendments and their impact on your tax planning and tax compliance strategy.

1. Raising of tax assessments by SARS simply using an estimate

SARS has had enough of taxpayers ducking and diving from their tax administration obligations. In terms of the new amendment, SARS has the power to raise an estimated assessment where the taxpayer does not respond to a request from SARS for relevant material, but this has been thought through carefully. The law amendment also now ensures that taxpayers will be barred from lodging an objection if the taxpayer does not submit the material requested. Should SARS have you on their radar or have questions subsequent to a lifestyle audit, ignoring a request for relevant material means SARS can raise an estimated assessment and impose penalties and interest. Getting untangled from this, even where you are innocent, will become far more difficult. Make sure you take your accountant’s calls or respond to their emails, as adopting the ostrich approach will get you into deep trouble.

2. Employer provided bursaries

Are you an employer who has tax structured bursaries, including for relatives of your employees? Or perhaps an employee who has benefitted hereon in the past? The law on this has been amended substantially and from 1 March 2021, using employer-provided bursaries as a mechanism to structure your remuneration from a tax perspective is no longer allowed. These bursaries must be disclosed on your IRP certificate, and not doing so is a criminal offense. Thus, there is no place to hide hereon and this is truly something of the past. There are now very limited instances where this tax exemption can be utilised, as part of a tax optimal total reward strategy.

3. Withdrawal from retirement funds upon emigration

Have you emigrated or are you planning to emigrate from South Africa in the near future, with retirement funding in a pension preservation fund, provident preservation fund or retirement annuity fund? You are on borrowed time if this is the case and you need to urgently finalise and file your financial emigration application, before 1 March 2021. If you miss this deadline, your retirement funds will be locked-in for at least the next 3 years in South Africa. We also expect more to come from the compulsory preservation of retirement funds, meaning the government may have the final say on how your retirement funds will be dealt with in future.

4. First good news item – unexpected tax relief for South Africans working abroad

Many expats were concerned that they would not make the 183-and-61 day tax exemption, as a result of the lockdown. SARS has kindly proposed to reduce, for a limited period, the 183 days requirement to 117 days. This rule change creates interesting tax planning opportunities and requires a deeper look for anyone who was outside South Africa for more than 60 days continuously in 2019 or 2020.

5. Living Annuities and termination of trusts

The era of setting up personal trusts left right and centre has come to an end with the introduction of section 7C. There are still instances where old trusts make sense and limited instances where one’s objective is asset protection. But if you think that creating a new trust will benefit you, perhaps you should get a second opinion from your accountant. You may sound important over dinner referring to your trust or even prevent your children from fighting over who gets the beach house, although inevitably they often still do. But do not think for a second you will pay less tax, as the opposite is true. Where you have a trust with a living annuity, you need to be aware of the new law changes when considering the death of an annuitant.

6. Circumvention of the anti-avoidance rules for trusts

SARS has now amended the legislation in order to curb the abuse of the introduction of low interest or interest-free loans, advances or credits for trusts. Just to rub salt in the wounds of those who still persist in thinking trust structures are tax-efficient, SARS has now shown that you need to stop listening to trust advisors who keep trying to find the next loophole. As SARS sees it, they will close it, leaving you with an overly complex trust structure that needs untangling.

7. Reimbursing employees for business travel

SARS has kindly relaxed their strict regulations when excluding business travel expenses. This is, however, subject to the employer’s policy provisions. Make sure your company travel policy is updated to utilise this tax relief. This is very much part of the equal pay for equal work value methodology for responsible employers where employees were left with little recourse regarding these tax burdens due to an oversight or the employer’s failure to execute the instruction for reimbursement.

8. Roll over of amounts claimable under the employment tax incentive

Excesses of Employment Tax Incentive claims for non-compliant tax employers will now not be rolled over at the end of the PAYE reconciliation period. This is to protect taxpayers once they do become compliant.

9. Tax treatment of secured non IFRS 9 doubtful debt

If you own a business that has been negatively affected by Covid-19, you need to talk with your accountant regarding this change. SARS proposes to make provision for the amount of debt to be reduced, differentiating between taxpayers that apply IFRS9 and taxpayers that do not.

10. Potential tax avoidance caused by dividends deductions

Taxpayers were able to structure their investments in order to issue financial instruments to the investors that yield dividends, while it receives interest or other income on its financial assets, thus avoiding tax implications. The new amendments now mean that taxpayers will no longer have the advantage of this loophole.

11. Refund need not be authorised where the matter is under criminal investigation

The proposed amendments further include that where you are subject to a criminal investigation in terms of the Tax Administration Act, any refund owed to you by SARS will be withheld pending the outcome of such investigation. We can only hope this will not be abused by SARS officials, as we stand reminded by the fact that the Tax Ombud has found SARS guilty of delay tactics in paying refunds.

12. The most critical tax law change! Inclusion of the words “Wilfully or negligently” in tax prosecution

Getting an admitted tax attorney involved on your taxes ensures legal privilege. SARS’ seemingly harmless inclusion of the words “willfully and negligently” when it comes to lesser tax offences increases liability for non-compliant taxpayers, with prosecution resulting in imprisonment or a hefty fine. By not simply updating your details, forgetting to do something, or making an unintended error can now land you in real trouble. Perhaps now is the time to take your tax administration and compliance extremely seriously, as SARS has just acquired its biggest ammunition yet to discourage non-compliance.

 

Source: https://www.taxconsulting.co.za/12-tax-law-changes-to-discuss-with-your-accountant-post-covid-19/

 

 

Exploring the evolution of the accountant

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For a long time, accountants were considered bean-counters, which is essential, but they’ve become much more than just number-crunchers. They’re essential business partners and will be vital in guiding small businesses through the challenges ahead.

Our State of Accounting Research found that 97% of accountants believe that they can support economic growth. And our State of Small Business research found that 28% of businesses wanted their accountants to act as a full-on business consultant. This is an increase from the previous year, when it was just 11%.

Technology has been one of the key factors enabling this shift, allowing accountants to step away from manual and repetitive tasks. Our research found that 87% of accounting firms use at least some cloud technology, and many others have turned to automation.

“Cloud technology has given our clients and us an advantage during the sudden forced remote working around the world. Already having real-time access from anywhere to your finances has made recently forced adjustments easier. In 2020 we found ourselves helping more new businesses migrate to the cloud than before. Being in the cloud as a business is no longer optional,” says Montaque Swanepoel, the founder and CEO of CFO360.

While this model has proved successful for early adopters like CFO360, many businesses are still struggling. According to our research two-thirds of accounting firms struggle to hire talent with the right technology skills for future growth. Here is how we can – and must – support accountants so they can guide small businesses.

Cultivating the right skillset

Our research found that 35% of accountants reported that their firm seeks candidates with cloud skills, and this number is bound to have increased due to Covid and remote working. Cloud competence is no longer a new skill, and businesses will increasingly be seeking out advisors with these skills.

To support this shift, the industry needs a strong pipeline of technologically skilled accountants. It’s encouraging to see education providers stepping up to ensure that graduates are equipped with up to date skills.

Cultivating the right skills in the next generation of accountants, as well as among current advisors, is critical. We can’t rely entirely on the next generation – firms need to be upskilling teams to close this gap now. It’s positive, therefore, to see that 76% of firms have invested in training staff in new skills over the last year.

Preparing the accountants of today

The evolution of accounting is already well underway. Our pre-Covid research found that 54% of firms believed they would manage both finances and business advice in the near future. And 38% even reported that offering advice on growth would be their accountants’ primary responsibility, while just 8% thought they would remain focused entirely on the numbers.

As Montaque puts it: “We have realised as accountants, our roles have started to shift in the last couple of years. Although the need for tax compliance, bookkeeping, and accounting is still necessary and always will be, for the small business owner, the need for strong business partners and business advisory has grown. With the right technology and the right advice, many business owners have capitalised on growth opportunities or adjusted to weather the storm. With some industries thriving and others struggling, the business advisory role, supported by the right technology, has never been more important.”

There are plenty of resources out there to help enable this shift, as well as technology partners and constant efforts by software-makers to make their offerings easier to use and more powerful. For instance, current accounting apps already tie into bank feeds, automating financial data capture. So simply updating to the latest apps will already save accountants’ time.

Getting through the challenges ahead

Accountants have already played a massive role in supporting their small business clients as they’ve had to adapt to survive. They are the unsung heroes of our ongoing recovery. But the industry will need the right support to weather this storm. The technology community and accounting bodies must work together to create the right support network for accountants and small businesses alike.

 

Source: https://www.bizcommunity.com/Article/196/511/210349.html

 

How to get your pricing strategy right and increase business profitability

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Value has to be the primary driver in setting a pricing strategy. This can then deliver both higher profits and improved customer satisfaction. Andreas Hinterhuber’s extensive research shows that business efforts to increase prices result in higher profitability than those to reduce costs. He sets out below the key components to increased business profitability.

1. Value-based pricing: The driver to increase short-term profits

No business can afford to ignore the importance of pricing. Ensuring you are competitive as well as profitable is a central element of the FD role in any industry. For many FDs, though, pricing strategies are often left to out-of-date formulae and allowed to stagnate. Perhaps a new approach is needed.

Pricing – the profit driver

Pricing has a dramatic but frequently underappreciated effect on profits. A study of a sample of Fortune 500 companies showed the impact of pricing exceeded the impact of other elements of the marketing mix on profitability (Hinterhuber, 2004). An increase in average selling prices of 5% increases EBIT by an average of 22%, while other activities, such as revenue growth or cost reduction tend to have a much smaller impact. So why does pricing have a bigger impact on profitability than other tactical measures, such as growth or cost reductions? The answer lies in understanding and analysing customer value.

Value-based pricing

Pricing is clearly a key profit driver; however most companies get it wrong. They base prices on costs or on competitor benchmarks. Of course both of these should influence the pricing decision, but they should never be top of the list.

Conversely, only a minority of companies – between 15% and 20% – based their prices primarily on customer value (Hinterhuber, 2008). Substantial empirical research over the last few years has confirmed that value-based pricing is the only pricing approach that leads to higher profits (Liozu and Hinterhuber, 2013). By contrast, cost-based and competition-based pricing are likely to be detrimental to company profitability.

So what do we mean by ‘customer value’? It is the willingness of the customer to pay and is the sum of the combined benefits that accrue to the customer as a result of purchasing a given offering. It can be calculated and quantified as “the price of the customer’s best alternative – reference value – plus the value of whatever differentiates the offering from the alternative – differentiation value” (Nagle & Holden, 2002).

Value-based pricing is especially appropriate for highly differentiated products. But it would be a mistake to assume it is only appropriate for products with a clear competitive advantage, such as branded tablet PCs or life-saving pharmaceuticals. Value-based pricing should guide pricing decisions for apparent commodity products as well.

Consider a recent case study in the highly-competitive global chemical industry. Executives at this company assume themselves to be operating in a commodities industry, and are convinced that – in order to achieve meaningful sales – prices for the chemical in question need to be set at parity to price levels of the industry leader.

Workshops with executives and focus groups with core customers and distributors led to the discovery of a number of differentiating factors between the company’s main competitor and its own offering.

While there was not a dramatic difference between the two products, we found a number of small but meaningful distinguishing characteristics between the two products. Using internal evaluation and field-value-in-use assessments, we tentatively quantified the additional customer value for these differentiating features.

We found small differences in logistical know-how, in product quality, in ordering costs and complexity, in vendor competence and in customer knowledge added up to a positive differentiation value of 8%, allowing the product price to be up to 8% higher than the customer’s best alternative. The highest possible price is, of course, not necessarily the best price. But after applying a series of price optimisations, competitive simulations and estimates of customer reactions, we calculated the most profitable price point to be 5% above the best available alternative. The final price of 105 will – although higher than competitive prices by 5% – still be convenient for customers, since this price is below the maximum value of 108.

When basing price on customer value remember that:

  • even so-called ‘commodities’ can and need to be differentiated;
  • the sum of many small differences in product characteristics can add up to a significant difference in customer value;
  • even apparently small price premiums over competitive products (e.g. 5%) translate into significant profitability differences between companies;  and
  • price and value premium between two competitive offerings needs to be sustained over time.

2. Steps to implementation

Clarity on goals

The first step in the successful implementation of value-based pricing is to define the objective of the company. As much as improving profitability seems a straightforward objective, different companies may pursue different objectives during different stages of their own life cycle.

Growth in absolute revenues (as opposed to growth in profits) is frequently an important goal – especially for products with network externalities. Finally, the growth for ancillary products (e.g., razors versus blades) may be the main consideration behind the overall pricing strategy in case of interdependencies between products.

Mutually incompatible goals of profit maximisation, revenue maximisation, and the maximisation of sales of ancillary products require substantially different pricing strategies.

Know your customer

Customers have a subjective measure when deciding to buy or not – value. The value a customer assigns to the product and which determines the price a company should charge can be assessed by asking a few questions:

  • What is the underlying need customers are willing to pay for? Answering this question allows a business to understand how customers are best served, what variables of the product or service make them chose you over competitors and ultimately allows the company to assign a monetary value to the variables that are important to customers. And of course, charging for them.
  • What are commonalities and differences between market segments that affect customer willingness to pay? This question is probably the most crucial for companies willing to charge different prices for different segments, yet it is still relevant for those who have only one price. Theatres leverage the willingness of different customer segments and offer lower prices during weekdays and afternoons, in order to maximise the profit from a perishable offer.
  • How much more is the customer willing to pay? How can that threshold be increased? Some products can be easily customised and in this case, willingness to pay appears on a single-sale basis. For other products, customers self-select and companies must look at what makes their products unique against comparable competitors’ products and then analyse the monetary value to such differences.  Customer willingness to pay can be measured (although not as easily analysing costs) and the most widely-used approach for measuring customer willingness to pay is conjoint analysis, which, if augmented with qualitative data – e.g. focus groups, customer observations, ethnographic research – yields actionable results. Customer needs change Champions of value-based pricing routinely analyse how changes in customers need affect perceptions of value, and so calculate the maximum willingness to pay.
  • How do different price points affect the bottom line? Once data is gathered, a company must understand how these new price points will impact sales. The result can often be in terms of different prices for different segments and one must ask what the likely economic value is created based on the weight of each segment, which is useful data to take into account for the second and next key element of pricing decision.

Know your company

Each company is different and different cost structures will allow different degrees of leeway for implementing short-term, impactful pricing strategies. A simple issue arising is the effect that an increase in price might have on demand. Since even small price changes have a substantial effect on profitability, we need a structured approach to understand how price and volume affect profits.

A structured way to calculate this is through CVP (cost-volume profit) analysis. It allows us to calculate the required volume increase to compensate for price reductions, and the maximum affordable volume loss associated with price increases, if the overall goal is to maintain profits.

For example, a product or service has a 30% contribution margin. A 10% price reduction – e.g. a special one-off discount granted to a customer – requires an increase of 50% in sales to keep overall profits constant. The implied price elasticity of demand is unlikely in practice. Conversely, a 10% price increase for the same product maintains its profitability even if volumes decline by up to 14%. The implied price elasticity of demand for price increases is considerably lower.

Know your competition

Competitive analysis is an important aspect to take into account when deciding what strategy to implement. A thoughtful look at competition may show unexplored markets, or better segmentations by others, as well as unserved niches or needs that the firm can tackle.

It can also be important to assess the effectiveness the strategy is going to have in the arena. Price wars often come from overlooking the power of pricing, such as when companies with new superior products charge the market average without considering the value they create; this forces competition to respond fiercely.

In other situations, and against common sense, companies may charge a premium to gain market share by eliciting exclusiveness and high quality in the mind of customers, as well as distinguishing their offering from the competition. In some situations, the pricing strategy adopted by some players may influence and actually determine the competitive structure.

3. Making it work

The final step on the road to successful pricing is to implement and follow up the pricing decision. It all comes down to setting price and leveraging the newly discovered value of the company’s product or service.

The decision to change price in itself is not enough – a correct implementation is key. A few guidelines can ensure that the price orientation (the ability to set prices based on value), matches the price realisation (the ability to enforce the prices):

  • Communicate value. The company will gain a better understanding of its own value proposition when it analyses the key attributes of its consumers. What emerges from that stage should be constantly communicated and the consumer reminded of the reasons why he or she chooses you over competitors. This is particularly true when the customers are big companies whose purchasing departments have to justify expenditures: they must be able to explain the ‘value they are getting’ not ‘the money they are spending’.
  • Company effort. Having the support of all stakeholders in the company helps make better decisions. Also in a previous stage, technical developers and sales managers can provide useful, if not critical, insights on value since they are the ones dealing directly with the product and the customers.
  • Pricing rules. Those responsible for the change must make sure there won’t be deviations from list prices, unless specified and for given order sizes. For example, when dealing with a sales force paid on revenue rather than profitability, sales managers may be inclined to give discounts to close a deal.
  • Negotiation and value communication. Companies that champion price realisation tend to have a sales force that knows why the price reflects the value the company is delivering, and is able to communicate this factor, escaping the downward spiral of negotiating price reductions.

In conclusion, pricing is one area where small changes can set a company apart from competition. Value-based pricing is a road that secures results in the short run; it also sets the direction for a path toward serving customers better, in light of the understanding of what value really means to them.

The original version of this article, written by Andreas Hinterhuber, partner and Evandro Pollono, senior consultant at Hinterhuber and Partners, Innsbruck, Austria appeared in the May 2014 edition of the ICAEW Finance and Management Faculty magazine.

 

Source: https://www.icaew.com/technical/business-and-management/strategy-risk-and-innovation/strategy/how-to-get-your-pricing-strategy-right-and-increase-business-profitability