Greater transparency among Tax Authorities across the world: Have you considered these important international tax principles?

Greater transparency among Tax Authorities across the world: Have you considered these important international tax principles?

The ramping-up of country-by-country (CbC) reporting to regulate transfer pricing and combat cross-border tax evasion, in terms of the Organization for Economic Co-Operation and Development’s (OECD) base erosion and profit shifting (BEPS) policies heralds a new tax landscape. It makes different demands of tax authorities worldwide and considers information at a finer level of detail. It also creates greater visibility amongst tax authorities and exposes companies with international structures especially those that have not been implemented correctly.

The risk associated with international structures thus rises significantly and companies need relevant strategic advice to ensure that these structures withstand the scrutiny of tax authorities across the world.
It is important to note that ‘tax’ should always follow business and never the other way around. There should always be a valid business purpose and commercial rationale for setting up an offshore structure. The following international tax principles should always be considered:

Substance over form, whereby true effect will only be given to the legal form of a transaction if the substance is the same. It would be important to demonstrate that there are capital infrastructure and people in the offshore entity sufficient to support the revenue that is being recognized in that country. You cannot have a post box in a tax favourable jurisdiction without people functions, risks and assets that are commensurate with the revenue being recognized there. How would a revenue authority know, you may ask? They could request the financial statements of the offshore entity and soon deduce that there is no substance by virtue of income being accounted for but no corresponding rental expense, payroll and other expenses that would need to be incurred in the production of that income, in other words, no substance.

Residence, place of effective management (‘POEM’) or management and control are basic tests of residency in most countries. In other words, you cannot have an offshore entity in country B that is effectively managed in another country, country A. In that case, the offshore entity in country B could be considered to be a tax resident of country A. The basic principle around POEM is it is the place where the key decisions are taken by directors and senior managers i.e. the place where the ‘shots are called’.

Controlled Foreign Company Rules (‘CFC’)
which are implemented in tax legislation in most countries. In South Africa, these rules apply if an SA tax resident or residents, either individually or jointly, hold more than 50% of the participation rights or are able to exercise more than 50% of the voting rights either directly or indirectly in a foreign entity. In that case that foreign entity is considered to be a CFC and subject to tax in SA subject, to certain exclusions one of which is the Foreign Business Establishment exclusion which in broad strokes means that it must have an office that it intends to occupy for at least a year with people, capital infrastructure and resources.

Transfer pricing generally relates to all intercompany transactions. In South Africa, the legislation applies to all cross-border intercompany transactions between connected parties which generally means where there is at least a 20% shareholding. It would need to be supported to Revenue Authorities across the globe that pricing is market-related. The recent implementation of Country by Country reporting creates greater visibility to tax authorities’ across the world on the activities, size, financial and tax position of companies within the Multinational Entity Group.
South Africa Sourced Income – South Africa has a worldwide basis of taxation whereby non-residents are taxed on South African sourced income. As such if your offshore entity conducts activities in South Africa and these activities are considered the originating cause of income, such income would be subject to tax in South Africa subject of course to any double taxation relief that may exist by virtue of a Double Taxation Agreement.

General Anti Avoidance Provisions would be the overarching wrapper to ‘catch all other’ not caught by one or more of the above principles.

South African beneficiaries of Offshore Trusts – South African resident beneficiaries as a general rule are taxed where a donation is made to an offshore trust but also where interest-free loans are advanced. In such case, the attribution rules apply to attribute income and capital gains of the offshore trust which are taxed in the hands of the SA beneficiary.

Where a distribution is made by the offshore trust to an SA beneficiary the latter will be taxed on that distribution based on the nature of the income out of which it was distributed e.g. if it was a foreign dividend the beneficiary will be taxed at an effective rate of either 0% or 20% depending upon the shareholding in the foreign company declaring the dividends and if it is interest, a marginal tax rate of 45% may be applied or a tax rate of 18% on a capital profit.

In terms of the Act, there is an exemption from tax on foreign dividends where the person holds at least 10% of the equity shares and voting rights in the foreign company; referred to as the participation exemption. This exemption also applies to the disposal of share where the disposal is exempt from CGT.

As such, if the current year’s income of the trust comprised a dividend, that dividend is not taxable in the hands of the donor or the lender under the interest-free loan and neither is it taxable as a capital gain if the trust had disposed of the shares.

Similarly where such dividend or gain has been capitalized and in a future year that capital was awarded to a beneficiary in SA that award would be exempt from tax on the dividends or the CGT. However if the trust had earned the dividend and distributed in the current year, the beneficiary would have been taxable at the rate of 20% while a capital profit made in the same year is not taxable.

Draft legislation has now been put out for public comment incorporating the following changes to the attribution and distribution rules.

In determining an amount that should be included as taxable income in the hands of a resident who made a donation, settlement or other dispositions to a foreign trust and that foreign trust holds shares in a foreign company, it is proposed that the participation exemption in respect of foreign dividends should be disregarded, provided that those foreign dividends are paid by a foreign company where more than 50 per cent of the total participation rights or voting rights in that foreign company, are directly or indirectly exercisable by that resident who made a donation settlement or other dispositions to a foreign trust or connected person in relation to the resident.

If these attribution rules do not apply and a trust receives a dividend where it holds a greater than 50% interest, and the dividend is capitalized, an award out of capital in the future year to a beneficiary in SA will be taxable at an effective rate of 20%.  The participation exemption will not apply.

The new rules if included in the legislation will also apply to CGT so that where CGT would not have applied under the attribution rules, or out of an award of capital in the current or future year, will in future be subject to CGT. The participation exemption will not apply.

The new rules are intended to apply to any dividend received or disposal of shares on or after 1 March 2019.

If these changes are successfully implemented, it should mean that any dividend on a qualifying interest or any profit on disposal of a qualifying interest derived by an offshore trust on or before the 29 February 2019 and capitalised should still be able to be awarded out of capital, tax-free in the following year

Contact us at Tuffias Sandberg if you in need of assistance in local or international tax-related issues.

Business Rescue Options: Going the Informal Route v the Companies Act Route

Business Rescue Options: Going the Informal Route v the Companies Act Route

As a company director the last thing you want to have to grapple with is a failing business.

But the reality is that financial adversity can strike even the most successful business at any time, and the earlier you address the problem the better your company’s prospects of recovery will be.

Moreover the Companies Act obliges you, on pain of risking personal liability, to take appropriate action.

What should you do? Should you enter into an informal arrangement with creditors or should you seek formal business rescue protection? We discuss the pros and cons of both options…

The business rescue provisions in the Companies Act are regarded as progressive and world class and there is evidence that it has worked well.

Yet a 2016 survey showed that more distressed businesses opted for an informal approach and appear to be more successful than those opting for the remedies of the Companies Act.

What’s the difference?

Business rescue in terms of the Companies Act is a process whereby the company informs stakeholders of its situation and a business rescue practitioner is appointed to try and salvage the company. A moratorium is placed on creditors which gives  the practitioner room to find a solution.

With an informal arrangement, the business enters into negotiations with some or all of its creditors.

The two significant differences between the two approaches are that –

  • With an informal approach there is no protection from creditors demanding to be paid – this is a substantial risk because if creditors decide they want to be paid, the company could collapse.
  • The other big difference is that the informal way offers confidentiality to the business – with business rescue the financial position of the company becomes common knowledge to all stakeholders and the general market place. The company thus suffers reputational damage from which it may never recover even if it reaches a favourable settlement – e.g. consumers of the company’s product may opt to use a rival’s product in case the company does go into bankruptcy.

Directors: Plan ahead to prevent falling foul of business rescue requirements

Once a company becomes aware that it has run into or is going to experience financial difficulties, the directors are required by the Companies Act to perform liquidity and solvency tests and if these show the business cannot meet its obligations for the next six months, then it is required to either declare insolvency or apply for business rescue.

Should the directors decide not to proceed with business rescue or liquidation, they are obliged to provide stakeholders with reasons for their decision in writing – hence the company’s stressed position is revealed to the public.

Therefore if you want to take the informal route you need to do this before the business becomes financially stressed as above.

You will also need to present creditors with a credible plan when you embark on this option. Clearly, monitoring of the cash position and planning a comprehensive strategy are critical to the success of the informal turnaround process.

Your personal liability risk 

Directors are personally liable for any losses as a result of their actions or inactions if it can be shown that they acted recklessly or negligently.

So plan accordingly and carefully.

Remember also that staff and stakeholders could be financially ruined if the business fails.

The Protection of Personal Information (PoPI) Act 2013 and its impact on your organisations Terms and Conditions

The Protection of Personal Information (PoPI) Act 2013 and its impact on your organisations Terms and Conditions

For anyone who is not familiar with the PoPI Act and what it entails, here is a brief summary along with some guidelines on how your business will need to comply.

Firstly some background, the PoPI Act sets out the conditions on how you can legally process a ‘data subject’s’ (persons) personal information.  The Act provides for the protection of personal information, through the processing of personal information by public and private bodies in a manner that recognises an individuals’ right to privacy.

The PoPI Act does not prohibit you from processing or require you to obtain permission from a person to process their personal information.  If you are going to process, use or facilitate someone’s personal information however, it is up to you to comply with the conditions set out in the Act.

The Act sets out and individuals’ right to know:

  • What is done with your information
  • How your information is processed or shared
  • Who receives your information or with whom it is shared
  • What type of information is processed and shared; and
  • Why your information is processed or shared

The conditions of these rights are as follows:

  • Accountability
  • Processing limitation
  • Purpose specification
  • Further processing limitation
  • Information quality
  • Openness
  • Security safeguards
  • Data subject participation

The Act applies to anyone who keeps any database or type of record relating to a persons’ personal information.  The Act regulates the processing or sharing of personal information and includes those records already in your possession.

We are all familiar with those painful, unsolicited text messages and phone calls offering you a ‘can’t-be-missed’ opportunity to join a time-share offer or take up a mobile phone contract with an out-of-this-world free data package included.

Apart from the intrusion and inconvenience we often find ourselves wondering where on earth these institutions got our information and who granted them permission to approach us.

The PoPI Act has altered how consent is regarded for direct marketing purposes and is regulated through an ‘opt-in’ or ‘out’ mechanism for consumers.

This means that the processing of a persons’ personal information for the purpose of direct marketing by any means of electronic communication is prohibited unless that person has specifically consented to the processing, or is a customer of the party conducting the marketing.

It is helpful to note that a responsible party may approach a person (who has not previously withheld consent) only once to request consent for the processing of their personal information for direct marketing purposes.  The consent must be obtained in the prescribed manner.

Compliance with the PoPI Act will impact your organisation’s processes, technology and the manner in which employee’s process personal information.

It is advisable that organisations follow the following steps in order to comply with the Act.

  • Raise awareness of the PoPI Act with all data management professionals in your organisation
  • Review the rules governing data requests
  • Implement security controls to protect personal information
  • Adopt a compliance culture to instil the importance of the Act
  • Align your policies, processes and procedures to the Act
  • Include POPI Act compliance in the key performance areas and contracts of those who handle the data.
  • Ensure all governance documents complement each other when relating to the Act

It is imperative that you and your organisation include all terms and conditions related to the use of a person’s personal information in your standard terms and conditions.

This could be set out in a separate Annexure to your standard terms and conditions or attached as your Personal Information Protection Policy which will be required to be signed by both parties.

This could also be in the form of a consent form attached to your contract, agreement or terms and conditions.  How you incorporate this is up to you but it must be incorporated to ensure your business complies.

Companies: What is an Alternate Director? A Curious Role…

Companies: What is an Alternate Director? A Curious Role…

Inevitably, there will be times when one or more of a company’s directors are absent and have to miss board meetings – perhaps through illness, frequent travel, taking of leave etc.

But the company’s operations must continue regardless, and to provide for those situations the Companies Act provides for the appointment of an “alternative director” to fill in for a particular director when need be.

Such an alternate director is included in the Act’s definition of “director” and that means a host of consequences for both the company and the appointee.

Read on for some thoughts on the roles, duties and risks that an alternate director takes on in accepting such an appointment…

Situations can arise where a director becomes ill and takes a leave of absence or travels frequently and has to miss board meetings.

The Companies Act provides for the business to appoint an alternate director to fill in for the absent director.

Roles, duties and risks of the alternate director

The Companies Act includes an alternate director in its definition of a “director”.

Thus, an alternate director is elected in the same manner as a director and when stepping in for the director, the alternate has the full powers of a director i.e. he or she participates and votes as a director in meetings and/or when resolutions are passed.

The alternate director also has to act in the best interests of the company, independently, with due care and skill, fully apprise himself/herself of the issues to be decided on and not have (or declare) any conflicts of interest.

The liabilities incurred by directors fully apply to alternate directors and as the alternate plays a more limited role than a director, there is a strong case to be made for alternate directors being indemnified by insurance cover.

In the event of being sued, the insurance will be paid out as long as the alternate director acts as set out in the above paragraph.

The alternate director should also motivate for the company to pay any legal costs incurred as a result of being sued.

When the director for whom the alternate director stands in for resigns, dies or is removed from office, the alternate director position ceases.

Whilst one can see the necessity of the role of the alternate director, it is nevertheless a curious role.

In a sense, it is similar to a political vice president who needs to be ready at any time to fulfil the role of the president.

Thus, an alternate director needs to be fully up to date in the affairs of the company and to step in whenever the director is absent.



President Cyril Ramaphosa was initially expected to announce his Cabinet soon after his inauguration on Saturday (25 May). However, the announcement was delayed to this week and finally, on Wednesday evening (29 May 2019) the president’s choices were revealed. The delay in announcing the Cabinet had seen the rand slump to a c. 6-month low as investors interpreted it as Ramaphosa facing opposition to his reform agenda and signs that he may be negotiating with factions within his own party.

The press and political commentators have theorised as to the reasons for the delay. Conjecture ranged from Ramaphosa having to appease opposing factions within the ANC, the ANC’s integrity commission having flagged 22 members as problematic on the national and provincial parliamentary lists prior to the election (including Deputy President David Mabuza and ex-Mineral Resources Minister Gwede Mantashe), having to reward ANC allies such as the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU) for their support and current Public Protector (PP) Busisiwe Mkhwebane’s findings against former Public Enterprises Minister Pravin Gordhan (a key Ramaphosa ally) being serendipitously released a day before Ramaphosa’s inauguration.

Whatever the reasons, and these probably involve the machinations of individuals aligned to the ANC faction fearful of the cleanup in government, overall, reviewing the chosen Cabinet we note there were no major disappointments and the key drivers for sorting out the economy remain. Ramaphosa in all likelihood did the best he could under difficult circumstances considering the fact that he is to an extent obliged to hand out enough “patronage” to satisfy different factional interests (although this has seemingly been the case more at the level of deputy ministers). Disappointingly, he has retained a number of individuals from the previous Cabinet, although he shuffled them around to different posts. We note that the president has said that the performance of ministers “individually and collectively – will be closely monitored against specific outcomes” and where implementation is unacceptable, “action will be taken.”

Nevertheless, with a few exceptions, his choices seem to be market-friendly and, more importantly, excludes several (although not all) questionable candidates from the Zuma-era. In addition, he has changed how his executive and ministries are structured, cutting the size of the executive from 36 ministers (and 35 deputy ministers) to 28 ministers (and 34 deputy ministers). The SA Cabinet was one of the world’s largest, ballooning from c. 50 members under ex-presidents Nelson Mandela and Thabo Mbeki, 47 under Kgalema Motlanthe to 71 members under Zuma. With the country’s bloated public sector wage bill (R540bn-plus p.a. – c. one-third of government spending), SA could ill afford maintaining a Cabinet of that size. For a size comparison with a number of other countries see Figure 1 below:

Figure 1: Cabinet sizes of various countries

Source: News24, CIA World Factbook, Reuters, Anchor

Figure 2: Ramaphosa’s new Cabinet:

Source: presidency.gov.za, News 24, Anchor

Red indicates a new member of cabinet. Blue indicates a member of Cabinet who has moved portfolios.

First, let’s assess the positives or strategic moves on the part of the president – the new executive was cut (comprising now of 28 ministers vs 36 previously), for the first time in SA history women account for 50% of ministers, there is a good generational mix with a significant number of younger people  appointed and he kept the all-important economic cluster untainted. Well-respected former South African Reserve Bank (SARB) governor Tito Mboweni remains finance minister (fiscal stability), although his deputy Mondli Gungubele has been replaced by David Masondo. Mboweni has been a proponent of reining in government spending and selling some beleaguered state-owned entities (SOEs). His reappointment is seen as buoying Ramaphosa’s plans to revive the economy and attract foreign investment. Gordhan, probably one of the more controversial appointments for some following the release of the PP’s report on Friday (24 May), is once again minister of public enterprises. He is well-respected (except by the Zuma faction and the EFF) and has been at the forefront of efforts to turn around SOEs at the epicenter of looting during Zuma’s presidency. Gordhan headed the SA Revenue Service (SARS) and previously served two terms as finance minister.

A big surprise was the appointment of Patricia de Lille as minister of public works and infrastructure. This is likely a strategic move on the president’s part– what better way to get those Western Cape voters from the DA. Although, people who had voted for de Lille’s GOOD party might be slightly unhappy at the turn of events.

Other new faces include Jackson Mthembu, the ANC’s former chief whip in Parliament, as minister in the presidency and lawyer Ronald Lamola as the minister of justice and correctional services. Lamola is a strong Ramaphosa supporter, lawyer and at 36 he is among parliament’s youngest members. He was previously  ANC spokesman on land reform. The appointment of Naledi Pandor to international relations and co-operation has also been lauded by various commentators, with Lindiwe Sisulu moving to human settlements, water and sanitation. Senzo Mchunu, who was defeated by Ace Magashule for the position of ANC secretary-general in 2017’s ANC elective conference, is the new minister of public service and administration and, in a move likely to appease unions, ex-union leader Ebrahim Patel was named minister of trade, industry and economic development.

Dr Nkosazana Dlamini-Zuma, who lost to Ramaphosa at the ANC electoral conference and was ex-president Zuma’s favoured successor, has been moved from minister in the presidency (who oversees the National Planning Commission [NPC]) to minister of cooperative governance and traditional affairs, with ex-Johannesburg mayor Parks Tau and Obed Bapela as her deputies. Intellidex writes that she has broad support from the ANC’s NEC and “pockets of strong opposition.”

Former minister of state security Dipuo Letsatsi-Duba, a key defender of Ramaphosa, is surprisingly out of Cabinet. She has been replaced by Ayanda Dlodlo with Zizi Kodwa as her deputy. Among the new appointees are Barbara Creecy as minister of environment, forestry and fisheries, while Thoko Didiza’s new role is that of minister of agriculture, land reform and rural development. Didiza had occupied the position before under the Thabo Mbeki administration and by all accounts served the position well.

Over 50% of the new executive seems to be comprised of Ramaphosa’s allies. According to a report in The Citizen, these allies include Mantashe, Gordhan, Mondli Gungubele, Blade Nzimande, Bheki Cele, Cassel Mathale, Stella Ndabeni-Abrahams, Senzo Mchunu, Aaron Motsoaledi, Naledi Pandor, Jackson Mthembu, Fikile Mbalula, Ronald Lamola and Zizi Kodwa. The paper also writes that “none of the remaining members can genuinely be counted as hard-core Zuma supporters.”

It was revealed last week that some of the more circumspect ministers in the previous administration including Nomvula Mokonyane and ex-Finance Minister Malusi Gigaba would not be sworn in as members of parliament. Wednesday’s announcement also left out Bathabile Dlamini (head of the ANC’s women’s league and former women’s minister who the High Court accused of perjury although she denies wrongdoing), Michael Masutha and Siyabonga Cwele. Other ministers that didn’t make the cut included Jeff Radebe (the longest-serving Cabinet minister, heading the energy portfolio.), Rob Davies, Derek Hanekom, Senzeni Zokwana, NomaIndia Mfeketo, Suzan Shabangu, Dipuo Letsatsi Duba, and Gugile Nkwinti.

In terms of the smaller Cabinet we are neutral on this announcement – it could have been made significantly leaner. The president only cut his executive by 8 people – with the number of ministers serving under him reduced from 36 to 28 people, with 34 deputy ministers (many of the combined ministries now have two deputy ministers!).

The various ministries that were merged to cut down on expenditure include trade and industry being combined with economic development, higher education and training combined with science and technology, environmental affairs combined with forestry and fisheries, while land reform and rural development will have one minister and the combined mineral resources and energy ministries will now fall under Gwede Mantashe (he previously held the mining portfolio). Human settlements was combined with water and sanitation, while sports and recreation combines with arts and culture. The portfolios of communications and telecommunications and postal services had already been combined previously.

On the negative side, David DD Mabuza retained the position of deputy president (there were whispers that Naledi Pandor or Lindiwe Sisulu might be up for this position). While Mabuza played a pivotal role in helping Ramaphosa win control of the ANC in December 2017 and commentators see him as an important power broker within the party, he is a controversial character. Although several reasons for the delay in the Cabinet announcement floated around, Mabuza’s insistence to “clear his name” in front of the party’s integrity committee, was likely the main reason. The integrity committee had accused him of bringing the party into disrepute after he was linked to several scandals during his tenure as Mpumalanga premier. He also faced accusations that he helped rig state tenders and had opponents silenced and even assassinated while premier (these allegations also appeared in the New York Times in 2018). Mabuza denies any wrongdoing and has never been charged. He was also cleared of wrongdoing by the integrity committee. Nevertheless, it is concerning that a person with these accusations hanging over them is literally a heartbeat away from the presidency.

Other circumspect reappointments include that of Blade Nzimande to the combined ministry of higher education, science and technology (he was higher education and training minister during the fees-must-fall campaign and received backlash from students and the media on his handling of the situation, even being accused of worsening the crisis). Angie Motshekga has already spent a decade as minister of basic education and, despite the dismal state of SA’s  education system, has been given a further 5 years. Nosiviwe Mapisa-Nqakula retains the defence ministry despite being accused last year of using an SA plane to smuggle a friend into SA, Maite Nkoana-Mashabane remains in cabinet as minister in the presidency for women, youth and persons with disabilities and the appointment of former Cosatu president and staunch Zuma supporter, Sdumo Dlamini (as deputy minister of agriculture, land reform and rural development) is likely Ramaphosa reaching out to former Zuma supporters.

While some questionable characters remain in key positions, Ramaphosa’s cabinet appointments seems to have brought about some much-needed investor confidence with the rand strengthening slightly Wednesday evening (+0.4%) and remaining relatively steady this morning (although this is likely due to the positive perception associated with the retention of Mboweni and Gordhan). Under the circumstances, Ramaphosa has done relatively well with some of the portfolios, and retaining well-regarded ministers such as Mboweni and Gordhan (despite some fightback against their retentions from various fronts) in key portfolios should be applauded and seen as a signal to investors that Ramaphosa’s reform agenda remains on track. However, despite some positive appointments, investors will not on the back of the new Cabinet announcement be rushing to invest in SA without clear signals that those involved in corruption and misconduct will be going to jail – here actions speak louder than words. In addition, resolving the debt burden at SOEs and especially at power utility Eskom is key, and here it would appear that Gordhan is the man for the job. Fortunately, for the most part, those ministers tainted by corruption scandals, implicated in the state capture inquiry or with ineffective track records, who would have reduced confidence, have been left out. In terms of the new faces, only time will tell whether Ramaphosa’s decisions were in the interest of SA or of the ANC.




South Africa (SA) voted on Wednesday, 8 May, in what was probably the most important general election since the dawn of democracy. In what follows, we look at the results provided by the Independent Electoral Commission (IEC). We note that despite some issues (voters’ indelible ink being easily removed, a few reports of double voting etc.) the IEC has declared the election as being “free and fair”. Surprisingly, from the data, voter turnout was very low with 17.7mn total votes (65.99% of the 26.8mn registered voters- see Figure 1). There were 235,449 spoilt ballots.

Figure 1: Voter turnout: 1994-2019

Source: News24.com, Wikipedia, Stats SA, Anchor

Voter turnout

The voter turnout of 65.99% was far lower than expected and is below the 73.5% recorded in the 2014 election, with the Southern African Development Community (SADC) election observers raising concern over the poor youth voter turnout. Julius Malema’s Economic Freedom Fighters (EFF) has become the official opposition in three provinces and grown to 10.8% nationally. However, with the ANC garnering a majority nationally as well as in all provinces except the Western Cape, the EFF’s mooted pre-election role as kingmaker and the likelihood of EFF party members entering government posts by coalition agreements is no longer relevant. While its numbers swelled in the national assembly its performance does nevertheless seem lower relative to what some pollsters and the party itself had predicted. A possible reason being the lower-than-expected youth turnout (the EFF’s biggest support base) vs older voters. It could also indicate that a smaller-than-expected number of voters support some of the EFF’s more radical ideas, and it would seem from these election results that, in general, South Africans reject the more radical left and right, instead preferring more centrist parties (ANC and the DA). The c. 58% performance from the ANC and the party retaining Gauteng with a majority of 53.2%, is likely to be positive for the country (and the JSE) and is a sign that voters are giving Ramaphosa the required mandate to effect change.

ANC election performance and the Ramaphosa effect

Although there was little doubt before the election that the ANC would emerge victorious, the margin of victory was unclear. Several political commentators argued that should President Cyril Ramaphosa not lead the ANC to a substantial victory (c.55%-60% of the national vote), it would weaken his position within the ruling party and, eventually, could lead to his downfall as the so-called Zuma faction saw themselves strengthened. However, Ipsos polls before the elections showed unprecedented support for Ramaphosa both in terms of popularity and competency, while the ANC did not fare anywhere near as well. Susan Booysen, director of research at the Mapungubwe Institute for Strategic Reflection, told BusinessTechrecently that since Ramaphosa assumed office (on 15 February 2018), “the ANC has experienced a resurgence.” According to Booysen, in the last month of Zuma’s rule (January 2018), the party “had slipped below the 50% mark, …”. We agree and believe that had Zuma still been the face of the ANC, the party would have easily dropped below the 50% mark and lost Gauteng.

Ramaphosa has proven to be extremely popular with voters (more so than his party) and has even led to people not usually aligned to the ANC contemplating voting for him to strengthen his so-called reform agenda. This, as he promises to root out corruption and “renew” the ANC. While it has since worn off, the initial bout of ‘Ramaphoria’ during the first few months of his presidency took the wind out of the sails of the major opposition parties (the DA and EFF – as can be seen from the election results vs the local elections), for whom Zuma was a blessing in disguise.

The key now is for Ramaphosa to show leadership with the appointment of his new cabinet, which is expected to be the first key message he sends to global and local investors. In terms of the Constitution, the President has absolute power to appoint the deputy president and ministers and to dismiss them. Ramaphosa is expected to announce the make-up and size (which by all accounts is set to be cut from the bloated cabinet of the Zuma years) of his new cabinet by around 21 May, as the presidential inauguration takes place on 25 May. His cabinet appointments should tell us more about his intentions (and whether he has been able to sideline the so-called Zuma-aligned party members). More importantly, it will be a truer test of his ability to execute on his promises to rid the country of rampant corruption.

The hope is that he will remove tainted and controversial Zuma-era cabinet ministers such as Bathabile Dlamini, Mosebenzi Zwane, Malusi Gigaba, Nomvula Mokonyane, former state security minister David Mahlobo and his successor, Bongani Bongo (all of whom appear high on the lists the party submitted to the IEC). The chances of all these names falling are, however, slim. Most are quite high in the ANC NEC but, even if Ramaphosa is able to remove half of these individuals from cabinet, it will likely be seen as a victory, not only for SA but also for him and his position in the party.

Our base case comes to fruition

Our own base-case scenario for a relatively strong ANC election win (ANC gets 58% or more of the vote nationally) has materialised with the ANC winning 57.5% of the vote nationally. We view the result as providing a mandate for Ramaphosa to continue his reform and anti-corruption drive, which is positive for SA investor confidence. Even though the ANC’s national majority has been reduced to below 60% for the first time, and is down 7.5% from 2014, we highlight that it is significantly higher (by 6.7%) vs the ANC’s performance in the local government elections when it garnered 53.9% support overall.

These results should, in turn, see strong inflows into the SA equity market. Recent market performance has indicated support for this view, although we repeat that Ramaphosa will need to show strong leadership and take meaningful actions in order to reinforce confidence. In Figure 2 below, we highlight our base-case scenario as it appeared in our initial election note entitled, Elections 2019: How to position your portfolio.

Figure 2: Our base-case scenario on the 2019 general election

Source: Anchor

To summarise, Anchor’s base-case scenario (at a 55% probability), expected the ANC to get 58%-plus of the vote. With the final tally within a whisker of this scenario, we believe that the current ‘repair’ scenario should maintain its momentum, with Ramaphosa emboldened and seen as having received the required mandate from voters to solidify his position and to steer ahead unfettered with his anti-corruption and growth agenda. Ramaphosa is expected to assemble a new cabinet, with few Zuma cronies or compromised individuals. He is also expected to make headway in managing divisions within the ANC, gaining the support of the ANC caucus and the NEC, as he intensifies the fight against corruption and state capture.

This, in turn, will be positive for the local economy and we are likely to see more inflows of foreign direct investment (FDI) and local investment into SA as ANC policies are (hopefully) clarified, especially those related to expropriation without compensation (EWC), the nationalisation of the SA Reserve Bank (SARB) etc. A more certain future overall, with Ramaphosa perhaps serving two terms, boosting the JSE (bar any external offshore factors) and the rand strengthening. Here we recommend high exposure to SA Inc. shares (see Figure 2 above), especially the quality counters where foreigners take their exposure.

Hence, we are maintaining meaningful exposure to SA Inc. shares, but retaining a diversified portfolio. Importantly, investors should be ready to react as the SA political drama unfolds. SA has serious structural issues and the advances made in solving these are equally important. It should also be borne in mind that many of the factors impacting equity markets are global in nature and the SA political outcome is just one of the contributors.

The ANC cabinet – revamped?

With the ruling party having experienced a serious credibility crisis over the past few years and being deeply divided between the so-called Ramaphosa (constitutionalists, reformist, anti-corruption) and the Zuma factions (now seemingly headed by ANC Secretary General Ace Magashula), a strong victory was not at all a certainty, although Ramaphosa’s charisma seems to have carried the ANC through.

However, the Herculean task of getting SA’s economy back on track now starts officially and it will be interesting to see the make-up of Ramaphosa’s cabinet once that announcement is made. With a clear ANC election win on a national level, it is Ramaphosa’s prerogative to appoint a cabinet (in consultation with the ANC and its alliance partners) and who he chooses may well give South Africans a better idea of the ANC’s commitment to rooting out corruption.

Ramaphosa is, by all accounts, the complete opposite when compared to Zuma in terms of his governing style – he is a modern leader for whom the rule of law is paramount. Following years in the trade union movement and in business, Ramaphosa is an astute negotiator and a cautious strategist who wants to unify a divided ANC and tripartite alliance. If Ramaphosa, the constitutionalist, reformist (and one of the authors of our constitution), emerges victorious, with a strong mandate (which seems to now be the case), political commentators believe he can continue “gloves off” with his current reform agenda.

By quickly consolidating his power after his election victory, Ramaphosa might be able to rid the once-proud liberation movement of those individuals implicated in State Capture and their “fightback” campaign. This, in turn, will be positive for SA, and the country might finally see renewal and growth again, having left the disastrous 9 years of ex-President Jacob Zuma’s rule behind it.

We note that the rand exchange rate posted gains against a strong dollar for the third day in a row on Friday (10 May) as the ANC seemed set for a convincing victory nationally, whist also maintaining majority control over SA’s economic hub of Gauteng.

Figure 3: Rand vs US dollar exchange rate: December 2017-10 May 2019

Source: Bloomberg, Anchor

The 2014 election vs 2019 election

In the last general election (2014), the votes received by the top-5 political parties are shown in Figure 4 below. The ANC earned 62% of the national vote vs 65% in 2009. ANC support further dwindled in the 2016 municipal elections – it received only 53.9% of the national vote and lost key metropolitan municipalities (Johannesburg, Tshwane and Nelson Mandela Bay). Of the total 25.39mn voters in 2014, 73.48% voted with 18.4mn valid votes cast. Spoilt votes totaled 252,274 (these were likely disillusioned ANC voters spoiling their ballots instead of voting for another party). According to the IEC, this year’s voters roll contains 26.8mn voters, higher than in 2014 but, nevertheless, indicating 10mn-plus citizens of voting age have chosen not to register to vote in this election. Of these, 65.99% actually voted (see Figure 1), with spoilt votes at 235,472.

Figure 4: ANC historical performance nationally

Source: elections.org, Anchor

As can be seen from Figure 4 above, prior to this year’s election, the ANC posted its worst YoY election losses, down 5.4% and 5.7% YoY in 2009 and 2014, respectively, during the Zuma years. We note that following the “recall’ of Thabo Mbeki in 2008, a faction split from the ANC to form COPE, while the EFF was formed in July 2013, less than a year before the 2013 election, when Malema was kicked out of the ANC.

Recent poll data indicated that the ANC was likely to win with a 55%-60% majority, which Anchor and many other political commentators saw as the required percentage for Ramaphosa to lead in a less constrained way. Our base case of the most likely outcome was for the ANC to get 58%-plus of the vote (we put this at a 55% probability). The strong Ramaphosa/ ANC win could see the market rally on expectations of greater policy certainty, improved state-owned enterprises (SOE) leadership and a better growth outlook.

In terms of parliamentary seats, there are 400 seats in total (MPs serving in parliament) during a five-year term. With voter turnout standing at c.17.4mn or 65.99% of the 26.8mn registered voters, IEC officials will have to divide the total number of actual votes (17.4mn) by the number of Parliamentary seats (400). So, in order to earn a single seat for an MP, a party would have to secure c. 43,500 votes. Below, we highlight the seats received by the top-5 parties in 2014 and the top-5 parties in the 2019 election – giving readers an idea what our sixth democratic Parliament will look like. The national assembly now has 14 political parties represented, with the ANC and the DA losing 19 and 5 seats each, respectively, and the EFF and VF Plus gaining 15 and 6 seats each, respectively.

Figure 5: 2014 (LHS) and 2019E (RHS) general elections: Top-5 parties’ seats in Parliament

Source: IEC, Anchor

The Provinces:

Figure 6: 2014 (LHS) vs 2019 (RHS) provincial election winners, %

Source: elections.org, Anchor. *Note Western Cape is DA stronghold

In terms of the provinces, while all eyes have been on Gauteng as the major battleground, it is also interesting to see the ‘messages’ provincial voting outcomes have sent especially in the Supra and Ace tainted provinces of the North West and the Free State – both have seen gains for the EFF (17.1% vs 12.53% in 2014) and the DA (16.9% from 16.2%), respectively, although the ANC remains the majority party by a significant margin in both.

In terms of Gauteng, the retention of which was of critical importance for the ANC, the party received 53.2% of the vote (retaining the province with a majority), while the DA disappointed vs projections and coming in at 24.5%, with the EFF at 13.5%. A concern going into the election was that the EFF would secure enough Gauteng votes to derail Ramaphosa’s reform momentum. However, this has clearly not materialised. In addition, there was also the risk that the ANC would need the EFF to form a ruling coalition in the province, making the EFF so-called kingmakers in Gauteng. As highlighted above, this notion too has now likely disappeared.

Nevertheless, the EFF have done well in the following provinces where it will be the official opposition – Limpopo (13.1%), Mpumalanga (11.5%), and the North West (17.1%), while the IFP has emerged as the official opposition in KwaZulu-Natal with 14.6% of the vote. In the Western Cape, the DA will hold onto the province with a 52.4% victory, although we note here that Patricia de Lille’s GOOD party (with c. 2.2% of the vote) has definitely attracted a number of ex-DA voters.

Likely the biggest surprise contender of this election was not, as many thought the EFF, but rather the Freedom Front Plus (2.4% of the vote nationally), which cemented its position among the top-five parties in parliament, while also improving significantly in most provinces. This again is likely a result of the more conservative DA voter base moving to the FF-Plus, another reason the DA’s performance disappointed. 

Figure 7: Votes by province: Top-5 parties nationally, 2019

Source: elections.org, Anchor


SA turned a corner when Cyril Ramaphosa was elected ANC president at the party’s elective conference in December 2017. Many positive moves have been made since as discussed in our report entitled Investment scenarios for the SA general election. However, not surprisingly, there is strong opposition within a faction of the ANC against moves by Ramaphosa to curb corruption and revive embattled SOEs. Our base case is for this direction to be sustained and this could see underweight foreign fund managers direct financial flows back into the SA market. The offshore component of the JSE should provide support and, since our base case of a positive SA scenario has unfolded (with Ramaphosa being given the required mandate to pursue his reform agenda), we could see a material bounce in local equities. However, our bets are measured, and we are managing portfolios with one eye carefully on the risks.

Jobs will be created by the private sector only within a favourable investment environment and not with policy uncertainty, corruption, doublespeak and EWC hanging over our collective heads. No-one will invest if they believe their money or investment isn’t safe. The ruling party needs to send clear messages after this election regarding its policies and we need a renewed collaboration between government, business and labour in order to place the country on a renewed growth path – away from conflict to joint goals around growth that will, in turn, create jobs and a thriving economy.

While we continue to have a positive stance on local equities, the future is far from certain despite our base-case scenario unfolding with the ANC election outcome. Being nimble is as important as it has ever been, and we will be quick to act in the best interests of our clients. Investors in the SA market have been going through emotional turmoil for a while now, with worsening local news and a difficult operating environment for businesses (although the global backdrop had proved supportive). Hence, sectoral exposure is increasingly critical, and these could be materially differentiated over the coming months. However, we believe as it currently stands an emboldened Ramaphosa could lead to more certainty as well as more definitive policy measures which are likely to boost the flagging SA economy.