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Tech relief as SA looks to relax strict IP exchange laws

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Plans are afoot to relax South Africa’s stringent intellectual property (IP) exchange laws – something that local companies, especially the growing technology sector, were grappling with.

According to law firm Webber Wentzel, policy statements in National Treasury’s 2020 Budget Review published on 26 February indicate a clear and welcome intention from government to significantly relax these controls.

The South African Reserve Bank (SARB) currently administers restrictive export controls in respect of SA-owned IP.

Webber Wentzel says these controls, which require South African residents to get approval for transfers and licences of IP to non-residents, have hindered and discouraged cross-border transactions involving South African IP.

This, in turn, has restricted the ability of South African residents to maximise the potential of their intellectual creations, it notes.

Ongoing engagements

“Over the last five years, Webber Wentzel has collaborated with a number of industry stakeholders in ongoing engagements with the SARB and National Treasury to draw their attention to the unintended negative consequences of the IP exchange controls and propose alternative, less restrictive approaches which would still achieve the relevant policy goals,” the law firm says.

“In particular, we have emphasised both the administrative burden that these controls place on IP-intensive industries – particularly South Africa’s burgeoning technology sector – and the deterrent effect they have in respect of foreign investment in South African IP,” it adds.

Webber Wentzel points out that some relaxations were announced over this period (for example, an announcement in the 2017 Budget Review that the SARB’s approval would no longer be required for “standard IP transactions”) and the process for obtaining approval has become more predictable.

“However, the current position laid out in the Currency and Exchanges Manual is that both the licensing and transfer of SA-owned intellectual property to a non-resident, whether related or not, requires approval from either an authorised dealer or the SARB, depending on the circumstances.”

As such, the firm says, the new policy statement in the 2020 Budget Review represents a welcome shift towards a far less restrictive regime.

It notes that in the context of an announcement of broader reforms of the exchange control regime, National Treasury expressly notes that “the export of intellectual property for fair value to non-related parties will not be subject to approval”.

“This statement suggests that one of the key changes for which we have been motivating – cutting the red tape that currently holds up low-risk IP transactions between unrelated parties – will soon be implemented.”

However, it says it is important to note this policy statement is not yet law. “It will still need to be officially implemented, which is usually done through circulars issued by the SARB’s Financial Surveillance Department.

“In this regard, National Treasury has indicated the exchange control reforms will be rolled out over the next 12 months. Only once the official implementation has occurred will we know how this new policy will work in practice. As such, we will be monitoring the situation very closely and providing updates as and when further details are provided.”

Leanne Mostert, partner at Webber Wentzel.
Leanne Mostert, partner at Webber Wentzel.

Transactional complexity

Leanne Mostert, partner at Webber Wentzel, tells ITWeb that very few countries in the world have IP exchange controls.

“Given that SA’s exchange control regulation is extremely uncommon globally, most foreign investors are unwilling to deal with the resulting transactional complexity and uncertainty, and have been reluctant to invest the resources required to understand and comply with local legislation.”

Mostert notes there is much empirical evidence of the adverse effects of the exchange control regime as it applies to IP.

She says the overall impact is that SA, as a jurisdiction for entrepreneurship and investment, is at a significant competitive disadvantage.

This as international and local investors are uncomfortable with the uncertainty, complexity, problems and delays associated with exchange control.

“The result is that they are reluctant to invest in South African companies and find non-South African alternatives more appealing. IP exchange control restrictions severely inhibit commercial agility, access to foreign skills and know-how, the global expansion of businesses, foreign revenue and job creation opportunities.

“Many local SA businesses and entrepreneurs feel they have no choice but to emigrate or start businesses offshore in order to avoid exchange control problems, resulting in an exodus of some of the best talent and skills which would otherwise have had the highest potential to contribute to local economic growth and job creation,” Mostert says.

Commercialisation of IP

According to Andre Visser, head of the corporate and commercial department at law firm Adams & Adams, and Dylan Jefferys, associate at Adams & Adams, among the challenges faced by tech companies with respect to cross-border transactions is access for the commercialisation of IP offshore, as well as financing for such transactions.

They say financing is an issue because there is a limited appetite for investing in tech in SA, unlike in the EU and US, where there are numerous tech-focused investors injecting funds into the tech sector, who require the IP to be housed in either the EU or US.

“Security for such financing is also an issue as investors are hesitant to take security in SA due it being a risky jurisdiction from an economic perspective, and security requires exchange control approval from the SARB, which is off-putting to foreign investors,” Visser and Jefferys say.

“The development and commercialisation of IP, even by SA companies, is largely being taken up offshore in order to ensure these transactions do not fall foul of the various rules and controls pertaining to such transactions.”

According to the two, the potential relaxation of SA’s exchange control regulations is, therefore, a welcome development, particularly given that SA follows an international tax regime and there are existing tax measures, such as transfer pricing rules, to ensure that value is received for IP in SA.

They explain this largely renders the extra layer of red-tape in the form of SARB approval superfluous.

“For instance, the auditor’s letter, confirming the basis of the calculation of the value of the IP or the licence fee, which is required in order to obtain approval for cross-border transfers of IP or the licensing of IP out of SA, is an extra administrative burden, particularly because auditors are reluctant to issue such letters as there are no auditing standards regulating the valuation of IP in South Africa.

“The relaxation of SA’s exchange control regulations may also allow for increased investment into SA, as tech companies might feel more confident that they can deal with the transfer of IP assets that are developed in SA with more certainty and less restriction.”

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