Part 2: Comparative Legal Analysis – Evaluating EU Trade Agreements with Third
2.2 EU-South Africa Trade, Development and Cooperation Agreement
2.2.2 Assessment of the Regulatory Framework for the provision of Financial Services and
2.2.2.1 Financial services
Right to establishment and supply of services
The TDCA is less ambitious than most other FTAs concluded between the EU and its trading partners. For example, this is exemplified by the use of the terminology ‘endeavour’ in article 30 TDCA. With regard to the right to establishment and the supply of services, the TDCA refers to the obligations of the Parties under the GATS, and in particular to the Most-favoured-nation principle, including the protocol and annexes.60 The Parties reaffirm their respective commitments as annexed to the fifth Protocol to the GATS concerning financial services.61 The parties pledge to endeavour to go beyond the GATS requirements by aiming for a further liberalisation of the supply of services in order to eliminate all discrimination between the Parties in the services sector. This shall include the supply of services: (a) from the territory of one Party into the territory of the other; (b) in the territory of one Party to the service consumer of the other; (c) by a service supplier of one Party, through commercial presence in the territory of the other; and (d) by a service supplier of one Party, through presence of natural persons of that Party in the territory of the other.62
57 Joint Communiqué EU-SADC Political Dialogue Meeting at Ministerial Level, Luxembourg, 27 October 2015.
58 G. Wellmer, Join My Value Chain, South Africa’s Regional Trade Policy, in: J. Becker and W.
Blaas, Strategic Arena Switching in International Trade Negotiations, Ashgate Publishing lt., 2007.
59 A. Adebajo, The EU and Africa: From Eurafrique to Afro-Europa, C. Hurst & Co. London, 2012, pp. 128-129.
60 Article 29 TDCA.
61 Article 29(3) TDCA.
62 Article 30 TDCA.
Similarly, the terminology chosen, i.e. ‘to foster cooperation’ and to ‘encourage’, does not evince any strong ambitions of the Parties in this context. Under the TDCA, the Parties committed to
‘foster’ the cooperation in the services sector in general and in the areas of banking, insurance and other financial services in particular.63 This is to be performed by, inter alia: (a) encouraging trade in services; (b) exchanging, where appropriate, information on rules, laws and regulations governing the services sector in the Parties; and (c) improving accounting, auditing, supervision and regulation of financial services and financial monitoring, for example through the facilitation of training schemes.64
In the 2013 Progress Report on cooperation between the EU, the Member States and South Africa under the TDCA,65 no reference is made to cooperation in the area of financial services.
However, in the section covering the bilateral relations between the EU Member States and South Africa, one notion deserves attention. It is explicitly mentioned that South African investment in the financial services sector of Ireland is ‘significant’, stating that ‘South African investment in Ireland has mainly focussed on financial services companies, many of which now have a significant presence in Ireland’.66 It can be deduced from this that the TDCA is facilitating money flows between these two countries, and, from the South African perspective, specifically to the financial services sector in Ireland. A strong argument can be made with regard to the reasons behind the choice for Ireland as destination for South African investments in the financial services sector, since Ireland is often reported as having one of the lowest corporate tax rates in the developed world.67 More specifically, Irish corporate tax is currently set at 12.5%
for trading income (and 25% for non-trading income such as investments made), whereas the EU average is currently 22.25%.68 As such, Ireland is considered a relatively advantageous destination to conduct business compared to other EU countries (Germany: 29.65%; The Netherlands: 25%; France: 33.33%; Belgium: 33.99%).69 Especially for non-EU trading partners, such as South Africa, this factor will weigh in significantly in deciding where to establish their EU-based operations.
63 Article 63 TDCA.
64 Article 63(b) TDCA.
65 Delegation of the European Union to the Republic of South Africa, The EU and South Africa:
Development Partners, Progress Report 2013. It can be noted that the report is not the same type of report as the European Commission’s annual reports to the European Parliament and the Council as presented under the trade agreements with Colombia/Peru and with Korea.
66 Ibid., p. 16.
67 See for example: State Aid: European Commission Press Release, Commission Investigates Transfer Pricing Arrangements on Corporate Taxation of Apple (Ireland) Starbucks (Netherlands) and Fiat Finance and Trade (Luxembourg), Brussels, 11 June 2014; Andersen, J., FDI in Ireland: A Reason for Optimism?, The World Bank, Private Sector Development: News and Views on a Competitive Private Sector and a Resilient Financial Sector, 19 March 2012.
68 KPMG, Corporate Tax Rate Table, 18 March 2016.
Current payments and capital movements
With regard to the facilitation of current payments, the wording chosen can be considered to allow for significant room for manoeuvring by the States Parties. Under the TDCA, the Parties
‘undertake to allow’ all payments for current transactions between residents of the Community and of South Africa to be made in a freely convertible currency.70 To compare, the EU- Colombia/Peru Trade Agreement uses the wording ‘shall’ (see Annex 1).71 Apparently, the negotiators of the TDCA deemed it necessary to refrain from mandatory liberalisation in this particular area. Furthermore, South Africa may take additional measures to ensure that this provision is not used by its residents to make unauthorised capital outflows.72 During and after the 2008 financial crisis, South African banks introduced restrictions aimed at preventing an outflow of private capital.73
The TDCA stipulates that the Parties shall ensure that direct investments in South Africa in companies formed in accordance with current laws can move freely, and that such investment and any profit stemming therefrom can be liquidated and repatriated.74 With regard to investment promotion and protection, the Parties shall aim to establish a climate which favours and promotes mutually beneficial investment, both domestic and foreign, especially through improved conditions for investment protection, investment promotion, the transfer of capital and the exchange of information on investment opportunities.75 The TDCA promotes the conclusion of agreements between South Africa and the EU Member States in the area of investment promotion and protection, the avoidance of double taxation and the exchange of information on investment opportunities.76
Transparency aspects of financial services/Data protection
The TDCA contains few provisions covering transparency aspects of financial services as such, but does contain a general provision on data protection. The TDCA creates an explicit obligation for the Parties to cooperate to improve the level of protection for the processing of personal data, taking into account international standards.77 Cooperation may include technical
70 Article 32(1) TDCA.
71Article 168 EU- Colombia/Peru Trade Agreement: “The Parties shall authorise, in freely convertible currency and in accordance with the provisions of Article VIII of the Articles of Agreement of the International Monetary Fund, any payments and transfers on the current account of balance of payments between the Parties.”
72 Article 32(2) TDCA.
73 IMF, South Africa Financial Sector Assessment Program Detailed Assessment of Compliance on the Basel Core Principles for Effective Banking Supervision, IMF Country Report No. 15/55, March 2015, p. 12.
74 Article 33(1) TDCA.
75 Article 52(1) TDCA.
76 Article 52(2) TDCA.
77 Article 91(1) TDCA.
assistance in the form of exchanges of information, exchange of experts and the establishment of joint programmes and projects.78 As such, this provision contains relatively strong language compared to the other provisions discussed here, committing the Parties to undertake action in this area.
2.2.2.2 Money laundering and fight against drugs
Considering the fact that it is well known that both Parties face significant challenges in the fight against money laundering, the commitments made under the TDCA are rather minimal.
Furthermore, a comparison of provisions on money laundering among EU FTAs leads to the conclusion that stricter formulations are used in other FTAs. In the EU-Korea FTA for instance, it is stated that ‘[e]ach party shall, to the extent practicable, ensure that internationally agreed standards (…) are implemented and applied in its territory,’79 thus explicitly committing the Parties to cooperate (see Annex 1).
The TDCA contains a general provision on money laundering in which explicit reference is made to the FATF standards. The Parties undertake to cooperate in the fight against money laundering by preventing the use of their financial institutions to launder capital arising from criminal activities in general on the basis of standards equivalent to those adopted by international bodies, in particular the FATF.80 Furthermore, South Africa can take measures to prevent abuse of the liberalisation of current payments, in order to prevent unauthorised capital outflows.81 As such, the TDCA does not provide for an explicit obligation for the Parties to combat money laundering, but rather encourages them to take action.
2.2.2.3 Tax evasion and avoidance
The TDCA does not contain an explicit obligation for the Parties to combat tax elusion and evasion. What is more, the TDCA does not address cooperation in international tax matters.
Rather, the TDCA safeguards the rights of the Parties to take autonomous measures in this context and preserves the functioning of existing or future bilateral tax arrangements between South Africa and an EU Member State.
78 Article 91(2) TDCA.
79 Article 7.24 EU-Korea FTA.
80 Article 90 TDCA.
Box 4 South Africa’s capacity to combat illicit financial flows (IFFs) and tax evasion
On a more general note, as mentioned earlier, the Parties have ‘pledged’ to further cooperate in the services sector through, inter alia, exchanging, ‘where appropriate’, information on rules, laws and regulations governing the services sector.82 This provision can imply cooperation and exchange of information on tax matters. Nevertheless, phrased like this, it can hardly be concluded that a serious commitment to ensure the exchange of tax information between the Parties has been created.
Tax carve-out clause
The Parties confirm that nothing in the TDCA, or in any arrangements adopted under this Agreement, may be construed to prevent the adoption or enforcement of any measure aimed at preventing the avoidance or evasion of taxes pursuant to the tax provisions of agreements to avoid double taxation or other tax arrangements, or domestic fiscal legislation.83 South Africa concluded numerous ‘Double Taxation Agreements’ (DTAs), the purpose of which is to enable the administrations of the States Parties to eliminate double taxation. South Africa has concluded DTAs with all EU Member States, except Slovenia, Estonia, Latvia and Lithuania.84 Thus, these DTAs are not affected in any way by the provisions of the TDCA.
82 Article 63(b) TDCA.
83 Article 98(2) TDCA.
84 South African Revenue Service, available at: http://www.sars.gov.za/Legal/International- Treaties-Agreements/DTA-Protocols/Pages/default.aspx.
As the largest financial centre of the region, South Africa is an important hub for IFFs;
While the legal frameworks to combat IFFs and tax evasion are generally in place, lack of enforcement capacity frustrates the fight against these illegal practices;
Without mutual commitment from both the EU and its Member States and South Africa, tax evasion and elusion will continue to take place; and
In this regard, the EU, as developed partner, has an enhanced responsibility to address tax evasive practices, also outside the OECD frameworks and especially vis-à-vis EU companies.