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    SAVCA SAVCA Presentation Transcript

    • AVCA 2005 Conference 6 November – 9 November 2005 Southern African Venture Capital & Private Equity Association 33 Scott Street Waverley, Johannesburg PO Box 1140 Houghton 2041 Tel: +27-11-885-2666 Fax: +27-11-8853640 www.savca.co.za
    • Contents of tax paper submitted to Revenue Authorities
      • Background to Private Equity Industry
      • Economic impact of PE on the local economy
      • Tax analysis:
        • Case law
        • Tax treatment of other comparable industries
        • International benchmarking
      • PE impact on BEE facilitation
    • Background to Private Equity Tax debate
      • Recognised globally for its significant positive contribution to the development of national and regional economies, in both developed and developing countries
      • Contribution takes many forms; enterprise creation, development, job creation, new technologies, new forms of competitive advantages and increases in taxation revenues
      • Attractor for foreign direct investment, a key component of capital formation
      • Asset class receives small allocation of total institutional allocation
      • Taxation of gains on PE investments as revenue would have a major Impact on the decision of investors to commit capital to private equity funds, rather than to other competing asset classes
      • The very existence of the industry would be in question should all realisation gains be deemed of a revenue nature
      • Clarity and consistency of treatment, in a manner that promotes the sustainable growth and development of the private equity industry, to the net benefit of all stakeholders
    • Business case for a capital basis of taxation for PE realisation
      • Is a positive and significant contributor to local economies as indicated by its role in:
        • Developing new enterprises
        • Improving the performance of established enterprises
        • Supporting existing jobs and maintaining the employment base of the economy
        • Developing and commercialising new technologies
        • Increasing the economy’s revenue base in terms of the sales of products and services
        • Increasing the economy’s foreign exchange earnings by increasing exports from investee companies
        • Increasing efficiencies in the management of production assets and the use of business resources
        • Attracting new investment into the economy by both local and international investors
        • Supporting the tax revenue base of the economy on a sustainable basis
    • Economic impact of the private equity industry
      • “ Contribution of the private equity industry to the national economy is linked to a supportive regulatory and tax environment”
      • Findings from economic impact studies conducted in the US and the UK
      • ‘ The Economic Impact of the Private Equity and Venture Capital in the UK’
      • ‘ Venture Impact 2004 – Venture Capital Benefits to the US Economy’
    • Economic impact of the private equity industry
      • The key findings from the 2003 UK study are as follows:
      • ‘ Private equity backed companies create jobs at a considerably faster rate than other private sector companies’
      • ‘ Private equity backed companies boost the UK economy’
      • ’ 81% of companies said that without private equity the business would not have existed at all or would have developed less rapidly’
      • ‘ Over three quarters of the companies felt that their private equity firms had made a major contribution other than the provision of money’
      • ‘ Nearly half the firms said that with private equity backing their level of investment was higher than would have been possible’
      • ‘ Private equity backed companies generate total sales of £177 billion and contribute around £26.6 billion in taxes’
    • Economic impact of the private equity industry
      • Some of the key quantitative findings from the UK study indicated that, ‘over the five-year period from 1997/8 to 2002/3, venture backed companies have achieved:
      • ‘ Average turnover growth of 21% per annum, and PBT growth of 26% per annum’
      • Average growth of 11% per annum in value of exports, compared with 3.3% nationally’
      • An average annual rate of growth equal to 27% for R&D expenditure and 19% for UK employment; employment growth nationally currently stands at 0.5% per annum’
      • Levels for corporate investment in venture-backed businesses of 21% versus the comparable figure for the UK economy as a whole (gross fixed capital formation) pf 5.4%’
      • ‘ private equity backed companies provided a substantial impetus to the economic performance and global competitiveness of the UK’
    • Economic impact of the private equity industry
      • The key findings from the 2004 US study were as follows:
      • ‘ Venture capital back companies employed more than 10 million American workers and generated $1.8 trillion in sales in 2003’
      • ‘ Venture capital backed companies outperformed their nonventured counterparts in job creation and sales growth between 2000 and 2003. Employment in venture backed companies jumped 6.5%, while national private sector employment shrank by 2.3%. Venture backed company sales grew by nearly 12%, compared to a n overall rise in US company sales of 6.5%’
      • Venture backed ‘breeder’ industries with a heavy emphasis on research and development, like biotechnology and healthcare products, have made great employment gains since 2000’
      • ‘ Venture backed firms are the national leaders in R&D . The mix of US R&D is shifting toward smaller firms in the leading-edge biotechnology, medical research, and high-technology industries’
    • Economic impact of the private equity industry
      • SAVCA, together with Monitor conducted a pilot study into the economic impact of PE on the SA economy
      • Qualitative output suggests findings similar to those in the UK & US
      • For many investees Private equity (PE) was the only funding option
      • PE enabled higher gearing and therefore the introduction of significant management / BEE stakes
      • Increased R&D facilitated greater product development
      • Improved managerial effectiveness
    • Tax, legal and regulatory analysis
      • Scope
      • excluded the taxation of fund managers and/or general partners
      • Capital vs. Revenue
      • Taxpayer is engaged in a scheme of profit-making
      • The intention of the purchaser of the property in acquiring the property
      • Whether or not the property (including shares) in question may be considered to be the stock-in-trade of the taxpayer
      • The presumption of an intention towards long term investment may be argued in the case of investors, who are contractually committed to an investment period between 3 and 7 years
      • Investment participation of the fund manager is seen as that of a limited partner in the fund and therefore has no different status as that of any limited partner
    • Tax, legal and regulatory analysis
      • Income tax treatment of private equity funds and comparable industries
      • Collective investment schemes include unit trusts
        • Any gain or loss realised by the CIS is not taxed
        • The tax event is only triggered when the investor realises his/her investment in the CIS in securities
      • Long term insurers - capital nature
      • Pension funds are not subject to income tax or capital gains tax
      • Most private equity funds are fiscally transparent entities
      • The realisation proceeds generated by the fund accrue directly to the investors
      • If the intention of the investors was relevant, the fact that the investors in a private equity fund have no choice but to be passive investors, would mean that the nature of the proceeds would not be of a speculative nature, i.e. capital nature
      • No clear practice of the SARS in the case of private equity funds
      • Lack of a level playing field for investors in private equity
      • It is suggested to treat the private equity industry in a similar manner to CIS in securities
    • Tax, legal and regulatory analysis
      • International benchmarking on the taxation of the private equity industry
      • Developed countries
        • USA (Deloitte)
        • UK (SHG)
        • Australia (SHG)
        • Germany (SHG)
      • Developing countries
        • Chile (Deloitte)
        • India (Deloitte)
      • In all countries, the profits from the disposal of shares in private equity benefited from tax concessions. In general, such gains are treated as capital gains after a holding period which varies from 12 months to three years
      • In each country considered, the tax regimes are dependent on the holding period of the investment
    • Tax, legal and regulatory analysis
      • International benchmarking on the taxation of the private equity industry
      • Tax concessions to private equity granted on the basis that it is beneficial for the economy to stimulate economic activity at the smaller company level
      • Chile and India, a minimum holding period of one year qualifies the proceeds as being of a capital nature
      • United States of America allows the taxpayer to exclude 50% of the capital gain from CGT where the unlisted share has been held for a minim period of five years
      • The Deloitte study concluded greater clarity and certainty is imperative for businesses and investment to be attracted
    • Tax, legal and regulatory analysis
      • International benchmarking on the taxation of the private equity industry
      • ‘ international best practice’ with respect to the taxation of investors in private equity funds would include the following key principals:
        • Government recognition of the importance of the private equity industry to national economic development
        • Clarity of tax policies applicable to the private equity industry, in particular certainty as to when the gains would be capital or revenue in nature
        • Taxation of investors in private equity funds (and unlisted investments more generally) in a manner that encourages, rather than that deters, investment into the industry
    • Contributors to the report
      • These organisational contributors, and their areas of contribution, are as follows:
      • Contributors to the analysis on the economic impact of the private equity industry (Section 4)
        • Monitor Company (project sponsor) – represented by Christoph Andrykowsky
        • Graduate School of Business (GSB) at the University of Cape Town (project sponsor) – represented by Evan Gilbert
        • Business Partners Limited – represented by Ben Bierman
      • Contributors to the tax, legal and regulatory analysis (Section 5)
        • Sonnenberg Hoffman & Galombik (project sponsor) – represented by Ana-Celia Mendes, Wally Horak, and Alwina Brand
        • Deloitte and Touche (SAVCA sponsor) – represented by Nithia Naliah
      • Contributors to the analysis on the BEE impact of the private equity industry (Section 6)
        • Business Map Foundation – represented by Karen Heese
      • SAVCA wishes to express its appreciation to these organisations, most of whom have assisted the association free of charge on a sponsorship basis, as indicated above.