INCE|Connect News

ILLICIT FINANCIAL FLOWS: Trade misinvoicing costs South Africa $7.4bn in tax a

year. In a new report, Global Financial Integrity (GFI) estimates South Africa lost

$37-billion - $7.4-billion a year - in potential government revenue due to

trade misinvoicing between 2010 and 2014, denying the state resources to meet

its developmental goals. GFI has called illicit financial flows (IFFs) the

most damaging economic condition facing developing countries. The Washington-

based non-profit specialising in IFFs says trade misinvoicing accounts for the

majority of IFFs.It involves companies moving money illicitly across borders

by misrepresenting the value of a transaction and the report, titled South

Africa: Potential Revenue Losses Associated with Trade Misinvoicing , provides

an estimate of the total value misrepresented and calculates the tax lost.

"The practice of trade misinvoicing has become normalised in many categories

of international trade," reads the report. "GFI's very conservatively

estimated $37-billion in lost revenues over the last five years of available

data represents resources that could have made an immense difference in

housing, education, and health services and could have gone far in easing

poverty and inequality and accompanying social strains," it continued. Trade

misinvoicing occurs on both imports and exports. Companies can over-invoice

imports to shift money abroad or under-invoice imports to avoid customs duties

or VAT. They can under-invoice exports to shift money abroad and sometimes

over-invoice exports to claim rebates. The illicit practice, which essentially

involves companies lying about the value of their imports and exports to avoid

taxes, reduces government revenue, denying it custom duties, VAT, and other

taxes, as well as taking income and wealth out of the country, reducing

finances in the economy for domestic investment, consumption or savings. GFI

compared the latest available SARS data to information in the United Nations

Comtrade Database to find differences in import and export statistics between

2010 and 2014. The report says it conservatively estimates average annual

import under-invoicing to be at $16.3-billion and over-invoicing at

$9.8-billion. It estimates annual export under-invoicing at $11.6-billion and

over-invoicing at $8.6-billion. GFI then applied the relevant VAT, customs

duties, company income taxes and royalties to those figures to estimate that

the government is losing $7.4-billion in revenue a year due to trade

misinvoicing. The report looked specifically into export under-invoicing,

where companies misrepresent the value of the goods they bring into the

country to avoid taxes. Government is losing most on those taxes in the fields

of machinery, knitted apparel, and electrical machinery, it found. Issues of

illicit financial flows have gained prominence recently as government spending

is limited by the fiscally constrained environment as the economy remains weak

and SARS fails to meet its collection targets. There's also been a push to

hold corporates and high-income earners accountable. "Failure to address all

tax gaps in the absence of solid non-tax revenue indicates that it is workers

who will carry majority of the tax burden," said the EFF on IFFs in response

to the recent medium-term budget policy statement (MTBPS). "This all while

multinational companies enjoy the benefits of low tax rate and still

aggressively avoid tax and engage in profit shifting," the party continued.

The EFF has tabled a Private Members' Bill in Parliament to tackle IFFs, which

see billions transferred out of the country every year through illicit means.

Finance Minister Tito Mboweni didn't mention IFFs in his MTBPS, but delivering

the national Budget in Febuary 2018 former finance minister Malusi Gigaba said

Treasury, SARS, the Reserve Bank and Financial Intelligence Centre are

collaborating and will receive more resources to hold companies accountable.

Gigaba said international recommendations on transfer pricing and base erosion

are being implemented and that the global push for country-by-country company

reporting, where different revenue authorities will be able to compare

financial records in the various countries where countries operate, will help

ensure corporates pay their taxes. In May 2018, however, acting SARS

Commissioner Mark Kingon admitted that not enough has been done to tackle

IFFs. He said multi-agency teams were looking into nine cases involving more

than 9-billion rand. The severe reduction of staff at SARS, however, has

reportedly impacted on their investigations and without a more transparent

global financial system, which country-by-country reporting will help

introduce, it's too hard. GFI said South Africa can reduce revenue losses from

trade misinvoicing by tightening legislative and regulatory measures,

detecting misinvoicing while it happens and attempting to recover lost taxes

through audits and reviews. DM

Cryptocurrencies Falter as Bitcoin Tumbles Toward $5,000 Level. Bitcoin touched an October 2017 low and was trading at $5,235.17 at 8:50 a.m.

in London, according to consolidated Bloomberg pricing. Rival coins including

Ether and Litecoin also retreated, as the wider Bloomberg Galaxy Crypto Index

fell as much as 6.9 percent to a one year-low on a closing basis. XRP, the

token associated with Ripple, was the lone gainer among major digital

currencies. Volatility has returned to cryptocurrencies, with the largest

tokens shedding billions in market value since the hard fork of Bitcoin Cash

last week, after two software-development factions failed to agree on a way to

upgrade the offshoot of the original Bitcoin, leading to a computing power

arms race. Read about how the Bitcoin Cash clash is costing investors

billions. The cryptocurrency industry has now lost more than $660 billion in

value from a January peak, according to data from CoinMarketCap.com. Bitcoin

is down more than 70 percent from its December 2017 high, the data show.

Thomas J. Lee, managing partner at Fundstrat Global Advisors and a long-time

crypto bull, slashed his year-end price target for Bitcoin to $15,000 from

$25,000. The target is based on a fair value multiple of 2.2 times the

breakeven cost of mining, which the firm pegs at $7,000, according to a report

last week. "Crypto-specific events have led to greater uncertainty in the

crypto market, including the contentious hard fork for Bitcoin Cash," Lee said

in the note. Bitcoin's break below $6,000 "has lead to a renewed wave of

pessimism," he said. DM

Pepkor slumps on earnings decline. The retailer says one-off costs related to a third-party debt provision and

share dilution will leave full-year HEPS as much as 42% lower.

Pepkor fell over 11% at its worst yesterday after the retailer warned of a

sharp fall in full-year earnings and said it wouldn't exercise call options

giving it a stake in Shoprite.

In a trading statement, the company - formerly called Steinhoff Africa Retail

- said earnings and headline earnings per share (HEPS) for the year to end-

September would be between 32% and 42% down on last year. Its results were

affected by a 500 rand million provision made to cover a corporate guarantee and

associated loans. The one-off costs related to this would strip 14c per share

from its HEPS, while shares issued to buy Tekkie Town last year and for last

September's listing would reduce HEPS by a further 30c due to dilution.

The group said following discussions with the Public Investment Corporation

and Lancaster, and based on senior council advice, they had decided to

terminate call option agreements to acquire stakes in Shoprite. Call options

belonging to Christo Weise's Titan Group and Lavender Sky terminated earlier.

Had the transaction proceeded, it would have resulted in the combined parties

taking voting control of Shoprite with a 23.1% economic interest and 50.6%

voting control.

Pepkor's shares closed 6.4% down at 17.23 rand. Majority shareholder Steinhoff

International fell 7.6% to 1.83 rand.

Rhodes Foods more bullish on its outlook. The food producer says a turnaround at Ma Baker is progressing well while the

end of the drought in the Western Cape will return its international business

to profitability.

Rhodes Foods expects its international business to return to profitability

this year after it weighed on the group's full-year results.

The food producer says expert volumes are likely to continue to improve while

foreign selling prices of canned fruit should show a small increase this year.

The end to the drought in the Western Cape and the weaker rand should also

help its international business.

It's not just Rhodes' global business that has impacted its performance - the

integration of recently-acquired pie maker Ma Baker hasn't gone as smoothly as

expected, resulting in its regional operating margin declining to 7.8% from

9.7%. However, it says the turnaround in the performance of Ma Baker is a

priority and is progressing well. It has also faced rising interest payments

due to its increased capital investment programme and lower levels of cash

being generated owing to the lower profit over the year.

Group turnover rose 11.2% to 5.1 rand billion in the year to end-September, held

back by an 8.4% increase in international turnover. It said the reporting

period comprised 52 trading weeks compared to 53 weeks in the prior period.

Headline earnings dropped 32.9% to 159.1 rand million due to the weak performance

from its international operations, with diluted headline earnings per share

falling 34.9% to 60.8c. Its lowered its dividend by 34.7% to 20.3c per share.

The focus in the regional segment will continue to be on driving organic

growth, increasing brand shares and on improving margins," Rhodes said.

"Management aims to realise benefits from the recently and soon to be

completed capital projects which are expected to start yielding returns on

capital that was invested over the last two years."

Following the end of its reporting period, Rhodes said it had agreed to buy

the protein snacks business from RCL Foods for 30 rand million, subject to

regulatory approvals. The business producers protein snacks for Woolworths and

Rhodes will integrate it into its ready meals operation in Groot Drakenstein.

The deal is expected to become effective in April.

Its shares closed 3.2% higher at 15.48 rand yesterday.

> The food producing company Rhodes Food came out with their results today for

the FY18 and group turnover was up by 11%. Diluted HEPS is down by 34.9% and

dividend per share is down by 34.7% to 20.3 cents. #JMBUSHAInsights

>

> -- JM BUSHA Investment (@jm_busha) November 20, 2018

SANTACO takes a stake in SA Taxi. Over the past decade, Transaction Capital's SA Taxi has extended loans of

close to 22 rand billion to taxi operators.

Transaction Capital has sold a 25% stake in SA Taxi to the SA National Taxi

Council (SANTACO) in a move that will bolster its balance sheet and give taxi

operators an interest in the business that sells them vehicles and provides

finance and insurance. Announcing the deal ahead of its year-end results

yesterday, Transaction Capital said the deal would help support the viability

of taxi operators' businesses and their ability to repay loans and afford

insurance premiums.

Over the past decade, SA Taxi has extended loans of close to 22 rand billion to

taxi operators.

Under the terms, SANTACO will subscribe for new shares worth 1.7 rand billion,

with proportional ownership allocated to the Council as well as a trust

representing its provincial structures. Standard Bank and Futuregrowth Asset

Management will fund 1.2 rand billion of the subscription price, with SA Taxi

facilitating the balance in the form of vendor funding. SA Taxi will use about

R1 billion of the net proceeds of 1.2 rand billion to settle interest bearing

external and shareholder debt, with the remainder being used to fund growth.

Although Transaction Capital's proportionate share of SA Taxi's earnings will

be smaller, earnings are expected to increase due to the settlement of debt,"

Transaction Capital said. "Seen together with the operational benefits

expected from greater alignment with the minibus taxi industry, this ground-

breaking deal is expected to be earnings accretive to the group over the

medium term."

The company said its SA Taxi and Transaction Capital Risk Services (TCRS)

businesses remained resilient over the past year despite the weak economy,

rising fuel prices and the hike in the VAT rate. Gross loans and advances rose

13% over the year, while non-interest revenue from insurance products

increased by 26%. Group core headline earnings increased by 18% to 682 rand

million, with SA Taxi growing headline earnings by 21% to 368 rand million and

TCRS up 17% to 273 rand million. Core headline earnings per share increased by 16%

to 111.7c and it's lifted its total dividend by a quarter to 50c per share.

Its shares closed 4% higher at 18.95 rand yesterday.

> Around 69% of all South African households use minibus taxis, equating to

more than 15 million commuter trips a day. - Transaction Capital, 2018

>

> -- Brillant el Matador aka Dividend Papi (@briteless) November 20, 2018

> SANTACO is proud to announce that it has bought 25% shares in SA Taxi

Finance, a subsidiary of Transaction Capital. This acquisition makes

provincial structures of the taxi industry direct shareholders and

beneficiaries in the transaction.

>

> -- SANTACO (@SA_Taxis) November 19, 2018

Astral benefits from higher prices and lower feed costs. After a strong year, the poultry producer says its near-term prospects can be

regarded as a mixed bag of negative and positive factors.

Astral Foods has reported vastly improved full-year results after a confluence

of actors worked in its favour. Higher selling prices for its chickens,

stronger volumes and lower feed raw material costs helped the poultry producer

almost double headline earnings for the year to end-September.

Astral's feed division posted a 16.7% rise in operating profit to 457 rand

million. It said contributions from its operations in the rest of Africa also

continued to improve, with operating profit increasing by 18.5% to 32 rand

million. Despite an increase in working capital and higher capital

expenditure, it still had surplus cash of 789 rand million at the end of the

period, putting it in a favourable position to fund its final dividend and

part of its capacity expansion capital programme over the next three years. It

plans to spend 1.1 rand billion to expand its production capacity by an estimated

20% from current levels.

Overall revenue rose 4.5% to 13 rand billion in the year to end-September and

profit before interest and tax improved by 79% to 1.94 rand billion. Headline

earnings per share jumped 94% to 3,712c and it's declared a final dividend of

1,050c, taking its total dividend for the year 94% higher to 2,050c. Its net

asset value per share increased by 23% over the year to 96.06 rand.

The group said while imports from the European Union fell over the period due

to the outbreak of highly pathogenic bird flu, there was a swing in imports

towards Brazil and the US. It said the local poultry industry hasn't seen any

incidents of bird flu since May and it experienced no loss due to the disease

during the period under review.

For the period ahead, it said a rise in raw material prices would impacts feed

costs, while the negative impact of high fuel prices on consumer disposable

income would put pressure on selling prices. While the proposed minimum wage

legislation would increase poultry production costs, it said it could

positively support higher levels of consumer discretionary spend.

Astral's view on the near-term prospects can be regarded as a mixed bag of

both negative and positive factors, which could potentially have an influence

on its business performance," the poultry producer said.

Its shares slipped 5.7% to 185.64 rand yesterday.

#AstralFoods reports record earnings for the year ended 30 Sept 2018.

Revenue up 5% to R13.0bn, operating profit up 79% to R1.9bn, cash operating

profit up 50% to R2.2bn and HEPS up 94% to 3712c. Total dividend is 2050c, a

94% increase. pic.twitter.com/qGHA51IosT

-- KRIS (@KeyterRech) November 19, 2018

The Week Ahead of 20 November 2018. Global growth ex-US definitely appears to be slowing, with Japan recording a

reduction in third quarter economic growth and Chinese consumer spending and

real estate activity cooling noticeably. Trade talks between the US and China

are showing nascent signs of improvement and it seems possible that the two

sides may reach some sort of agreement at the G20 meeting at the end of this

month. US economic growth, led by robust consumer demand, shows few if any

signs of abating.

Bloomberg reports that the rise in interest rates catalyzed by faster growth

induced by US tax cuts may cause the US credit bubble to pop, according to

hedge fund manager Paul Tudor Jones of Tudor Investment Corporation. "We're

going to stress test our whole corporate credit market for the first time,"

Jones said last week at the Greenwich Economic Forum. "From a markets

perspective, it's going to be interesting. There probably will be some really

scary moments in corporate credit." Jones said zero and negative interest

rates have fuelled excess lending, placing markets in a dangerous condition.

He said today's levels of leverage could be systemically threatening even if

policy makers respond appropriately. Concerns about earnings peaking, trade

wars, oil prices and rising rates have been knocking credit markets, with

global high yield bonds suffering their worst Oct since 2008 and continuing to

sell off this month. Investment grade U.S. corporate debt is posting its worst

year-to-date performance in a decade, falling about 4% through Nov 15,

according to the Bloomberg Barclays index.

In the equity space, share buybacks continued to gain momentum as companies

came out of closed periods. For the third quarter as a whole, it appears

likely that share buybacks will set another record level of around $200

billion. This should help to underpin the US equity market.

Embattled British PM Theresa May endured one of her worst weeks in office last

week, as she doggedly attempted to gain support for her Brexit proposal. A

number of her cabinet colleagues resigned in protest, including the relatively

newly-appointed Brexit Secretary, Dominic Raab. Meanwhile the chairman of the

European Research Group within the Conservative Party, Jacob Rees-Mogg, openly

declared that May should step down as PM and that a new contest for the

Conservative Party leadership should begin.

The next few weeks are likely to be very testing for May as she attempts to

avert a motion of no-confidence in her and as she also tries to steer her

Brexit deal through the British parliament. To stage a motion of no-

confidence, the leader of the 1922 Committee of Conservative back-benchers in

parliament requires 15% of all Conservative MPs to submit letters expressing

their wish for such a vote to take place. That translates into 48 letters.

During the course of next week it may became clearer whether or not those 48

letters have indeed been submitted.

Getting her deal ratified by parliament, on or around 12 Dec, is far from

certain. Conservative rebels are likely to vote against it, as are the

majority of Labour MPs. And her partners in the fragile alliance that gives

her a working majority in parliament, the Democratic Unionist Part of Northern

Ireland, appear to be against it.

The JSE All Share Index fell by 2.2% last week to close on Fri 16 Nov at

52096. Year to date, the Alsi is down 12.4% and from its all time high on 25

Jan this year, it is down 15.6%.

JSE listed company results out this week;

19 November 2018

Netcare - Final

Astral Foods - Final

Invicta - Interim

Pioneer Foods - Final

Economic and related events this week;

20 November 2018

SA Leading Indicator Sep

21 November 2018

SA CPI Oct

22 November 2018

SA Repo rate announcement. Expect no change

Follow @Comrade_Skhokho

Discovery Bank launches & some good news on Torre. Content hosted by iono.fm

Anthea kicks off this week's business and financial segment of The Money Shot

by responding to a listener's email. Not a great start to the week on company

news, Vodacom (-8%), BTI (-11%), Rebosis (-21%) and Tsogo Sun (-3%). On the

bright side, Discovery Bank launches, while Tencent reports results, and some

good news on Torre.

Follow @AntheaCartesian

Follow @CliffCentral

...back to Podcast by CliffCentral

Sponsored - 10 mistakes to avoid in your will. Many people think a simple, one-page document is all they need to transfer

ownership of their worldly possessions to their heirs. Some even go so far as

to rely on the pre-printed will forms you can buy at your local stationery

shop.

While there is a strong case to be made for keeping things simple and

uncomplicated, it is possible to oversimplify and in so doing make life a

whole lot more complicated for your heirs.

A well thought out will, drafted by a knowledgeable estate practitioner, can

simplify matters and help save a significant amount in estate and other taxes.

Here are some common pitfalls we see, and how to avoid them:

1) Don't use overly complicated wording

The worst possible thing is when heirs dispute the validity of a will. When

interpreting a will, our courts look at the ordinary meaning of words and

phrases used in the will. Clear, concise language is of the utmost importance

to make sure that there can be no doubt about the true intention of the estate

owner's wishes.

Limit the use of legal terminology to an absolute minimum, and only to

instances in which you or your will drafter have a thorough knowledge of the

practical implications and legal consequences. For qualified, professional

assistance in ensuring that your will accurately reflects your final wishes,

consult a financial adviser who has specialist fiduciary expertise for

guidance.

2) Avoid overly complicated structures

A simple but properly drafted will is usually sufficient to ensure a speedy

and cost-efficient transfer of assets to your heirs. Local and foreign trusts

and companies can also be set up to house assets and make use of the benefits

associated with these structures. Be aware, however, of the associated cost of

maintaining them in foreign jurisdictions - especially where fees are charged

in a foreign currency - as this may quickly negate any savings on estate duty

or tax.

3) Don't become obsessed with tax savings

A mistake we often see in this field is that people become so obsessed with

saving on taxes in their estate plan, that they forget to fully take into

account the practical needs of their heirs.

4) Don't create a burden for your executor or trustees

You don't want to create a burden for your executor or trustees - and

ultimately your family - who have to implement and administer the structures

you set in place. For example, trusts that are set up to last in perpetuity

can be tricky to handle in the face of changing legislation.

5) Allow for flexibility

Think carefully when restricting the movement of assets or the transfer of

wealth that could otherwise have benefited your children and grandchildren.

6) Choose your executor carefully

By choosing the executor of your estate with care, you can achieve substantial

tax savings in the estate administration process. Selling estate assets during

this process can result in a recoupment of tax if the deceased claimed a

depreciation allowance on these assets.

7) Your freedom of testation has limits

Freedom of testation means you can leave your assets to whomever you please,

but you cannot neglect your duties, or the interest of those who depend on

you, when doing so. However, remember that claims for maintenance from

dependents, a surviving spouse or claims in terms of the accrual system

created by the Matrimonial Property Act will take precedence and best be

factored into your will to avoid delays and disputes.

8) Ask your children what they want

Consider existing trusts and other estate planning vehicles that your children

may already have set up. If they prefer to receive any benefit directly,

despite the benefit that a control mechanism can offer, then consider this.

9) Include your will as part of your financial plan

Your will should be included as part of your holistic financial plan and your

financial adviser and estate planners should be aware of each other's work.

This can help to avoid costly mistakes and misunderstandings.

10) Don't put it off

Do not underestimate the impact that an improperly drafted will - or the

absence of a will - can have on your family. There are many horror stories

about the cost of procrastination. Make an appointment with a recognised and

accredited estate practitioner and get it done.

Pioneer faces pressure despite improvement. The branded food producer has reported a big improvement full-year earnings

but said pressure started to emerge in the second half.

Pioneer Foods has bounced back from a weak 2017 to report improved earnings.

That's despite weakening consumer demand and rising input costs due to a

softer rand.

The branded food producer says a much better maize harvest supported profit

growth in the year to end-September but the milling and baking segments of its

Essential Foods division came under pressure in the second half of the year

due to intensified competition and as consumers traded down to cheaper staple

products. This was specifically evident in maize meal during the final quarter

with White Star trading at an all-time high price premium to other brands in

the category. Its bakeries business benefited from improved operational

efficiencies and it said pasta, rice and legumes continued to make a growing

contribution to earnings.

Within its Groceries division, Pioneer grew volumes in its cereal and long-

life fit juice categories. Operating profit was also supported by baking and

spreads. However, lower volumes and profitability were reported by the

snacking category, including dried fruit and rusks. LiquiFruit, Ceres and

Fruitree all gained market share, while Weet-Bix maintained its share. It said

the integration of the former Heinz Foods SA portfolio was well advanced.

Internationally, exports into Africa continued to be subject to volatile

socio-economic conditions, while fruit exports benefited from improved local

fruit availability, strong global demand and high US dollar prices. It said

the recent acquisition of UK granola brand Lizi's had supported growth in its

international branded products business.

For the year, revenue rose 3% to 20.2 rand billion and adjusted operating profit

jumped 26% to 1.6 rand billion. Adjusted headline earnings per share rose 25% to

553c and its maintained its final dividend at 260c, taking its total dividend

for the year to 365c per share.

Pioneer said its Groceries and International divisions should be able to

improve their performance in the year ahead following a turnaround at Heinz,

an expected higher vine fruit crop and a more beneficial rand exchange rate

for exports.

Although demand for maize meal products should remain strong, given ample

local raw material supply and relative consumer value, down-trading within the

category is expected to continue," the person who said it here which is red

"The exceptional maize profit contribution reported in the first half of the

2018 financial year is not expected to be repeated in the next financial

year."

Its shares closed 1% higher at 78.29 rand yesterday.

Pioneer Food Group Earnings:

-FY REVENUE INCREASED BY 3% TO 20.2 rand BLN

-FY HEADLINE EARNINGS PER SHARE INCREASED BY 33% TO 545 CENTS PER SHARE

- A GROSS FINAL DIVIDEND OF 260 CENTS (2017: 260 CENTS) PER SHARE HAS BEEN

APPROVED

-- Nick Kunze (@NickKunze2) November 19, 2018