US embassy cable - 05PRETORIA2103

UNCLAS PRETORIA 002103 
 
SIPDIS 
 
DEPT FOR AF/EPS; AF/S TCRAIG 
USDOC FOR 4510/ITA/IEP/ANESA/OA/J DIEMOND 
TREASURY FOR OWHYCHE-SHAW AND BRESNICK 
DEPT PASS USPTO FOR MADLIN 
DEPT PASS USTR FOR PCOLEMAN AND VESPINEL 
 
E.O. 12958:  N/A 
TAGS: ETRD, KIPR, EFIN, ECON, SF 
SUBJECT:  REMISSION OF ROYALTIES OUTSIDE OF SOUTH AFRICA 
 
 
1.  Summary.  The South African exchange control regulations 
require that any remittance of money offshore that derives 
from the payment of royalties must receive exchange control 
approval from the South African Reserve Bank (SARB).  The 
Department of Trade and Industry (DTI) is responsible for 
administering royalty payments connected with license 
agreements.  DTI generally approves royalties in the 4-6 
percent range.  End summary. 
 
2.  This cable provides information on the issue of the 
remission of royalty payments outside of South Africa 
gleaned from contacts with South African intellectual 
property lawyers.  The South African exchange control 
regulations require that any remittance of money offshore 
that derives from the payment of royalties must receive 
exchange control approval from the South African Reserve 
Bank (SARB).  The Department of Trade and Industry (DTI) is 
responsible for administering royalty payments connected 
with license agreements.  The local licensee is required to 
complete a Form DTP001 and submit it to DTI with a copy of 
the draft royalty agreement.  The application for foreign 
exchange approval is also made to SARB before the contract 
is finalized and prior to remitting any funds offshore.  DTI 
applies certain norms and guidelines regarding royalties. 
DTI may provide SARB with some indication of what the level 
should be.  A court case last year held an entire 
transaction to be invalid because exchange control approval 
had not been obtained. 
 
3.  One lawyer thought the amount of the royalty approved 
for musical works, pharmaceuticals, and clothing was usually 
in the range of 4-7 percent, unless the company can prove 
with substantial evidence that a higher royalty payment is 
warranted for specific types of goods, for example, by 
citing the normal royalty rates approved in other countries. 
Her experience was that the final percentage approved was 
usually settled in the middle of the 4-7 percent range. 
According to other lawyers, however, DTI has a range only up 
to 6 percent, but the amount will depend on the agreement 
and the usefulness of the technology licensed. 
 
4.  One attorney indicated that while there are no specific 
regulatory constraints regarding the maximum royalty 
payable, DTI, as part of its policy, identifies two 
categories of products for the purposes of determining an 
acceptable royalty rate.  He indicated DTI currently allows 
a maximum of 6 percent for intermediate capital goods to be 
remitted and a maximum of 4 percent for consumer goods. 
While the allowable amount is not cast in stone, it is 
possible but not probable that DTI could be persuaded to 
increase the royalty amount allowed.  At the end of the day, 
SARB would make the decision.  The general view in DTI 
appears to be that the total payment of any royalties 
remitted offshore not exceed 6 percent on net ex-works sales 
less the factory landed costs of any raw material/components 
imported directly or indirectly from the licensor and value 
added tax.  One lawyer was pleased that his law firm was 
able recently to persuade DTI to allow a royalty payment of 
5 percent concerning a client's distribution of sport and 
leisure footwear as well as authorization for a license to 
transfer know-how from the licensor to the local licensee 
for 5 percent of the ex-factory selling price. 
 
5.  In explaining the policy considerations driving DTI's 
policy, one lawyer said that DTI, in its capacity as 
administrator, tries to prevent people from paying 
exorbitant royalties offshore and tries to make sure people 
are not overpaying for intellectual property rights.  In 
practice, the lawyers have found DTI to apply these general 
principles on royalties across the board without any 
distinction between royalties remitted offshore to the 
United States, the EU, Asia, or Africa. 
 
FRAZER