International Protocols & Double Taxation Agreements: SA Revenue Service briefing

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Finance Standing Committee

09 March 2010
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The National Treasury and South African Revenue Service briefed the Committee on international  treaties and protocols in relation to taxation issues. It was noted that South Africa had migrated from a secondary tax on companies to dividends tax at shareholder level. The treaties had to be amended, as it had been found that they did not adequately cater to the new regime, having provided for a zero rate of tax. Therefore, a number of amendments were necessary to align these with the new tax regime. National Treasury gave a briefing on the major investments and trade flows between South Africa and a number of other countries. Members asked how National Treasury had compiled these figures, commented that South Africa had products that other countries lacked, which gave it a competitive edge, and asked to what degree this was factored in, when compiling the figures. They asked about the lack of records of trade between South Africa and Cyprus, and noted that this was likely to change in future and noted that there were, at this stage, no changes that the Committee needed to consider.

The South African Revenue Service (SARS) briefed the Committee on protocols and double taxation conventions. SARS had ensured that the re-negotiated Articles were in line with the OECD stipulations and requirements. A full description was given of the changes to treaties with Ireland, Oman, Cyprus, Seychelles and Malta. In respect of dividends, there was a general rule that tax would be 5% in respect of a shareholding of at least 10%, and 10% on all other dividends. The agreement with Seychelles differed because the revenue of professionals would be treated as normal business profits and not separately. SARS was now able to negotiate the rates it wanted under the provisions of the agreement between SA and Malta. The highlight of the agreement between SA and the UK was that the two states were empowered to collect taxes on behalf of the other state, and bank secrecy and the need for a domestic tax interest were no longer barriers for the exchange of information. The agreement with Germany had to be corrected in regard to the German text. There was an Article that held that the same rules that applied to civil servants would apply to German citizens who worked for the South African-German Chamber of Commerce. SA and Malawi would be able to claim the residence of an individual for taxation purposes through an agreement. The threshold for determining permanent residency was either 183 days or 6 months of operation in a contracting state.

Members asked questions on the procedure when a company domiciled in South Africa had foreign shareholders, enquired about the 183-day rule, and expressed some concern about the capital tax regime, noting that more revenue was being generated from personal income tax and there was a need to debate the sustainability of this model. Members also asked about UK companies who owned property in South Africa, whether there had been lack of cooperation from any countries, what the basis was for deciding where a company’s headquarters were located, how relocation would be treated for tax purposes, whether rumours of tax avoidance by way of a VAT scheme, through Lesotho, were correct, and their concern that illegal goods were entering South Africa from neighbouring states and affecting South African produced goods. 

Meeting report

Tax Treaties with the United Kingdom, Ireland, Sweden, Oman, Cyprus, Kuwait, Malta, Seychelles, and Malawi: National Treasury briefing
Mr Charles Makola, Director: Legal Tax Design Unit, National Treasury, said that his presentation would comprise a broad overview on treaties in general. This was because the Department was not sure of the Committee’s acquaintance with the technicalities of the treaties.

Ms S Dlamini-Dubazana (ANC) interrupted Mr Makola and explained that the Committee already had a briefing on the broad framework; the purpose of the current meeting was for a few technicalities to be clarified.

Mr Makola replied that his understanding was that the Committee was new and was not so well acquainted with the treaties.

The Chairperson agreed with Ms Dlamini-Dubazana on the subject of the previous briefing. He regarded it as serious that National Treasury would send to the Committee someone who was not aware of the briefings that had taken place last year on the protocols, and this matter would be taken up further with National Treasury.

Mr Makola stated that taxation by states resulted from their exercise of economic sovereignty. The treaties tried to prevent double taxation of royalties, dividends and interest. The Department was mostly interested in the residency of an individual. The Department had migrated from a Secondary Tax on Companies to dividends tax at shareholder level. Once this had been done, the Department realised that some of the treaties had a zero rate of taxation. The treaties had to be re-negotiated so that 5% could be withheld as taxes on dividends that were outbound. The next stage of the presentation would focus on the cash flows in the form of capital investments or mobile package investments.

Mr Lutando Mvovo, Deputy Director, National Treasury, referred the Committee to the South Africa (SA) and United Kingdom (UK) tax treaty. Investments by the UK in SA were between R558 and R894 billion in the years from 2005 to 2007. Some major UK investors were Panasonic, BP, and Unilever. Investments by SA into the UK totalled R517 billion in 2007. SA companies operating in the UK included Anglo Platinum, Dimension Data, and Standard Bank. Exports to the UK were between R32.3 and R40.1 billion during 2005 to 2008. Imports from the UK were between R20 and R34.7 billion during the same period. Investments by Ireland were between R1.5 and R2.4 billion from 2005 to 2007. During the same period SA companies like AECI Ltd, Alexkor, SABMiller and others had invested between R33.4 and R51.4 billion. Exports to Ireland totalled R7 billion in the years 2005 to 2008. The main exports were base metals, machinery and mineral products. Investments by Sweden into SA were between R3.1 and R3.5 billion from 2005-2007. Swedish Companies operating in SA included Atlas Copco, Electrolux and Ericsson. Total investments by SA into Sweden were a total of R991 million to R1.3 billion between 2005 and 2007. SA companies operating in Sweden included Dimension Data, Tiger Wheels and Sappi. Exports to Sweden were R1.5 billion to R3.4 billion from 2005 to 2008. During the same period imports were a total of R28.7 billion. Investments by Kuwait in SA were R2 million in 2006, R763 million in 2007 and R1 million in 2008. The reason for the significant increase in investments between 2006 and 2007 was that Kuwait had invested R600 million into Zimbali Lodge. This was an investment that was undertaken by IFA Hotels and Kuwait Group. Investments by South Africa were R1 million in 2006, R161 million in 2007 and R24 million in 2008.  Exports to Kuwait were between R306 million and R1.6 billion in 2008. Chemical, animal and paper products were amongst some of the main commodities that were exported. Imports from Kuwait went down from R314 million in 2005 to R284 million in 2008.  The main imports were petroleum, oils and chemical fertilisers. The total figure of investments from Malta went down from R38 million in 2006 to R1.3 million in 2008. Some of the main investment companies from SA that invested in Malta were Illovo Sugar, Anglo Gold and Dimension Data. Exports to Malta were between R10.6 million and R31.9 million from 2005 to 2008. The products that were exported included base metals and animal products.

There were no records of investment between SA and Cyprus. The breakdown of exports to Cyprus was R50 million in 2005, R106 million in 2006, R65 million in 2007 and R79 million in 2008. The main export products were wine, fruit juices and petroleum jelly. Imports from Cyprus ranged from R17.8 million in 2005 to R19.8 million in 2008. Investments by Oman in South Africa decreased from R3 million in 2006 to R1 million in 2007. Investments by SA were R1 million in 2005 and 2007. However there was a jump of R9 million in 2006. Exports to Oman increased from R180 million to R495 million in 2008. Imports from Oman also increased during this period, from R792 million to R1.2 billion. The total investment by Seychelles increased from R29 million in 2006 to R30 million in R2008. There was a significant increase in investments by SA during the same period, the amount rose from R72 million to R134 million. Exports to Seychelles decreased from R597 to R472 million. The main exported products were wood, fruit juices and dried fruit. Imports from Seychelles were R17 million in 2005, R15.2 million in 2006, R45 million in 2007 and R3.7 million in 2008. The products that were mainly imported were fish, beer and umbrellas.

The new treaty agreement between SA and Malawi was necessary, as the last one had been concluded in 1971, and since this time SA had migrated from a source based system of taxation to a capital gains system. The total investments made by Malawi in SA were R476 million from 2006 to 2008. Investments by South Africa in Malawi were a total of R678 million during the same period. Major SA investment companies included Nedbank, Massmart and South African Airways (SAA). Exports to Malawi increased from R1.5 billion to R3.8 billion from 2005 to 2008. Imports from Malawi also increased from R455 million to R971 million during the same period. Minerals, motor vehicles and tractors were some of the major products that were exported, whilst Malawi mainly imported cotton, fruit and rice.

Discussion
Mr D Van Rooyen (ANC) asked where the Department had sourced its figures.

Mr Mvovo responded that the investment information was sourced from the South African Reserve Bank (SARB). The information that pertained to trade flows was sourced from the Department of Trade and Industry (dti).

Mr M Motimela (ANC) noted that SA had products that other countries did not have, such as precious metals. These products gave SA a competitive edge. He asked to what extent did the Department factor in this advantage when it compiled its figures.

Mr Mvovo replied that he would not be able to answer this question as it fell within the territory of dti.

Mr Makola added that the main income streams that were of concern to National Treasury were outbound and inbound interest and dividends. The sourcing and modification of the information was mainly undertaken by SARB and dti.

The Chairperson asked why there were no records of trade between SA and Cyprus.

Mr Mvovo replied that there were no records that had been set out; the most that National Treasury had been told by SARB when it queried this was that the transactions could have been done through other countries, either the UK or another European country.

Mr Ron Van der Merwe, Senior Manager: International Treaties, Legal and Policy Division, South African Revenue Service (SARS) added that the figures for Cyprus could change because SA now had access to information.

Mr Van der Merwe informed the Committee that the Value Added Tax (VAT) agreement with Lesotho sought to sort out the VAT refund system, but it had not yet been finalised. The Memorandum of Understanding was still being finalised. There was a current global drive, which had been followed now for some time,  for countries to disclose information and to be transparent where the flow of information was concerned. South Africa and the G20 countries had been driving for the standard set by the Organisation for Economic Cooperation and Development (OECD) to be accepted by most countries. Currently there was no exchange of information Article for Malta, Cyprus and the Seychelles. A lot of progress had been made with these countries in order to conclude the Articles.

Ms Dlamini-Dubazana said the treaties that were being presented should address the questions raised by the Committee from the previous meeting. The Department should present the Articles in such a way that the Committee could get a practical perspective.

Mr Van der Merwe commented that there could still be a change in the Articles for Malta and Cyprus; this depended on the type of agreement.

Mr Makola added that the understanding from National Treasury was that the protocols would be considered from an economic perspective.

The Chairperson informed the Committee that the briefings were at a preliminary stage and there were no changes that the Committee had to make.

Mr B Viljoen, Committee Secretary, said that any Parliamentary changes would not be deemed final at this stage. The Committee would still have an opportunity to engage with the two departments and make suggestions before signature. After this the National Treasury still had to come back to the Committee for final approval.
           
Presentation: Protocols and Double Taxation Conventions/ Agreements: SARS briefing
Mr Van der Merwe said that Article 4 of the South Africa/Ireland treaty related to residence, and the definition of residence had been updated. The Article on dividends had been amended to the current South African position, which was that the dividend withholding tax in the source state would be limited to 5%, for a shareholding of at least 10%. The new Article on the exchange of information was in line with the requirements of the OECD. It extended to taxes of every kind and description. It ensured that bank secrecy and domestic interest were no longer barriers to the flow of information. This was an important shift from the previous position. Previously, when tax officials requested information from other countries, the response was often that there was no domestic tax interest and therefore the information requested could not be given.

The benefit was that more taxes would be collected. The Swedish protocol amended the article that dealt with dividends it was the same as the Ireland protocol. The Department was still battling to get a signature on the Oman protocol. Article 8 of this protocol related to transport. When the treaty was originally created Oman was in partnership with Gulf Air. Oman was now no longer in partnership with Gulf Air and had requested that the profits of Gulf Air should not be dealt with under the treaty. South African Revenue Services had dealt with Oman’s shares in Gulf Air, and this had now fallen away.

The Article on dividends held that tax would be 5% for a shareholding of at least 10% and 10% on all other dividends. The protocol on Kuwait was just a dividends change. The tax would now be 5% for a shareholding of at least 10%, and 10% on all other dividends. The Article on Cyprus had its definition of “residence” updated so that it could be aligned with the current practice. The focus was now on residence as opposed to source. The Article on dividends was now 5% for a shareholding of at least 10% and 10% on all other dividends. The agreement with Seychelles had the definition of “residence” updated so that it could be aligned with the current practice. The new approach was that there would not be separate tax for professionals like doctors and lawyers. The revenue of professionals would be treated as normal business profits. Article 5 held that an individual would be deemed to have a permanent establishment in the other state if there was performance of professional services in that state for a period which exceeded 183 days within a year. Article 10 had been changed in line with current practice, which was that tax would now be 5% for a shareholding of at least 10%, and 10% on all other dividends. The Article on capital gains tax had been amended. The normal rule for the taxation of immovable property was that the state where that immovable property was situated had a right of taxation. The new amendment of this Article held that gains derived by residents of a contracting state, from the alienation of shares deriving more than 50% of their value, whether directly or indirectly from immovable property situated in the other state, may be taxed in that other state.  The definition of “residence” had been updated in the Malta Protocol. Where dividends flowed from SA to Malta SARS was able to negotiate the rates it wanted, and these rates were 5% on shareholding and 10% on all other cases.

The key focus in the SA and UK Protocol was on the dividends and exchange of information. Article 25, which dealt with the exchange of information, was updated so that it could be in line with the OECD model. It extended to taxes of every kind and description and it negated bank secrecy and the need for a domestic tax interest. SARS also included an Article dealing with assistance in the collection of taxes. This was a standard Article, which was in line with other international models. It also meant that the two states were each empowered to collect taxes on behalf of the other state.

The protocol with Malaysia included the new OECD model on the exchange of information. The new article with Belgium included the new OECD model on the exchange of information as well. The agreement with Austria had been upgraded to the new OECD model on the exchange of information. The agreement that had been ratified by the Committee between SA and Germany had a few translation errors in the text that was in German, which had to be corrected by Germany. There was a further provision on German citizens who worked for the South African-German Chamber of Commerce but were remunerated by the German government. The Article held that the same rules that applied to civil servants would apply to these individuals. The exchange of information had been updated in the German and SA treaty.

Most of the Articles in the agreement with Malawi were in line with what SA normally did in the Southern African Development Community (SADC) region. Article 4 dealt with residence, and it provided that between SA and Malawi one of the countries should be able to claim the residence of an individual for taxation purposes. The two countries would, by agreement, decide upon the matter where a resident resided in both contracting states. If an establishment contracted in a particular state for more than 6 months then it was deemed to have a permanent establishment in that state. The Article on dividends was now 5% for a shareholding of at least 10%, and 10% on all other dividends. The resident state had the sole right to tax interest and royalties. Article 16 dealt with entertainers and sports people. Sometimes the activities were supported through public funds or a visit took place via a cultural agreement between governments. In this instance the rule was that the state of residence of that entertainer would impose taxes only in his state of residence. Article 17 dealt with pensions and annuities, it gave the sole right of taxation of any payment under a social security system to the state that paid that amount. A visiting professor or teacher was exempt from paying taxes in that country where he/she was visiting. There were certain conditions, which had to be fulfilled before this could happen. These included the requirement that the institution from which the teacher came had to be recognised, the contracting period had to be less than two years, and the remuneration had to come from SA or outside of Malawi. If the visit was for research purposes than it had to be for the public benefit. Paragraphs 2 and 3 referred to a tax bearing arrangement. These dealt with a tax holiday scheme whereby the benefits of a company that were granted by the contracting state would be transferred by that state to the resident state.

Discussion
Ms Dlamini-Dubazana asked what the procedure was where a company domiciled in South Africa had foreign shareholders.

Mr Van der Merwe responded that such a company would still have to register in South Africa. Shareholders would be taxed on the dividends.

Mr N Koornhof (COPE) asked if the 183-day threshold applied to the other states.

Mr Van der Merwe replied that it was absolutely standard. The international approach was 183 days, or 12 months.

The Chairperson expressed concern on the capital tax regime. As things currently stood, more revenue was being generated from personal income tax. This had to be debated further and there was a need to consider the sustainability of this model. In other countries, personal income tax was very high but the level of social security justified this.

Dr D George (DA) agreed with the Chairperson that the new model of personal income taxation warranted a further debate.

Mr Van der Merwe replied that the Committee might find the OECD figures on personal income tax to be very informative. Tax would now be 5% for a shareholding of at least 10% and 10% on all other dividends.

The Chairperson asked what the situation was for UK companies that owned property in South Africa.

Mr Van der Merwe replied that in the UK there were usually investment bodies, where a small number of investors would use a body as an investment vehicle, for example for the purpose of investing into property. Therefore one could not draw a direct comparison. However, if such companies were not at all resident in SA they would be taxed on the basis that they received income from immovable property in SA. The treaties gave an unlimited right of taxation to the source state where the immovable property was situated.

Mr Koornhof asked if there were any countries that SARS had found to be unwilling to cooperate.

Mr Van der Merwe replied that there was an international model called a Tax Information Exchange Agreement (TIEA).  This took the place of a full double taxation agreement and focused entirely on the exchange of information. SARS had already negotiated with the Cayman Islands, Bermuda, Bahamas and San Marino. Countries like Liechtenstein, Monaco and Gibraltar were problematic and SARS had been battling to get information.

The Chairperson asked how it was decided where a company’s headquarters would be located, in other words where effective management was conducted.

Mr Van der Merwe replied that the rule for effective management was the place where the strategic decisions were taken, which decided the running of the company as a whole. If there was dual residence and the two countries could not agree then that individual would be excluded from the benefits of the treaty. The exception was the exchange of information provision.

The Chairperson asked how the relocation of a country would be treated as a business transaction for tax purposes.

Mr Van der Merwe replied that relocation would mean that residence would also move. The state to which that company was moving would claim the residency of that company. If there was any sourced income from the original state, than that original state would still claim it.

Mr Makola also added that direct migration was highly unlikely. Relocation was a very expensive exercise.

Mr Van Rooyen asked when the Department would come back to brief the Committee again.

Mr Van der Merwe responded that the first step would be to get the signatures from the relevant Ministers. Once this was done then a date would be set with the Committee for ratification purposes.

Dr D George asked for clarity on the rumours of tax avoidance by South Africans through Lesotho via a VAT scheme.

Mr Van der Merwe responded that he was unsure if he was sufficiently qualified to answer the question, as he dealt with international tax agreements. There were some concerns, and an investigation had been conducted but at present this information was merely hearsay.

Ms Dlamini-Dubazana expressed concern over the amount of illegal goods from outside the country that found their way into SA through SADC countries. She noted that this was destroying the textile industry and the government played a role in this through international agreements.

Mr Van der Merwe said that this was something that he would not be able to comment on, as it would not arise from a double taxation avoidance agreement. This fell within the realm of trade agreements, which were regulated by dti.

The meeting was adjourned.

 



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