National Treasury & South African Revenue Services briefing on International Protocols

NCOP Finance

31 August 2010
Chairperson: Mr C De Beer (ANC, Northern Province)
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Meeting Summary

The Deputy Director: Tax Policy; International Tax of the National Treasury briefed the Committee on the requirements and process of ratifying a tax treaty.  Ratification could only take place after the signing of the tax treaty which was done in South Africa in accordance with Section 231 of the Constitution and Section 108(2) of the Income Tax Act. The tax treaty protocols focused on the renegotiation of nine treaties providing for a zero withholding tax rate on dividends.

The presentation included details of the South Africa-Ireland general investment flows for the period 2005-2008. During 2008, Irish investment totalled R1.9 billion and South African investment in Ireland amounted to R44.6 billion. The outward dividend payments for the period 2007-2009 totalled R637.5 million.  During 2009, the South Africa-Ireland trade flow totalled R1.1 billion and imports Ireland to South Africa amounted to R4.4 billion.

Details of the South Africa-Sweden general investment flows for the period 2005-2008 were presented.  During 2008, Swedish investment in South Africa totalled R3.5 billion and South African investment in Sweden amounted to R536 million. The total outward dividend payment amounted to R1,2 billion.  The South Africa-Sweden trade flows for the period 2005-2009 indicated that exports from South Africa to Sweden amounted to R2.7 billion during 2009 and imports from Sweden to South Africa totalled R9.4 billion.

The Manager: International Treaties, South African Revenue Services briefed the Committee on the amendments to the International Protocols in order to phase out the secondary tax on companies and its replacement with a dividends tax. Articles of interest in the South Africa-Ireland Protocol included amendments to Article 4 (that included a definition of ‘resident’) and Article 10, dealing with dividends.  The dividend rate for both the South Africa-Ireland Protocol and the South Africa-Sweden Protocol was 5% for a shareholding of at least 10% and a rate of 10% applied to all other categories of shareholding.  Article 26 was deleted and replaced by a new article on Exchange of Information to ensure that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information.

The Members of the Committee asked questions concerning Section 108(2) of the Income Tax Act; the accuracy of information on the investment made by companies; the implementation of taxation on dividends; whether the protocol came into effect on the date of signing or the date of ratification; the delay in submitting the signed protocols to Parliament; the reason for importing products that could be manufactured locally; whether the protocols had been ratified by the other parties; the monitoring of the ratification process and the provision to prevent legal challenges until such time as both countries had ratified the protocol.

The Committee approved the amendments to the protocols with Ireland and with Sweden.


Meeting report

Presentation on Tax Treaty Protocols with Ireland and Sweden by the National Treasury
Mr Lutando Mvovo, Deputy Director: Tax Policy; International Tax made the presentation to the Committee (see attached document).

The tax treaty ratification process dictated that treaty had to be ratified by Parliament before it came into force. Ratification could only take place after the tax treaty was signed.  In South Africa, the process was carried out in accordance with Section 231 of the Constitution and with Section 108(2) of the Income Tax Act.

The tax treaty protocols focused on the renegotiation of nine treaties, which included a zero withholding tax rate on dividends. The South Africa-Ireland general investment flows for the period 2005-2008 were highlighted. For the period 2008, a total amount of R1.9 billion was invested into South Africa by Ireland.  Irish companies operating in South Africa included Guinness, Spectra Group and Howard Holdings. For the period 2008, South Africa invested a total amount of R44.6 billion in Ireland.  South African companies operating in Ireland included Anglo Platinum, SAB Miller, Sasol Ltd, Old Mutual and Sappi Ltd. The South Africa-Ireland dividend flows for the period 2007-2009 were presented. The total outward dividend payments for this period amounted to R637,535,942. The South Africa-Ireland trade flows for the period 2005-2009 were highlighted. During 2009, exports from South Africa to Ireland totalled R1.1 billion and products included base metals, machinery and mechanical and electrical appliances. In 2009, imports from Ireland to South Africa amounted to R4.4 billion and included works of art, live animals and wood charcoal.

Mr Mvovo presented the general investment flows between South Africa and Sweden for the period 2005-2008. In 2008, Swedish investment totalled R3.5 billion and Swedish companies operating in South Africa included Atlas Copco, Volvo, Scania and Sandvik. During 2008, South Africa invested an amount of R536 million in Sweden and South African companies operating in Sweden included Dimension Data, Tiger Wheels and Sappi Ltd. The South Africa-Sweden dividend flows for the period 2007-2009 were presented. The total outward dividend payments for this period amounted to R1,269,013,966.

The South Africa-Sweden trade flow for the period 2005-2009 was highlighted. During 2009, exports from South Africa to Sweden amounted to R2.7 billion and the products included citrus and dried fruit, grapes and aluminium waste and scrap. In 2009, imports from Sweden to South Africa totalled R9.4 billion and products included motor cars, fork lifts, trucks and generators.

South African Revenue Services briefing on South Africa-Ireland protocol amending the Double Taxation Convention
Ms Oshna Maharaj, Manager: International Treaties, South African Revenue Services, submitted the presentation to the Committee (see attached document).

The presentation included an explanation of the reason for the amendments to the Convention.  The amendments became necessary in view of the proposed phasing out of the secondary tax on companies and its replacement with a dividends tax. Articles of interest in the South Africa-Ireland Protocol amending the Double Tax Convention included the update of the definition of ‘resident’ and the exclusion of a Common Contractual Fund in Ireland from the definition as it was fiscally transparent and therefore not regarded as an entity for tax purposes (Article 4) as well as Article 10, which dealt with dividends.  The amendment applied to the South Africa-Sweden Protocol as well.

Ms Maharaj explained that in practice, international withholding tax rates varied widely.  The dividend rate for both the South Africa-Ireland Protocol and the South Africa-Sweden Protocol was 5% for a shareholding of at least 10% and a rate of 10% on all other categories of shareholding. Article 26 of the South Africa-Ireland Protocol was deleted and replaced by a new article on Exchange of Information. The new Article 26 was in line with the OECD Model and ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for exchange of information.

Discussion

Mr B Mashile (ANC, Mpumalanga) asked for an explanation of the provisions contained in Section 108(2) of the Income Tax Act.

Mr Charles Makala Director International Tax, National Treasury replied that Section 108 stated that a treaty once in effect would become legally enforceable. A treaty was therefore as binding on the country as the Income Tax Act.

Mr A Lees (DA, Kwazulu-Natal) noted that Alexkor had been presented as one of the South African companies investing in Ireland but the company had denied this fact. This raised doubts on the accuracy of the report.

Mr Makala replied that international investments occurred in various formats. Investments were channelled through a country for particular reasons, such as tax. The National Treasury could not confirm which countries Alexkor actually invested in or had merely routed its investment through.

Mr Lees asked how tax on dividends would be implemented.  The protocol suggested that taxation on dividends had to be implemented but this had not yet occurred in South Africa.

Mr Makala replied that the dividend tax could not come into effect until such time that the protocol was in place. This avoided applying a zero rate to dividends. The tax liability for dividends was being moved from the company to the individual.

Mr T Chaane (ANC, North West) asked whether the protocol came into effect on the date of signing or the date of ratification.

Mr Mvovo replied that the protocol had to be signed before it was ratified by Parliament. Section 108 stated that after ratification by Parliament, the arrangements made in terms of any agreement as contemplated in Section 231 of the Constitution had to be gazetted and would be effected as if it had been enacted.

Mr Chaane asked why it had taken so long to bring the protocols to Parliament after they were signed.

Mr Makala replied that the process of arranging for the necessary signatures required an opportune time for both parties, which was not always easy.

The Chairperson observed that South Africa was importing items such as hides, charcoal and wood, which could be produced locally and create jobs.

Mr Lees asked for clarity on a dividend tax rate of 5% applicable on a shareholding of 10%.

Mr Makala explained that there a tax rate of 5% was applicable if 10% of the equity share capital was held.

Mr B Mashile (ANC, Mpumalanga) asked if the other party had already implemented the protocol.

Ms Maharaj replied that the other party had not yet ratified the protocol as notice had not yet been received through the diplomatic channels.

Mr Mashile asked what would happen if the other party declined the protocol that had been ratified and was already part of legislation applicable in South Africa.

Ms Maharaj replied that South Africa had allowed a lengthy period for the other party to ratify certain protocols. An example was the protocol with Rwanda that was recently signed after a period of one year.  Follow ups were made to inform the other party about progress on the South African side and enquiries were made about the progress made by the other party.

The Chairperson asked how the National Treasury monitored the process of ratification occurring in the other country.

Ms Maharaj replied that the Department of International Relations and Co-operation was involved in discussions on bi-lateral agreements and followed up on the status of agreements.

Mr Mashile asked which country was driving the implementation of the protocols.

Mr Mvovo replied that South Africa had initiated the protocols as the country stood to benefit from the changes made in the protocols.

Mr Lees asked if there was a provision in Section 108 that prevented a legal challenge should the other party fail to ratify the protocol in time.

Mr Mvovo replied that the protocol had to be published in the Government Gazette before it became law and this was only done after notification from the other party had been received that the protocol had been ratified.

The Chairperson proposed that the Committee approved the protocols read out the proposal for approval in terms of Section 231(2) of the Constitution on the amendments to the South Africa-Ireland Protocol and the South Africa-Sweden Protocol.  The Members of the Committee unanimously approved the amendments.

The meeting was adjourned. 



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