Double Taxation Agreements with UK & Kenya: briefing & approval; Double Taxation Agreements with Serbia, Syria, Mauritius & Zambia; Tax Information Exchange Agreements: briefing

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Finance Standing Committee

08 February 2011
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The National Treasury and the South African Revenue Service briefed Members on the protocol amending the double taxation agreements between South Africa and the United Kingdom protocol and between South Africa and Kenya. Article 10 of the protocol with the United Kingdom on double taxation agreement had to be renegotiated because of South Africa's proposed introduction of dividends tax. If Article 10 remained unchanged, it would have left open a loophole for tax avoidance. One of the factors taken into account was the flow of investment. The United Kingdom was one of the largest trading partners of South Africa. The tax treaty protocol was signed on 08 November 2010. It was likely that by the middle of the year the United Kingdom would ratify the treaty and it would be finalised some time this year.

The double taxation agreement between South Africa and Kenya was new. South Africa was one of the largest investors in Kenya. South Africa was the third largest investor in Kenya and the largest African investor in the largest and most advanced economy in East Africa. There were also a considerable number of South African companies operating in Kenya, and the tax treaty would promote South Africa as an ideal international holding country jurisdiction in Africa.

Members observed that the amount of investment into Mauritius was quite substantial compared with that into Kenya, and for an analysis of the forms of investments in which there was improvement in South Africa, on which aspect of investment South Africa must concentrate to achieve benefits to the poor masses, and for clarity on Article 5 on the permanent establishment. A Member was concerned about Article 14, with particular reference to nurses, who went and remained abroad. Would South Africa then tax them? Another Member asked how soon the National Treasury and SARS wanted Parliament to finalise these agreements.

The Standing Committee adopted the double taxation conventions / agreements between South Africa and the United Kingdom and between South Africa and Kenya and agreed that the two conventions / agreements be tabled in the National Assembly and duly processed.

The National Treasury and the South African Revenue Service gave preliminary briefings on the new double taxation agreement between South Africa and Serbia, South Africa and Syria, South Africa and Mauritius, and South Africa and Zambia.

The double taxation agreement between South Africa and Syria was a new agreement motivated by political relations. South Africa believed that the agreement would promote investment flow and increase the economic relations between the two countries. Negotiations were completed in 2007.

SARS pointed out that “Source taxation of shipping and air transport is not allowed” in correction of the presentation document.

Members asked about construction companies, and wanted clarification on investment into countries like Mauritius. Were we not creating more jobs in these countries through these treaties than in our own country?

Since these were the preliminary protocols, the Standing Committee did not adopt them, but would expect National Treasury and the South African Revenue Service to report back to Standing Committee in the second half of 2011.
 
The South African Revenue Service gave a simplified preliminary briefing on tax information exchange agreements between South Africa and Liberia, South Africa and Gibraltar, and South Africa and Monaco. Such agreements were mainly between the two revenue collection authorities concerned and were not policy issues but administrative agreements. This was merely an exchange of information between the South African Revenue Service and the Standing Committee and, when the time came for ratification, Members would discuss the tax information exchange agreements.


Meeting report

Double taxation: National Treasury briefing
Mr Charles Makola, Director: International Tax, National Treasury, said that the presentation would be given jointly by the National Treasury and the South African Revenue Service (SARS).

Mr Lutando Mvovo, Director: International Tax and Tax Treaties, National Treasury, outlined the procedures followed before and after ratifying taxation agreements. Before a treaty could come into effect, it had to be ratified by both contracting states. Ratification could take place only after the signing of tax treaty. In South Africa this process had to be done in accordance with Section 231 of the Constitution and Section 108 (2) of the Income Tax Act. Contracting States would notify each other on the completion of the procedures required by law for the bringing into force of the tax treaty. The tax treaty was to enter into force on the date of receipt of the later of these notifications (See National Treasury. Double taxation: briefing. Slide 2).

Ratification of the South Africa – United Kingdom protocol
Article 10 on dividends tax had to be renegotiated because of South Africa's proposed introduction of dividends tax. The tax treaty between South Africa and the United Kingdom was one of nine such treaties that needed renegotiation before South Africa could implement dividends tax. The reason was that the existing treaty had a zero rate withholding tax on dividends. Therefore, if South Africa had left it as it was, South Africa would have been leaving open a loophole for tax avoidance.

Other aspects had been renegotiated, such as the exchange of information, which was now in line with international trends.

The tax treaty protocol was signed on 08 November 2010 (slide 3).

One of the factors that were taken into account was the flow of investment. The United Kingdom was one of the largest trading partners of South Africa. Therefore, South Africa had had no choice but to renegotiate the protocol.

Mr Mvovo indicated the investment flows between the two countries (slide 4).

Ratification of the double taxation agreement between South Africa and Kenya
Mr Mvovo said that this was a new double taxation agreement. South Africa had initiated the negotiations. South Africa was one of the largest investors in Kenya. South Africa was the third largest investor in Kenya over the United States of America (USA) and the United Kingdom (UK). South Africa was the largest African investor in Kenya. Therefore Kenya was an important partner to South Africa, and was the largest and most advanced economy in East Africa. South Africa hoped that concluding a double taxation agreement would enhance the existing economic ties between the two countries, and increase and strengthen the economic relations with the East African region. There were also a considerable number of South African companies operating in Kenya. Therefore concluding a tax treaty with Kenya would promote South Africa as an ideal international holding country jurisdiction in Africa (slide 5).

The investment flows between the two countries between 2006 and 2009 were indicated (slide 6).

Double taxation conventions / agreements – formal ratification: SARS briefing
South Africa – United Kingdom protocol amending the double taxation convention
Mr Ron van der Merwe, Senior Manager: International Treaties, Legal and Policy Division, South African Revenue Service (SARS) said that as a result of the proposed phasing out of the secondary tax on companies and its replacement with a tax on dividends, it had become necessary to renegotiate, in particular Article, 10 dealing with dividends. The dividend rate now negotiated in the protocol with the United Kingdom was 5% withholding tax in the source state, where the shareholding in the resident companies was at least 10%; with a rate of 15% for qualifying dividends paid by property investment companies; there was a third rate of 10% in all other cases. The property investment companies were in particular United Kingdom investment vehicles, and they wanted a rate of 15% consistent with the way they treated these property investment companies. This was a United Kingdom issue not a South African issue. The two rates that were appropriate to South Africa were the 5% and the 10%, which were in line with South Africa's other treaties and protocols. (See SARS. Double taxation conventions / agreements formal ratification. Slides [3-4])

South Africa had also taken the opportunity to update the exchange of information Article 25 to align it with the latest Organisation of Economic Development and Cooperation (OECD) and United Nations (UN) approach with extended exchange of information to taxes of every kind and description. It was not longer merely taxes on income that were covered, so this gave more scope and would include, for example, the exchange of information on value-added tax (VAT). This new article 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. This was of some consequence in this protocol because in the past the UK used to have a domestic tax interest approach. By that Mr Van der Merwe simply meant that if South Africa had asked for information from the UK's Inland Revenue, if the UK did not have a domestic tax interest in that request, the UK could have refused that request. This was no longer the case, and the new article dealt with that very appropriately. (Slide [5])

South Africa had also included Article 25A, which was to assist in the collection of taxes. This article was now present in both the OECD and UN international models. It was present also in a number of South African treaties. It allowed for the states to provide reciprocal assistance in the collection of outstanding taxes once those assessments were final. (Slide [6])

South Africa – Kenya double taxation agreement
This was a fairly standard South African type double taxation agreement, Mr Van der Merwe said. Some of the articles of interest included Article 5 which provided for permanent establishment - the threshold of taxation of business profits in the source state. So as a resident of a state one would not pay tax in the other state until one had a permanent establishment there in relation to business profits. That threshold of permanent establishment in relation to construction in Article 5, paragraph 3, the OECD model referred to 12 months, the UN model to six months; in relation to South Africa and Kenya, building site construction, assembly or installation project, any supervisory activity in connection therewith; in other words, anything that happened on a construction site – permanent establishment (PE) would exist once it had passed a duration of six months. 

Also a deemed permanent establishment where there was a furnishing of services including consultancy by an enterprise or through its employees or other personnel where they had been in the other country for more than 183 days in any 112 months period. Also in relation to independent personal services, such as the services rendered by people like doctors, lawyers and engineers, in this particular treaty South Africa had Article 14 which dealt with it separately. The test there was once again 183 days presence or a fixed base in the source state. The fixed base was a similar concept to permanent establishment. It meant a place of business. Further in relation to Article 5 and permanent establishment, if there was a fixed place of business in the source state but its activities were merely preparatory or auxiliary – in other words they were not related to the profit making activities of that business – then one said that it was deemed not to be a permanent establishment. One of the activities which the OECD regarded as preparatory or auxiliary was delivery. This was not the case with the UN approach. This was also the approach which South Africa had used in this particular treaty so that where this permanent establishment or fixed place of business in the source state also carried out a delivery function it would still be deemed to have a permanent establishment. (See SARS. Double taxation conventions / agreements formal ratification. Slides [8-10])  

With regard to paragraph 6, of Article 5, this dealt with insurance enterprises of contracting states. It merely provided that if an insurance business of one of the states collected premiums in the territory of the other state or insured risks in that other state to an employee other than an independent agent, in other words, a dependent agent, then this was also deemed to be a permanent establishment and would be liable to tax in the source state. (Slide [11])

Article 8 dealt with shipping and air transport. In this particular treaty air transport was taxable only in the state of residence of the operator of those aircraft. With regard to shipping, there would be source state taxation allowed in the source state but in terms of the agreement the tax thereon was reduced by 50%. (Slide [12])

Article 10 dealt with dividends. In this particular treaty there was a single withholding tax rate of 10% in all cases. It was likewise with interest, and also with royalties going out – on which the source state had the right to impose a 10% rate of tax. (Slide [13])

Article 11 dealt with interest, and Article 12 with royalties (slides 14-15).

Article 18 dealt with pensions and annuities. South Africa had taken care of the social security system payment and any social security payments made under the social security system of the state. Such payments were taxable only in the state which paid that particular pension of benefit. (Slide [16]) 

Article 20 dealt with professors, teachers and researchers. Here South Africa was trying to encourage the movement of education professionals between the countries. If a professor, teacher or researcher visited the country from the other country to teach in a recognised educational institution, he or she would be exempt from tax in the country which he visited, provided that his or her visit was for less than two years and also provided that his or her remuneration came from outside. This meant of course that he or she would continue to be taxed in his or her state of residence. So in the case of a South African professor, the domestic tax law would continue to be applied to him or her. (Slide [17])

Article 27 dealt with the introduction of assistance in the collection of taxes. This was the same as in the UK protocol. This was dear to the heart of SARS, since it enabled the collection of taxes even when the person was no longer within South Africa's jurisdiction. (Slide [18])

Discussion
The Chairperson congratulated Mr Mvovo on his recent promotion from Deputy Director to full Director.

The Chairperson observed that the amount of investment into Mauritius was quite substantial compared with that into Kenya.

Mr Mvovo requested permission to answer that question when he came to the presentation on Mauritius. There was a reason for the huge difference between the two.

The Chairperson agreed.

Dr Z Luyenge (ANC) asked for an analysis of the forms of investments in which there was improvement in South Africa.

Mr Makola replied that investment came in a variety of forms. Some came in the form of investment in a viable business; some came in the form of “hot money”, which had been a topical issue across the world. However, the subject of “hot money” was being handled in the office of the Minister and National Treasury could not engage on it substantially. The treaties under consideration were more concerned with the first kind of investment – substantial investments rather than portfolio investments which were listed instruments and could be described as “money that flies”. It was concrete investment that was the subject of these treaties.

Dr Luyenge asked on which aspect of investment South Africa must concentrate to achieve benefits to the poor masses.

Ms Z Dlamini-Dubazana (ANC) asked for clarity on Article 5 on the permanent establishment, because Article 4 focused more on the business side, and Article 25 was on the personnel.

Ms Z Dlamini-Dubazana was concerned about Article 14, with particular reference to nurses, who went to America and after ten years obtained “permanent establishment” or a permanent residence permit. Would South Africa then tax them?

Mr Van der Merwe understood that nurses were leaving South Africa to work in the USA. Nurses would not fall under Article 14 because they were employees, not independent personal service practitioner providers. Employees were covered by Article 15. In a case like that, the source country would have an immediate right of taxation of those people. The source country in relation to remuneration was the country where the services were rendered. So, if the nurse was in the USA performing nursing duties the USA would have an immediate right of taxation. If she retained residence status in South Africa, South Africa would also have a right of taxation, but would solve that issue in terms of the exemption that was already in the Income Tax Act which said that if you were outside South Africa for more than 183 days, 60 days of which were consecutive, then South Africa would exempt you on the salary that you earned in that other country. If that nurse should fail to obtain that exemption, for some reason, for example, she was not away for 60 consecutive days on account of visiting her family, it would still be possible to sort out the issue on the basis of giving a credit for taxes paid in the USA which would solve any double taxation issue.  

Ms N Sibhidla (ANC) asked about the process issue. She asked how soon the National Treasury and SARS wanted Parliament to finalise these agreements.

Mr Van der Merwe replied that the ratification of these two agreements was hopefully something that we could do as soon as possible depending on the Standing Committee's report.

In particular, the agreement with the UK was important because the entry date for the taxation on dividends was set to be next year. Therefore it was necessary to ratify the agreement as soon as possible and get the UK to do so as well, although he understood that the UK was in the process of doing so. Ratification was thus important at this stage.

Mr Makola added that the Minister was quite keen that the two agreements be ratified as soon as possible. The domestic legislative process was already, to a great extent, finalised. Basically the treaties were withholding the dividend tax process from getting under way. The treaties were, due to no fault on the National Treasury’s side, awaiting the other parties to complete their processes. Until the treaties were ratified, National Treasury was wary of bringing into effect the tax on dividends. If one brought this tax into effect without the treaties, there would be great difficulties and it would be a loss to the fiscus.

There were certain treaties that were highly strategic to South Africa. On looking at the investment flows, one realised that this was a treaty that one could not do without. The UK treaty was particularly important to South Africa. His colleagues had been in contact with their UK counterparts and there was hope that by the middle of the year the UK would ratify the treaty. So the treaty was likely to be finalised some time this year. As soon as that was done, the Minister would decide on the effective date.

Ms L Dunjwa (ANC), a newcomer to the Standing Committee, asked how we ensured whether it was the responsibility of SARS or of National Treasury to ensure that when people went out of the country to render services they were informed of these processes to ensure that these processes were adhered to. She was concerned that our people were not sufficiently empowered. At the same time it was not possible to control their movements.

Mr Van der Merwe replied, if his memory served him correctly, that had seen a comprehensive brochure produced by SARS on the taxation of non-residents. All these issues would be dealt with in brochure form which put it in everyday language.

Dr Luyenge asked about investments from the business perspective. Was an external investor into the country allowed to enter into a partnership with a local person to avoid taxation there or wherever he or she came from? Were South Africans engaged in partnerships externally when they invested in another country?

Mr Van der Merwe replied that it came down to the basic principle that in whatever form that South African did business, he or she remained a resident of South Africa. As a resident of South Africa, South Africa had a unilateral right of taxation on any income he or she earned anywhere in the world. His or her income might be taxed in accordance with the double taxation agreement, but the state of residence would not give up any rights of taxation.

Adoption of the protocol between South Africa and United Kingdom on double taxation
The Chairperson said that unless there were some special circumstances to which Members felt that there was need to pay attention he proposed that the Standing Committee should process these protocols and agree that they should actually be tabled in the National Assembly so that the natural process in terms of trade and other things could develop.

The Chairperson read the motion of desirability, for record purposes: The Standing Committee on Finance having considered the request for approval by Parliament of the protocol between the Government of the Republic of South Africa and the Government of the United Kingdom and Northern Ireland to amend the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains recommended that the House, in terms of Section 231 (2) of the Constitution approve the said agreement.

The Committee indicated their agreement.

Adoption of the double taxation treaty between South Africa and Kenya
The Chairperson read the motion of desirability, for record purposes: The Standing Committee on Finance having considered the request for approval by Parliament of the agreement between the Government of the Republic of South Africa and the Government of the Republic of Kenya for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income recommended that the House, in terms of Section 231 (2) of the Constitution approve the said agreement.

The Committee indicated their agreement.

The Chairperson asked Mr Van der Merwe if he had heard him correctly as to the effective date of these agreements. Was it to be some time next year?

Mr Van der Merwe replied that it would be the first day of January following notification. For example, if South Africa ratified now, and the UK in the middle of 2011, the UK would immediately notify South Africa and therefore the provisions would come into effect from 01 January following that second date, so it would probably be 01 January 2012.

Double taxation conventions / agreements – preliminary hearing: Treasury & SARS joint presentation
New double taxation agreement with Serbia
Mr Mvovo said that the double taxation agreement between South Africa and Serbia was initiated by Serbia. It had been motivated by political relations between the two countries. The investment flows and trade had not played a great role in this treaty. The treaty was consistent with the relationship between South Africa and the region of Eastern Europe. Negotiations for this treaty were completed in 2004. (See National Treasury. Double taxation briefing. Slide 8)

Mr Van der Merwe mentioned that part of the reason for the delay between negotiation and this process was the changes that had happened in the political configuration of Serbia which had now lost Montenegro and certain other territories. Therefore it had become necessary to keep changing definitions to take account of those political changes.

Mr Van der Merwe explained the articles which dealt with the limitations and taxation rates.

Article 5 dealt with permanent establishment in relation to building sites, construction, assembly or installation, or any supervisory activity in connection therewith, and the furnishing of services – including consultancy services. (See SARS. Double taxation conventions / agreements – preliminary hearing: presentation. Slide [17])

With regard to Article 10 on dividends, a withholding tax of 5% or 15% was proposed in the OECD model. In practice withholding taxes varied widely internationally. The dividend rate in the South Africa – Serbia double taxation convention was 5% for a shareholding of at least 25%, and 15% on all others. (Slide [18])

Article 11 on interest provided a withholding tax of 10% as in the OECD model. (Slide [19]

In relation to royalties, it was also 10% in the source state. The difference here was that the definition of royalties included payments for the use of or the right to use industrial, commercial or scientific equipment. This was a position which Serbia took, as opposed to South Africa. (Slide [20]

Article 14 on independent personal services reflected the older approach of this treaty. Instead of being taxed as part of business profits, they were taxed under a separate Article, namely Article 14. The threshold for taxation in the source state was a fixed base of 183 days physical presence. A fixed place, as mentioned earlier, was a place of business. It was very similar to the concept of permanent establishment. (Slide [21])

Article 18 dealt with pensions. In this particular treaty, pensions were said to be taxable only in the state of residence of the person receiving that pension. This of course created a small problem in South Africa, in that our domestic law did not allow us to tax pensions which did not have their source in South Africa. To address the possibility of double non-taxation, Article 18, paragraph 2 stated that if the pension was not taxed in the state of residence then it might also be taxed in the state of source. That ensured that a person would pay tax in one of the countries. (Slide [22]) 

There was also a provision dealing with professors and researchers. Once again the exemption was in terms only of visits of less than two years. Also the remuneration should come from outside the host state. (Slide [21])

Article 23 dealt with capital. This was an article seldom found in South Africa's treaties for the simple reason that in South Africa there was no tax on capital. South Africa did impose tax capital gains, but that was a tax on income. Therefore it was included anyway and always had been. This article dealt with the taxation of capital as such. Serbia did impose a tax on capital, albeit at a low percentage. Although there was no reciprocity, it covered South African residents, and gave them the same benefits from this treaty in respect of items of capital which they might own in Serbia. So, in other words, a South African resident with some item of capital in Serbia would qualify for the benefits of this treaty. Serbia “would give it to him unilaterally; South Africa did not have a tax on capital.”  (Slide [24])

The double taxation agreement with Syria
Mr Mvovo said that the double taxation agreement between South Africa and Syria was a new double taxation agreement. It had also been motivated by political relations. Syria had initiated the negotiations, but they had been driven largely by South Africa's Department of International Relations and Cooperation (DIRCO). South Africa believed that the agreement would promote investment flow and increase the economic relations between the two countries. Negotiations were completed in 2007. (See National Treasury. Double taxation briefing. Slide 9)
 
Mr Van der Merwe mentioned that the articles were very much in line with South Africa's normal approach in relation to building sites, assembly, installation projects, and the limit before permanent establishment was created was nine months in the case of this agreement. Furnishing of services was 183 days in any period of 12 months. Here we found the later approach, which South Africa in particular tried to follow. This was to bring the professional services – doctors and lawyers – into the normal business profit scenario as opposed to having a separate article. Again there needed to be a physical presence in the source state of more than 183 days in any period of 12 months.  (See Double taxation conventions / agreements – preliminary hearing: presentation. Slides [25-27])

Article 8 dealt with shipping and air transport. There was an important word missing in the first bullet point of Slide [28]. He gave the correct version: “Source taxation of shipping and air transport is NOT allowed. “ It was taxable only in the state of residence of the companies operating the shipping and air transport. This was in line with  South Africa's normal approach. What was different in this article was that Syria wanted a provision to say that if a shipping or airline company was acting in its country as an agency for another company and selling tickets on its behalf, as an agent as opposed to carrying on its own operations of transporting goods and passengers, then those agency sales should not be covered by Article 8 but by business profits (Article 7). So we accepted Syria's position.

Article 10 on business dividends followed the normal South African provisions.

In Article 16 which dealt with entertainers, sportsmen and sportswomen South Africa had introduced a paragraph 3 which said that these kinds of entertainment or sporting activities were taxable only in the state of residence, if the activities were supported mainly by public funds of the state of residence, or its political subdivisions or local authorities. One was looking at the situation where entertainers went from South Africa to Syria and their visit was paid for out of South African public funds. The agreement was that they were taxable only in South Africa. The reverse would apply to visiting entertainers from Syria.

With regard to pensions and annuities, there were the normal pay outs under the social security system, where these pensions or benefits were taxable only in the state which paid those benefits. (Slides [29-33]). 

There was also a protocol with three provisions in this agreement with Syria. These were mainly there to clarify issues. These professional services fell under the provisions of Article 5 (3) (c). It was the first time that Syria had followed the South African approach of not having a separate article dealing with these people. So Syria wanted some clarity for its own people to show Syrian tax payers that these would now be dealt with by Article 5 and by Article 7 on business profits.

Syria had been worried that if one just had a place for storage and display, of course that was preparatory and would not therefore form a permanent establishment. Syria's concern was if the company concerned was selling. The clear words of the treaty said that the only activity that could take place was storage or display. If it went beyond storage and display, that exclusion was lost. So all one did in that second point was to clarify that should there be any selling activity, then that exclusion fell away. There was nothing new; this was the way that it had always been. (Slides [33-35])

Double taxation agreement between South Africa and Mauritius
Mr Mvovo said that this was a renegotiation of an existing double taxation agreement. The current agreement had come into force in June 1997. When renegotiation had begun South Africa was still on a source system of taxation and did not have a capital gains tax. Renegotiation had been required because firstly the increased presence of South African companies in Mauritius; secondly, because of abuse and erosion of the South African tax base. A large number of South African companies, when they invested offshore, used Mauritius as a conduit. In 2001, Mauritius introduced a tax incentive regime. This sought to make Mauritius a jurisdiction of preference for investment. This incentive was mostly targeted at non-resident companies. Also in 2001, Mauritius introduced a global licence company one. This was not subject to withholding taxes and was subject to a lower rate of taxation. Most South African companies, when they wanted to invest, for example, in the United Kingdom or India, set up an intermediary holding company in Mauritius. Such an intermediary holding company, if established before 2005, was not subject to any taxation in Mauritius. However, if established after 2005, it was subject to a corporate rate of tax of 3%. This was very attractive. This issue had not been a problem when South Africa was based on source taxation. This was why the investment flows into Mauritius were so big, compared to those into Kenya. Investments by Mauritian companies into South Africa were not direct. The renegotiation also sought to close this loophole in the existing treaty. (See National Treasury. Double taxation briefing. Slides 10-11)

Mr Van der Merwe commented on Article 4 and the definition of residence. The importance of this was that one had to be a resident of a contracting state in order to qualify for any of the benefits of the treaty. There was often a problem with dual residence. With companies, incorporation in South Africa, or having the company's effective place of management in South Africa, resulted in a company being considered resident in South Africa. It also happened that a company could be incorporated in one country but have its effective place of management in another country and thus be considered resident in both.

In order to make the treaty work, one had to assign residence to one of the two only. This had to be done by mutual agreement between the two countries concerned. If mutual agreement could not be reached, then such companies would be excluded from benefits of the treaty. 

The message to companies was that if they caused confusion as to their place of residence, then they could not expect to benefit from these treaties.

Mr Van der Merwe commented on Article 5.

Mr Van der Merwe commented on debt instruments which were listed on recognised stock exchanges. This was in line with South African domestic law. The treaty merely confirmed that these were exempted.

Mr Van der Merwe commented on the withholding tax rate of 5% on royalties in all cases.

Importantly, there was the full exchange of information article under Article 25. The old treaty had the more limited version of exchange of information where countries could say that they had bank secrecy.

Article 26 provided for the standard assistance in the collection of taxes. 

In the protocol South Africa had very much lowered the rates or insisted on 5% or 10% withholding tax in relation to dividends for Mauritius.

Mauritius had asked for a most favoured nation (MFN) clause.

The second point in the protocol was the way in which South Africa taxed branches of non-resident companies in South Africa. (See SARS. Double taxation conventions / agreements – preliminary hearing: presentation. Slides [47-60])

Double taxation agreement with Zambia
This was also a renegotiation of an existing treaty, Mr Mvovo said. The first treaty between South Africa and Zambia, then Northern Rhodesia, had come into force in May 1956. At that time South Africa was still on a source based system and did not have a capital gains tax. The renegotiation also sought to modernise the old treaty because much had changed since then.

South African presence and investments in Zambia had greatly increased. Renegotiation, it was hoped, would promote South Africa as an ideal regional holding company or jurisdiction.

Investment flows between Zambia and South Africa were indicated.

Investment flows between South Africa and Zambia were indicated. (See National Treasury. Double taxation briefing. Slides 12-13)

Mr Van der Merwe commented that nobody would be more pleased when this treaty was updated. “In 1956 they had some really funny ideas.”

Road transport had been included, because of the high level of such traffic between Zambia and South Africa. The normal international rule was applied that such profits were taxed only in the country of residence of the operator of air, sea, rail or road transport.

Assistance in the collection of taxes, on a reciprocal basis, was included. In view of the proximity of the two countries, Mr Van der Merwe felt that this was an important aspect of this treaty. (See SARS. Double taxation conventions / agreements – preliminary hearing: presentation. Slides [36-46])

Discussion
Mr E Mthethwa (ANC) asked about construction companies.

Mr Van der Merwe replied that South Africa would be negotiating for between six and 12 months, depending on the situation. In relation to certain countries, where one knew that perhaps South African construction companies were doing work in those other countries, South Africa would try for as long a period as possible, so South Africa would try to push it to 12 months, because that would mean that in those cases, South Africa would have the sole right in effect to tax those South African construction companies, which was an advantage for South Africa. So, in relation to countries like Serbia and Syria, where it was more likely that South African construction would be in those countries, South Africa pushed that period as much as it could, which was acceptable to the other country. The object certainly was to try to achieve a situation where, because those companies were in the other country for a period of less than twelve months, then South Africa as the country of residence would have the sole right of taxation, and would not have to give a credit for any foreign taxes paid. So it was an advantage to us.

Ms Dlamini-Dubazana moved that the preliminary briefing by the National Treasury and SARS on the international protocols on Zambia, Mauritius, and Syria be adopted by the Committee.

Mr Mthethwa was willing to second the motion, but first wanted clarification on investment into countries like Mauritius. Were we not creating more jobs in these countries through these treaties than in our own country?
It seemed that South Africa was creating much more benefit to Mauritius than the latter was creating for South Africa.

Mr Van der Merwe commented that it was necessary to realise that Mauritius was not the final destination of South African investments. As Mr Mvovo had said, Mauritius was a conduit. This was the issue. On the other hand investments into South Africa from Mauritius had South Africa as their final destination and South Africa was not a conduit in this case.

Mr Mvovo said that it had to be asked how one distinguished between a good and a bad treaty. The countries were different. When one dealt with Mauritius, one worried because in the past Mauritius had promoted itself as a good destination for money that was directed to other countries. So one did not want a situation where one had lower rates, because, if one had lower rates, somebody from the USA would go to Mauritius, put his money there, and then move it to South Africa, and then South Africa would not be able to tax it. However, when one talked to certain countries like Zambia, and other countries in sub-Saharan Africa, it had to be remembered that those countries had a high rate of taxation; South Africa had promoted itself, and there was no reason whatsoever why South Africa should not be the gateway into the entire continent. So this was the approach that South Africa took. South Africa had both the physical and fiscal infrastructure. There was no reason why countries which wanted to invest in Africa should not come to South Africa, and then go to the entire continent. So when one talked to the other countries, one wanted lower rates, because one did not want the investment to be deterred: one wanted the money to come to South Africa and flow gently into that particular country and move out with a high return. Investors wanted a high return but low tax. However, when it was our money we wanted it coming with high returns, but we were careful when other people like Mauritius adopted the same regime. It was not a “one size fits all” situation. For different countries South Africa adopted a different approach and a different strategy.

The Chairperson said that the Committee would want to engage further when it came to deliberate on the ratification of these protocols, particularly around Mauritius, since there were such high levels of disparity between investment flows. “In fact, you just get depressed.” 

Since these were the preliminary protocols, the Standing Committee should not adopt them.

The Standing Committee, however, sought guidance from National Treasury and SARS, of course informed by the urgency of the matters, on when they wanted to return to the Standing Committee, so that the matters could be included in the Standing Committee's programme. This would, as an election year, be a very busy year for Parliament. There would be interruptions after the budget, and beyond that, other challenges.

Mr Van der Merwe replied, particularly in relation to Mauritius and Zambia, that SARS and National Treasury would be pushing the process as hard as they could. With regard to Zambia, SARS and National Treasury already had the legal opinion from the Department of Constitutional Development and from the Department of International Relations and Cooperation to the effect that they had no issue with the treaty. South Africa was in that process with Mauritius. It was a matter of obtaining a signature, and sometimes that was the most difficult thing to do, since in South Africa only a Minister could sign. He did not want to be undiplomatic but this did make the process more difficult. For other countries, a deputy minister or a high commissioner or ambassador could sign. However, Mr Van der Merwe was very hopeful of returning to the Standing Committee by the second half of 2011, since these were two treaties which SARS and National Treasury wished to see completed. 

Tax Information Exchange Agreements preliminary hearing: SARS briefing
Mr Mvovo explained why National Treasury would not present on this subject. Such exchange of information agreements were mainly between the two revenue collection authorities concerned. Such agreements were not policy issues but administrative agreements.

Mr Van der Merwe said that finally, there were three tax information exchange agreements (TIEAs) – with Liberia, Gibraltar, and Monaco; these TIEAS were just on the exchange of information. He asked the Chairperson’s permission to deal with them on a simplified basis.

The Chairperson agreed.

Mr Van der Merwe said that South Africa had existing agreements with Brazil, India, Indonesia, and Luxembourg. With these four countries, South Africa had amended the exchange of information article at this stage by protocol to take account of the new international approach on exchange of information. The focus there, as SARS and National Treasury had said in presentations to the Standing Committee was to get rid of bank secrecy to outlaw domestic tax interest as a barrier to the exchange of information and therefore very much in line with the interests of SARS and of South Africa. So those four protocols literally introduced one new article, which was the updated exchange of information article. 

With the countries with which South Africa did not have double taxation agreements, and with which South Africa did not really want double taxation agreements, but with which South Africa did want an exchange of information, South Africa sought to enter into tax information exchange agreements (TIEAS). These merely allowed for exchange of information. South Africa had adopted a particular version of the international model. The three before Members today – Gibraltar, Liberia, and Monaco, were almost identical to what SARS and National Treasury had presented the previous year in relation to Guernsey, Jersey, and some other countries. There was nothing new; the focus was on exchange of information and away with bank secrecy and barriers to the exchange of information in relation to tax purposes. (See SARS. Tax information exchange agreements preliminary hearing. Slides [2-38])

Discussion
The Chairperson said that at this stage there was merely an exchange of information between SARS and the Standing Committee on this subject, and that, when the time came for ratification, there could be discussion.

Mr Van der Merwe concurred.

The Chairperson agreed that in the second part of the year the Standing Committee should consider as a matter of urgency the ratification of the protocols between South Africa and Zambia and South Africa and Mauritius.

The Chairperson adjourned the meeting.
 



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