Double taxation: National Treasury & South African Revenue Service on Protocol between South Africa & United Kingdom & on Agreement between South Africa & Kenya: briefing; Adoption of Hospital Revitalization Grant Report

Committee: NCOP Finance

Chairperson: Mr C De Beer (ANC, Northern Cape) and T Chaane (ANC)

Date of Meeting: 08 Mar 2011

Summary

The Committee was briefed by National Treasury and the South African Revenue Service on the Conventions, Agreements and Protocols on double taxation between South Africa and the United Kingdom and between South Africa and Kenya. Both the United Kingdom and Kenya were seen as important economic partners with South Africa.

Amendments, particularly with relation to the exchange of information between tax authorities, and the avoidance of double taxation had been addressed in the Protocols and Agreements. These Protocols and Agreements had generally followed international practice, particularly the Organisation for Economic Cooperation and Development (OECD) Model.

The Protocol between South Africa and the United Kingdom and the Agreement between South Africa and Kenya were approved by the Committee.

The Report on the Hospital Revitalisation Grant was adopted by the Committee.


Minutes

Double Taxation Briefing: National Treasury
Mr Lutando Mvovo, Deputy Director of Tax Policy: International Tax, National Treasury, briefed the Committee on the procedure for formal ratification of tax treaties. Before a tax treaty could come into force, it had to be ratified by Parliament. Such ratification itself could only take place after such a treaty was signed according to the Constitution and Section 108 (2) of the Income Tax Act. Contracting states would then notify one another on the completion of the procedures required by that State’s law to bring the tax treaties into force. Tax treaties would enter into force on the date of the receipt of the aforementioned notifications.

Mr Mvovo explained that the South Africa - United Kingdom tax treaty was one of the nine tax treaties that had a zero rate withholding tax on dividends. He further stated that this tax treaty had to be renegotiated before the proposed dividends tax could be implemented. This renegotiation also addressed certain aspects, for example the exchange in information, not present in old treaties. The South Africa - United Kingdom tax treaty protocol was signed on 8 November 2010.

Mr Mvovo briefed the Committee on the investment flows between South Africa and the United Kingdom between 2006 and 2009, stating that the United Kingdom was one of South Africa’s largest trading partners.
Mr Mvovo updated the Committee on the South Africa - Kenya Double Tax Agreement, stating that it was a new agreement. He gave a brief overview of South Africa’s economic ties with Kenya, stating that South Africa was the third largest investor in Kenya, and that since Kenya was the largest and most advanced economy in East Africa, Kenya was an important economic partner of South Africa. The National Treasury hoped that this new treaty would promote South Africa as an ideal holding company jurisdiction in Africa.
Mr Mvovo briefed the Committee on the investment flows between South Africa and Kenya between 2006 and 2009. (See National Treasury. Double Taxation Briefing).

South African Revenue Service Briefing: Double Taxation
Mr Ron van der Merwe, Senior Manager: International Treaties, Legal and Policy Division, South African Revenue Service (SARS), briefed the Committee on SARS’ position relating to the treaties between South Africa and the United Kingdom and South Africa and Kenya. It was noted that both treaties closely followed the OECD Model Convention which formed the foundation for the vast majority of Double Taxation Agreements worldwide.
Mr Van der Merwe highlighted the Article dealing with dividends rate as well as the Article dealing with the exchange of information in the South Africa - United Kingdom Protocol. The new Article ensured that bank secrecy of the absence of a domestic tax interest could no longer be used to deny a request for the exchange of information. A new Article in the Convention also empowered States to collect taxes on behalf of one another on a reciprocal basis.
Mr Van der Merwe then briefed the Committee on the Double Taxation Agreement between South Africa and Kenya, which was different from the normal South African approach to these types of agreements.
Mr van der Merwe highlighted Articles dealing with permanent establishments specifically with relation to construction. He also highlighted Article 14 which dealt with independent personal services, for example, professional service providers such as lawyers or doctors who established a physical presence of 183 days in any twelve month period for taxation purposes.
Mr van der Merwe stated that taxation of shipping had been allowed, but had been reduced by 50%.

Mr van der Merwe also highlighted Article 20 which attempted to encourage movement between states of teachers, professors and researchers and exempted taxation in the host State for a period of two years.
Article 27 allowed the states to collect taxes on behalf of one another.
Mr Van der Merwe expressed hope that SARS would be signing or finalising exchange of information agreements with a number of jurisdictions, including San Marino and Jersey. There were a number of such agreements that were being worked on that would be finalised in the forthcoming year.
(See South African Revenue Service. Double Taxation Conventions / Agreements formal ratification).

Discussion:
Mr M Makhubela (COPE, Limpopo) asked what the reason was for reducing the taxation on shipping by 50%.
Mr Van der Merwe replied that this article was a compromise, because Kenya wanted source taxation of shipping.
Mr Makhubela further asked whether the provision allowing the exemption of taxation to teachers, professors and researchers would not allow tax evasion schemes to be carried out by some of these beneficiaries.
Mr Van der Merwe clarified that the payment of that salary was still taxed in the source State, but not in the host state for a period of two years.
Co-Chairperson Chaane asked whether or not all of the countries with which South Africa had ratified tax treaties, had themselves ratified the treaties.
Mr Van der Merwe replied that, to the best of his knowledge, the majority of treaties had been ratified in the other countries concerned.
Mr Mvovo noted that Ireland, Sweden and Mexico had all ratified their respective treaties with South Africa.
Mr Van der Merwe stated that, if necessary, the Committee would be provided with a comprehensive list to confirm which states had ratified treaties with South Africa.
Co-Chairperson De Beer noted a visit undertaken to Kenya and stated that there were a great many things that South Africa could learn from Kenya, particularly in agriculture where 78% of the country’s labour force were employed in that sector.
The Protocol between South Africa and the United Kingdom and the Agreement between South Africa and Kenya were approved by the Committee.

Report of the Select Committee: Hospital Revitalisation Grant
The Appropriations Select Committee Chairperson, Mr Chaane, asked for questions and comments on the Report. Minor issues regarding the date and typographical references to the provinces were noted.
The Report was adopted by the Committee.
The meeting was adjourned.