National Treasury and the South African Revenue Service (SARS) gave preliminary briefings to Members on Double Taxation Conventions / Agreements, the African Tax Administration Forum Multilateral Agreement, Tax Information Exchange Agreements, and Value-Added Tax Agreements.
The purpose of the double taxation conventions / agreements was to remove barriers to cross-border trade and investment. All countries when negotiating these treaties closely followed the provisions set out in the Organisation of Economic Cooperation and Development (OECD) and United Nations model conventions. Those two models formed the basis of every single double taxation treaty in the world. The convention with Cameroon and the agreement with Qatar were explained.
The African Tax Administration Forum Multilateral Agreement closely followed the Article on Exchange of Information and Assistance in Collection in the Articles on Exchange of Information and Assistance in Collection in the OECD Model Tax Convention. The Agreement established the African Tax Administration Forum and entered into force on 08 October 2012 establishing the Forum as an International Organisation. The Parties were Member States of the Forum and the Agreement allowed for effective exchange of information and assistance, and to increase cooperation among tax authorities to combat tax avoidance and evasion. This Agreement contained the full exchange of information mechanism that one would have in a full double taxation agreement.
The tax information exchange agreements were to allow for effective exchange of information between authorities. The agreements were much the same and focused on exchange of information on request between the contracting parties. Secondly, those contracting parties would guarantee to keep full records of all ownership information in relation to companies, banks, trusts, foundations, and other legal entities. Thirdly, in all cases there was to be absolute confidentiality on the exchange of information. The agreements with Barbados, Belize, the Turks and Caicos Islands, Liechtenstein, the British Virgin Islands, the Isle of Man, and the Cook Islands were explained.
The Value-Added Tax Agreements with Swaziland and with Lesotho were to provide for mutual assistance and co-operation and the prevention of fiscal evasion with respect to value-added tax. They were 99% in draft form and virtually the same. It made sense to enter into such agreements as there were cross-border transactions with the two countries and these had the potential to lead to budget losses through tax evasion, round-tripping of goods, and under declaration of values.
DA Members asked if the value-added tax agreement with Swaziland was the first step towards moving away from the South African Customs Union common revenue pool and noted that the agreement put many requirements on the Swaziland tax authorities. Was SARS confident that Swaziland could fulfil its side of the bargain? What impact would the agreement have on the Swaziland tax administration? Was the problem of tax evasion in respect of sugar imported from Swaziland two years ago now resolved? They also asked about the potential for automatic sharing of tax information globally, and thought that a next generation of tax havens – smaller, under-developed countries - might consider the benefits of offering tax secrecy and align politically with countries traditionally opposed to the G8 countries. Also such potential new tax havens might lack the technical capacity to share tax information. Was the problem of tax evasion in respect of sugar imported from Swaziland two years ago now resolved? What impact would the agreement have on the Swaziland tax administration?
ANC Members asked why the double taxation agreement with Cameroon was necessary if Cameroon was a member state of the African Tax Administration Forum, and to what extent the double taxation agreement was consistent with the African Tax Administration Forum Multilateral Agreement. What criteria had SARS used to select Lesotho and Swaziland for Value-Added Tax agreements? Members also asked how National Treasury and SARS would deal with requests from Botswana or Zimbabwe for tax refunds as the currencies were different, and asked for the rationale for Article 22 of the double taxation agreement with Cameroon which provided that the exemption from research taxation would be applicable only to professors and teachers but not for research if it was for private benefit.
National Treasury and SARS said that the protocols and agreements for formal ratification remained essentially unchanged since the preliminary briefing in May 2012, but they gave Members some additional background and responded to questions on the Double Taxation Agreement with Mauritius as this had lately been the subject of speculation in the media.
The Committee reported that it recommended the National Assembly to approve formal ratification of three Protocols (with Botswana, Malta, and Norway), two Double Taxation Agreements (with Mauritius and Chile) and two Tax Information Exchange Agreements (with Samoa and Costa Rica).
Double Taxation Conventions / Agreements: Preliminary Hearing
Mr Charles Makola, National Treasury Director: International Tax, said that the purpose of the agreements was to remove barriers to cross-border trade and investment.
Convention between Government of RSA and Government of Republic of Cameroon for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income
This treaty was new and was initiated by South Africa because of the presence of South African companies in Cameroon that wanted protection and certainty. The South African Government's intention was to enhance economic relations between South Africa and central Africa. The intention was to expand South Africa's treaty network and to provide certainty and protection for South African companies that were investing in Cameroon and the central African region. There was a growing presence of South African companies in the aviation sector and telecommunications, as well as in the financial sectors. This was part of South Africa's Gateway to Africa Strategy to ensure that South Africa was used by international or foreign investors as a gateway to Africa. The intention again was to ensure that South African companies were protected from a tax perspective. The negotiations had been finalised and the next step was the signing of the treaty.
Mr Ron van der Merwe, SARS Senior Manager: International Development and Treaties, referred Members to the presentation document [SARS] Double Taxation Conventions / Agreements Preliminary Hearing. The purpose of these agreements was to remove barriers to cross-border trade and investment. All countries when negotiating these treaties closely followed the provisions set out in the Organisation of Economic Cooperation and Development (OECD) model conventions. Those two models formed the basis of every single double taxation treaty in the world.
Article 4: Resident
Mr Van der Merwe explained the so-called tiebreaker rule for dual residence for entities other than individuals. In this particular agreement South Africa followed the new approach set out in the OECD commentary where, if there were dual residence for companies, the competent authorities of the two states would use the mutual agreement procedure to decide which state had the sole claim of residence. (Slide 5)
Article 5: Permanent Establishment
Mr Van der Merwe explained the reason for the definition of permanent establishment. This was the threshold at which non-residents became taxable in the source country. If someone was a resident of one state and doing business in the other country he or she would become taxable in that other country immediately he or she had a permanent establishment. This applied in particular in the case of construction, building sites, and installation projects, though subject to time limits set out in the treaties. The OECD model proposed 12 months. The United Nations model proposed six months. South Africa preferred the six-month rule. Therefore in the convention between South Africa and Cameroon, a building site, construction, assembly or installation project or any supervisory activity in connection therewith that went on for more than six months would create a permanent establishment (PE) and therefore become taxable in that source state. So every activity that happened on a construction site was covered by that rule. The Agreement further dealt with the furnishing of services by an enterprise through employees or other personnel engaged by the enterprise for such purpose. The period that would create a PE was more than 183 days in any 12-month period. This was an important issue as many services provided by consulting companies were normally done by employees of those companies. With today's technology there was little reason to open an office as such to do such work. They would be more likely simply to use space in the offices of the client. Therefore it was important to have this physical presence rule to deem a PE and therefore to have taxation in the source state. (Slide 6)
An enterprise would be deemed to have a PE if it provided services or supplies, equipment and machinery on hire for use or to be used in exploration for, extraction of, or exploitation of mineral resources if activities continued for a period or periods exceeding 183 days in any 12 month period.
Also used in this Agreement was the UN provision in relation to insurance enterprises, whereby such an enterprise was taxable in the source state if it collected premiums in the territory of that other state or insured risks situated therein through a person other than an agent of an independent status. Here the focus was on insurance companies that did their business in a country through dependent agents. (Slide 7).
Article 10: Dividends
In practice withholding taxes varied widely internationally. The dividend rate in the South Africa and Cameroon double taxation convention was 10% where the shareholding in the company paying the dividend was at least 25%. For portfolio dividends it was 15%. 'Therefore all other cases 15% withholding tax.' In all South Africa's agreements, South Africa gave a favourable rate where the investment related to foreign direct investment. (Slide 8)
Article 11: Interest
The rate in the South Africa and Cameroon double taxation convention was 10% on the source state.
Article 12: Royalties
The limitation imposed on the source state on royalties going out to non-residents was 10%. (Slide 10)
Article 14: Fees for Technical Services
These were fees were defined in the agreement as fees for technical services, management, or consultancy. This provided that these fees might be taxed on gross in the source state but with a limit of 10%. (Slide 11)
Article 18: Entertainers and Sportspersons
A paragraph was included whereby the state being visited would not tax the visiting entertainers and sportspersons if their activities were supported wholly or mainly by public funds of the resident state or its political subdivisions or local authorities and also if their activities took place under formal cultural agreement entered into by the governments of the contracting states. (Slide 12)
Article 19: Pensions and Annuities
The normal South African approach was taken here, namely that there was a shared right to tax, pensions, and other similar remuneration and annuities. Pensions were one of the few things under South African domestic law that South Africa could tax only if there was a source in South Africa. So South Africa preferred that the source state should always retain its taxing right in South Africa. This was important as otherwise one would create cases of double non-taxation. South Africa could certainly not tax pensions of people who retired to South Africa but whose pension source was outside South Africa. In other words, South Africa preferred to allow the source state to impose tax on pensions. (Slide 13)
Article 22: Professors, Teachers and Researchers
Professors, teachers and researchers were exempt from taxation in the host state, the state that they were visiting, for a period of two years if the remuneration was received from outside the host state. The intent was to promote the exchange of people who were very good technically in education and similar fields. If a visiting professor were to travel from South Africa to Cameroon, the latter country would not tax him or her provided that his contract was for less than two years and provided that the remuneration came from outside Cameroon. Of course this worked vice versa as well. (Slide 14)
Article 27: Exchange of Information
This was the latest version. This Article made sure that bank secrecy and not having a domestic tax interest could not be used as an excuse for not exchanging information. (Slide 15)
There were two most favoured nation clauses. South Africa had obtained a good deal with Cameroon on withholding taxes. However, South Africa had covered itself by saying that if, in future, Cameroon agreed to a lower rate than that given to South Africa, Cameroon would approach South Africa to renegotiate with a view to similar treatment. Cameroon had then said that if South Africa wanted to impose higher rates, which was unlikely in view of South Africa's policy and its domestic law, it would ask South Africa to approach it with a view to possible renegotiations of those rates. (Slides 16-17)
With a view to the participation exemption that South Africa had in domestic law which said that if a shareholder owned more than 10% of a foreign company, when the dividend came in the shareholder was exempt from tax on the dividend. South Africa had included a paragraph to set out the terms of this exemption. If South Africa changed its domestic law in this respect, it would consult Cameroon with a view to renegotiating this particular area. (Slide 18)
Agreement between Government of RSA and Government of State of Qatar for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income
Mr Makola said that this too was a new treaty. It was initiated by South Africa because of the presence of South African companies in Qatar, especially in the construction and oil sectors. It was also intended to expand South Africa's treaty network in the Middle East. Currently there was only one treaty in that region – with the Kingdom of Saudi Arabia. As Members would be aware, the economic growth in that region was 'amazing', especially in the oil sector, and there were also South African individuals working in the Middle East. Qatar was no different. It was therefore important for South Africa to consider negotiating a treaty with Qatar to ensure the protection of South Africans residing there and companies operating there or investing in Qatar. Qatar had some of the largest reserves of oil in the world, which were estimated to be in the region of 15.21 million barrels. Its natural gas reserves were estimated at 25.4 trillion cubic meters.
Mr Van der Merwe said that the DTA with Qatar closely followed the OECD Model Convention that formed the foundation for the vast majority of DTAs worldwide. (Slide 20)
Article 5: Permanent Establishment (PE)
Qatar had asked that PE also include a warehouse where storage facilities were provided to parties other than the enterprise, a sales outlet, or a farm, plantation or orchard. However the inclusion of these was by no means out of the ordinary. (See Slides 21-23)
Article 8: Shipping and air transport
Profits of an enterprise of a contracting state from the use or rental of containers used for the transport in international traffic of goods or merchandise should be taxable only in the residence State of the enterprise that operated that business. (Slide 24)
Article 10: Dividends
The dividend rate in the agreement between South Africa and Qatar was 5% for a shareholding of at least 10%, and 10% portfolio, which was all other dividends. This was in line with most of the agreements. There was a source state exemption where the dividend was being paid to the government of the other contracting state, political sub-division, local authority or statutory body. It was thus a government to government exemption. (See slide 25)
Article 11: Interest
Interest arising in a contracting state and paid to a resident of the other contracting state might be taxed in that other state. In this agreement there was a 10% limit on source state. (See slide 26)
Article 12: Royalties
Royalties arising in a contracting state and paid to a resident of the other contracting state might be taxed in that other state. In this agreement, royalties were taxed at a rate of 5%. (Slide 27)
Article 15: Directors' Fees
Salaries, wages and other similar remuneration earned by a resident of a Contracting State in that person's
capacity as an official in top-level managerial position of a company that was resident of the other Contracting State might be taxed in that other State. This dealt with the seconding of senior management to subsidiaries. (Slide 28)
Article 17: Pensions and Annuities
Provided that pensions and other similar payments, and annuities, arising in a contracting state and paid to a resident of the other Contracting State, might be taxed in the source state. In any case when the source state had a right of taxation, it had the prior right. (Slide 29)
Students, Apprentices and Business Trainees
Students, apprentices or business trainees were exempt from taxation in host state if payment was received from outside the host state for the purpose of their maintenance, education or training. (Slide 30)
Article 24: Exchange of Information
This Article was in line with the OECD Model and extended to taxes of every kind and description. The 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. (Slide 31)
Provided that the exemptions provided for in paragraph 3 of Article 10 and paragraph 3(d) of Article 11 applied to the Qatar Investment Authority, Qatar Holding and their subsidiaries as long as these were wholly owned, directly or indirectly, by the State of Qatar. (Slide 32)
Africa Tax Avoidance Forum (ATAF)
Mr Van der Merwe explained that the ATAF Agreement established the African Tax Administration Forum (ATAF) and entered into force on 8 October 2012 establishing ATAF as an International Organisation. The Parties to the ATAF Multilateral Agreement on Mutual Assistance in Tax Matters were Member States of the African Tax Administration Forum. The Agreement was to allow for effective exchange of information and assistance between the Tax Authorities of the Member States that were Parties to the Agreement; and to increase co-operation among tax authorities to combat tax avoidance and evasion.
The Agreement closely follows the Articles on Exchange of Information and Assistance in Collection in the OECD Model Tax Convention. Articles of interest in the Multilateral ATAF Agreement on Mutual Assistance in Tax Matters were:
Article 2: Objective
The objective of the Agreement was to enable the Contracting Parties to assist one another in tax matters. It allowed for assistance that comprised of:
(a) exchange of information in tax matters;
(b) carrying out of tax examinations abroad;
(c) carrying out of simultaneous tax examinations; and
(d) assisting in the collection of taxes
Article 3: Taxes Covered
This Agreement should apply to all taxes on income, on capital, and to taxes on goods and services imposed by or on behalf of the Contracting Parties.
Article 4: Exchange of Information
The Contracting Parties should through their Competent Authorities, provide one another, spontaneously, automatically or upon request with such information as might be relevant for carrying out the provisions of this Agreement or for the administration or enforcement of the domestic laws of the Requesting Party concerning the taxes covered by this Agreement insofar as the taxation under those laws was not contrary to any other instrument entered into between the Requesting and Requested Party. (See slides 8-10)
Article 5: Tax Examinations Abroad
A Requested Party might allow representatives of the Requesting Party to enter the territory of Requested Party to interview individuals and examine records with the written consent of the taxpayer concerned. At the request of the Competent Authority of a Requesting Party, the Competent Authority of the Requested Party might allow representatives of the Competent Authority of the Requesting Party to participate in any appropriate part of a tax examination in the territory of the Requested Party. All decisions with respect to the conduct of the tax examination should be made by the Requested Party conducting the examination.
Article: Simultaneous Examination
At the request of the Competent Authority of one of the Contracting Parties, two or more Competent Authorities of the Contracting Parties might consult together for the purposes of determining cases and procedures for simultaneous tax examinations. Each Competent Authority involved should decide whether or not it wished to participate in a particular simultaneous tax examination.
Article 7: Assistance in Collection
The Requested Party should, upon request, lend assistance to the Requesting Party in the collection of revenue claims. When a revenue claim of a Contracting Party was a claim in respect of which that Party might, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim should, at the request of that Party, be accepted for purposes of taking measures of conservancy by the Competent Authority of the Requested Party.
Article 8: Confidentiality
Any information obtained by a Party should be treated as secret and protected in the same manner as information obtained under the domestic law of that Party. Information received should be disclosed only to persons or authorities including courts and administrative bodies concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes covered by the Agreement. The information could be disclosed in a public court proceeding or in judicial decisions.
Article 9: Costs
Subject to paragraph 2, the Contracting Parties should waive all claims for reimbursement of ordinary costs incurred in the execution of this Agreement. As soon as the Requested Party anticipated that expenses of a substantial or extraordinary nature might be incurred in the provision of assistance pursuant to this Agreement, it would before incurring such costs, notify the Competent Authority of the Requesting Authorities and both Competent Authorities should decide the manner in which the costs should be borne.
Other International Agreements or Arrangements
The possibilities of assistance provided by this Agreement did not limit, nor were they limited by, those contained in existing international agreements or other arrangements between the Parties that related to co-operation in tax matters.
Mutual Agreement Procedure
Where difficulties or doubts arose between two or more Contracting Parties about implementation or interpretation of Agreement, the Competent Authorities should try to resolve the matter by mutual agreement.
Ratification and Entry into Force
This Agreement should be ratified by Member States in accordance with their constitutional procedures. This Agreement should enter into force 30 calendar days after five of the Member States had submitted their instrument of ratification to the Executive Secretary of ATAF.
Mr Van der Merwe emphasised that this Agreement contained the full exchange of information mechanism that one would have in a full double taxation agreement.
Tax Information Exchange Agreements (TIEA): Preliminary Hearing
Mr Van der Merwe explained that the purpose of the agreements was to allow for effective Exchange of Information between the Tax Authorities. The agreements were much the same. They focused on three things – firstly, that there would be exchange of information on request between the contracting parties. Secondly, those contracting parties would guarantee to keep full records of all ownership information in relation to companies, banks, trusts, foundations, and other legal entities. The only exclusion was public companies and only where it would be too much of an effort to get that information. At the same time, he pointed out, that information was probably available on the internet. Thirdly, in all cases there was to be absolute confidentiality on the exchange of information.
Agreement between the Government of the Republic of South Africa and the Government of Barbados for the exchange of information relating to tax matters (See slides 23-33)
TIEA between South Africa and Belize (See slides 34-45)
TIEA between South Africa and the Turks and Caicos Islands (See slides 46-57)
TIEA between South Africa and the Principality of Liechtenstein (See slides 58-69)
TIEA between South Africa and the British Virgin Islands (See slides 70-81)
TIEA between South Africa and the Isle of Man (See slides 82-93)
TIEA between South Africa and the Cook Islands (See slides 94-105)
Value-Added Tax Agreements: Preliminary Hearing
Mr Prenesh Ramphal, SARS Senior Manager: VAT Policy, explained that the purpose of the agreements was to provide for mutual assistance and co-operation and the prevention of fiscal evasion with respect to value-added tax. They were 99% in draft form and virtually the same. VAT in South Africa was almost 22 years old but South Africa had never had a VAT agreement with any of its neighbours. It made sense to enter into such agreements, as there were cross-border transactions between the two countries largely between Southern African Development Community (SADC) member states. These had the potential to lead to budget losses through tax evasion, round-tripping of goods, and under declaration of values.
Agreement between Government of Republic of South Africa and Government of Kingdom of Swaziland on mutual assistance and co-operation and prevention of fiscal evasion with respect to value-added tax (See slides 3-17)
VAT agreement between South Africa and Kingdom of Lesotho (See slides 18-32)
Mr T Harris (DA) appreciated the insightful presentations. Was the VAT agreement with Swaziland the first step towards moving away from the South African Customs Union (SACU) common revenue pool?
Mr Ramphal replied with reference to the SACU refund pooling arrangement that this arrangement was limited to customs duty alone. It was a different tax instrument altogether and it had no impact on VAT, albeit that it had an impact on the manner by which one would calculate the value for VAT collections. However, the refund itself was relevant only to customs duty, because SACU was a duty free area. In terms of this agreement, there was no view that by implementation of a VAT agreement between SACU member countries the SACU duty refund arrangement would disappear. That would still remain in place.
Mr Harris said that this agreement put many requirements on the Swaziland tax authorities. Was SARS confident that the Swaziland side could fulfil its side of the bargain?
Mr D Ross (DA) asked what impact the agreement would have on the Swaziland tax administration.
Mr Ramphal replied with reference to the capacity of Swaziland and Lesotho to implement the agreements. VAT as a tax instrument in the world was managed at borders by customs. It was entrenched in law. For example if one determined the valuation of goods imported one must use the customs and excise manner in determining the valuation. One must process the valuation through approved customs processes. Having said that, in the last seven years SARS had modernised customs in a revolutionary way, at airports, land border posts, and at the harbours. Along with that was a capacity building programme, with, in this particular case, the request of Swaziland and Lesotho to be part of that space for improved customs and border management. Members might have heard of the implementation of the one stop border post with Mozambique. It was all part of the bigger picture. SARS was helping to improve Swaziland and Lesotho’s tax administration capacity through the request for capacity building intervention where SARS invited the Swaziland and Lesotho revenue authorities to share in matters of tax, VAT, and customs management. He confirmed that Swaziland and Lesotho would have the capacity. Swaziland had introduced VAT in 2012. It was funded partly by the International Monetary Fund (IMF), which had asked the SARS Commissioner to assist. The IMF had favoured South Africa's VAT system as a model and South Africa had showed Swaziland its design model, operational method, and how it managed it. It was the second largest money-spinner in South Africa, and with 22 years of operation had a good track record.
Mr Harris asked Mr Van der Merwe about the potential for automatic sharing of tax information globally. The Group of Eight countries (G8) was currently giving much attention to this subject. A small number of tax havens could spoil the whole system. He was not sure of the extent of reform in the Bahamas, Cyprus or Luxembourg. If those countries held out as tax havens they could surely provide all the options that companies needed for tax refuge. He asked for an update of the status of the group of classic tax havens, including those that he had mentioned, together with Monaco and Panama. It was a step in the right direction that South Africa was going to enter a TIEA with Liechtenstein, which was traditionally a tax haven. The classic advantage of these countries had been secrecy. The other obstruction to automatic tax information sharing was the technical capacity of the tax authority. A third reason was political. A country that was an international pariah might not care about international agreements and might try to make a political point by maintaining a special status in terms of tax. These reasons raised a further interesting prospect. There might be a next generation of tax havens – smaller, under-developed countries that might consider the benefits of offering tax secrecy and which might align politically with countries that were traditionally opposed to the G8 countries. Also they might lack the technical capacity to share tax information.
Mr Van der Merwe responded on the automatic exchange of information. The majority of the states that Mr Harris had mentioned had now agreed that they would engage in the automatic exchange of information. That of course was a major move. Austria, for a time, was proposing to hold out, but was now looking at the subject in a different light. These countries disliked the term 'tax haven', so he preferred to say 'off-shore jurisdictions'. All of them were members of the global forum. A country could not join the global forum unless it committed to exchange information on request. Many of those previously secretive jurisdictions were already asking if they might join multilateral conventions that required automatic exchange of information. In other words, the bridge was already there. There might indeed be some holdouts, as some countries had cut themselves off politically and had no double taxation agreements. It was most unlikely that [North] Korea would participate. However, increasingly there was pressure from the major countries on such countries to participate. He referred to UK legislation on foreign account holders and forthcoming similar legislation in South Africa that would come to the Committee. (See also Mr Makola's comments on Mauritius, below.)
Mr Van der Merwe replied that Mr Harris had made a good point about technical capacity. It was really necessary to introduce the right systems to be able to exchange information automatically. On request, it was easy to exchange information, but to do so automatically was difficult. For lesser developing countries it was a challenge to have the systems in place for automatic exchange of information, even if they might sign up to an agreement to exchange information. At the same time there was an incentive for lesser developing countries to put the systems in place for automatic exchange of information because they were the countries that would benefit in the long run as they would want exchange of information with partner countries where multinational companies did their business.
Mr Ross referred to huge tax evasion in respect of sugar imported from Swaziland two years ago. Was it a case of under declaration by the South African importers? Were those problems now resolved?
Mr Ramphal replied that companies in Lesotho, Swaziland, and South Africa had sugar swap agreements. The under declaration was detected based on mischievous activities and the existence of a commercial tax invoice issued by the supplier which South Africa could obtain on the basis of the exchange of information.
Ms Z Dlamini-Dubazana (ANC) noted that ATAF had 36 member states. Was Cameroon not a member state? If not, she could understand the need for the DTA with Cameroon. If yes, why was the agreement with Cameroon necessary?
Mr Van der Merwe replied that Cameroon was a member state. Obviously Qatar was not as it was not part of the African continent. South Africa had a number of DTAs with other African countries with which it had extensive trade and investment.
Ms Dlamini-Dubazana said that the ATAF did not refer to professionals such as teachers to the same extent that the DTAs did refer to them. If the aim was standardisation, where was the consistency in this respect?
Mr Van der Merwe replied that the whole rationale behind the ATAF agreement was that the agreement was not about taxing rights. For taxing rights South Africa needed to enter into a DTA with each country separately, as it was doing with Cameroon. It was the DTA that dealt with taxing rights. The multilateral ATAF agreement had a focus only on two things – firstly, on the exchange of information in all its forms including spontaneous requests and joint audits, and secondly on collection. The ATAF agreement did not deal with taxing rights at all. Taxing rights would be dealt with only on a bilateral basis. To do so in a multilateral agreement would be virtually impossible. The ATAF agreement was a superior kind of TIEA. Whereas the latter dealt only with exchange of information on request, the ATAF agreement went further and dealt with the exchange of information in all its forms.
Mr Van der Merwe explained further that South Africa had a great deal of trade and investment with Cameroon. That necessitated a full DTA with Cameroon to sort out the taxing rights. The ATAF agreement was to enable the 36 member states merely to exchange information. South Africa could already exchange information with Cameroon, but, for argument's sake, Cameroon might not be able to exchange information with Rwanda. Also Cameroon might not exchange information with Kenya for want of a bilateral agreement, South Africa could not exchange information with some of the other ATAF member states such as Morocco for want of a bilateral agreement. The ATAF agreement would allow South Africa and such countries at least to have joint audits and exchange information within the membership of ATAF without affecting the rights to taxation. The ATAF agreement was indeed over and above the DTA with Cameroon. It must be seen as a multilateral agreement for the membership. The goal was that all the members should sign up to this flow of information for tax purposes.
Ms Dlamini-Dubazana asked what criteria SARS had used to select Lesotho and Swaziland. What about relations with the USA? South Africa was a member of the global community. South Africa should not enter agreements with Lesotho and Swaziland just because they had the same exchange rate tax of 14%. The matter was deeper than that. It was surely politics.
Mr Ramphal replied that the criteria were, in terms of theoretical building and harmonisation of tax laws, it worked best in that environment. It would work even better if there were a similar VAT rate. However, it did not need to have a similar VAT rate because it was included in the proposed article that if, by virtue of a different rate, the supplying vendor in South Africa was charging a lower rate of tax because South Africa's rate was lower, then it placed a reliance on the importing state to collect that excess. The excess was based on valuation and on a transactional value. This meant that a tax invoice must be in existence.
Mr Ramphal added that in terms of capacity building, and in terms of the questions on the model, Swaziland and Lesotho had approached South Africa. When Lesotho had introduced VAT in 2004, he, in his capacity then as a junior auditor, had been asked to assist his Lesotho counterparts with capacity building. Lesotho's VAT arrangements were very similar to those of South Africa. Lesotho had shown immense interest in the refund mechanism. Not that a refund mechanism was new, as currently there was a refund mechanism. It was just that the purchaser of the goods got the money. Then, when he got the money, by that time he had already entered the country and the revenue authority there would have asked him for VAT on importation. He gave some figures on Lesotho to give some idea why SARS chose Lesotho. Additionally land-border interaction was a factor. He explained the difference between direct and indirect exports. It was indirect exports with which one was dealing substantively in the VAT agreements. Most of the transactions with the USA were direct exports, and the arrangement with the European countries was similar. With direct exports there was no requirement to have a refund or even cause to have a VAT agreement with those countries. Since the financial year ended 2010, South Africa had a monthly average VAT payout to qualifying purchasers who resided in Lesotho or businesses resident there ranging from R32 million to R40 million per month. These figures were informed by the volume. The nature of the volume was informed by the land-border and road traffic across it.
Acting Chairperson, Mr van Rooyen, asked Mr Ramphal to limit his response due to time constraints.
Mr E Mthethwa (ANC) asked about tax refunds. If South Africa was approached by Botswana or Zimbabwe, how would National Treasury and SARS deal with such requests, as the currencies were different?
Mr Ramphal replied that 'these two countries [Lesotho and Swaziland] approached SARS for capacity building both in customs and VAT and when it comes to cross-border management of goods SARS looked at the delays in refunds'. Lesotho and Swaziland were not handpicked. The agreements were by engagement with these two revenue authorities and their respective governments, which had approached SARS. SARS had drawn the whole concept of a VAT agreement from the fundamental agreements in the European Union (EU). The EU was governed by the six directives which said that a country would charge its own rate but "we will distribute according to which country has its own taxing rights on that".
The Acting Chairperson would expect an environment where tax interventions encouraged research. Article 22 of the DTA with Cameroon provided that the exemption from research taxation would be applicable only to professors and teachers but not for research if it was for private benefit. He asked for the rationale for this approach.
Mr Van der Merwe explained that this was not the most popular article in treaties. Some commentators took the view that tax authorities should not single out any particular categories for special treatment. However, it was not special treatment because the Article did not take away the right of the state of residence to impose taxation on that professor or teacher's salary. It was just that the country which the professor or teacher was visiting in order to pass on specialist skills was agreeing not to impose tax on that professor or teacher's salary. He agreed that research was very important and should be dealt with in any country's domestic law and he had no doubt that his colleagues from National Treasury would agree.
Protocols, DTAs and TIEAs: Formal Ratification: preliminary discussion
The Acting Chairperson asked National Treasury and SARS if they had anything new to add to what they had told the Committee in May 2012, before the Chairperson would take the Committee through the process of formal ratification.
Mr Makola said that there were no specific new items as such. The biggest treaty was probably the one with Mauritius. This had picked up some media attention that had been dismissed by government as misdirected precisely because it was indeed so. The agreements and the provisions were still the same.
Mr Van der Merwe agreed that the treaties remained unchanged. However, in the Mauritius treaty there was still a paragraph 5 on the non-discrimination Article 23 related to the old secondary tax on companies (STC). As Members would know, South Africa had abolished the STC. Therefore that paragraph would no longer operate, but there was no intention to change the agreement. It was a fait acompli as such. He had no other comments as everything was as presented previously.
The Acting Chairperson observed that relying on the media was not always helpful.
Mr Makola spoke briefly about Mauritius. He said that 'low-tax jurisdictions' thrived on two things as a fiscal policy matter. They thrived on secrecy, about which Mr Van der Merwe had spoken. In the current dispensation that had almost collapsed – 'that system of secrecy, of hiding money in low-tax jurisdictions'. He did not expect that system would survive more than ten years. The second thing, which was more difficult, was [tax] base erosion and profit shifting. That policy position would sustain low tax jurisdictions 'probably for ever'. This applied particularly as to [tax] base erosion. When one said that another country was eroding South Africa's tax base, somebody could argue that South Africa was also a tax haven. Somebody could argue that the USA was a tax haven. Any country had the potential to be used as a tax haven. The trick was to have both domestic instruments and double taxation agreements that prevented that kind of practice. This was what the treaty with Mauritius did. This treaty protected the South African tax base. It protected the profits generated in South Africa, and made sure that they were subject to tax in South Africa and not moved to the next jurisdiction. It could also work the other way, but as Members knew, Mauritius practically worked as an intermediary jurisdiction. This meant that the money that was often pumped into that jurisdiction never stayed there. Sometimes it actually never went to Mauritius itself, and this was common knowledge. This was the general background to the treaty with Mauritius.
South Africa had focused mainly from the policy perspective on things such as interest, as interest was 'dangerous' because it was deductible in South Africa. If interest went out of South Africa tax free, there would be a problem as it would not be taxed on the other side - then there would be the problem of double non-taxation. The same applied to royalties, as these would reduce the South African tax base. Moreover, as Members might have learned from the media, royalties were the biggest value driver in companies. It was intellectual property that added greater value to companies of late than their physical assets. Regarding dividends, what National Treasury and SARS had mainly focused on, was the participation threshold. Foreign direct investment internationally was defined as a 10% voting and equity participation in a company. It was necessary to align the participation threshold with international standards. For that foreign direct investment, which South Africa was encouraging, South Africa was taxing on the dividend side at a lower rate of about 5%. For portfolio investments, like a non-resident buying shares on the stock exchange, that was portfolio and was money 'that flies' and was taxed at a higher rate. Such investments did not necessarily create jobs but were, in a way, like 'gambling on the stock exchange'.
He also explained the Capital Gains Tax Article. The tax system was based on the premise that the moment a person left South Africa, he or she triggered tax [liability] immediately, but some people found mechanisms to avoid tax [liability] by putting their immovable properties into companies and when they were overseas they could sell their shares. It was not an ideal situation that somebody could leave South Africa and relocate overseas tax-free. Therefore the treaty provided that shares in a company that substantially held immovable property were regarded in the same way as land. He also explained the provision on 'tax sparring', see diagram and text, slide 10), and the major benefits, which included minimising the risk of [tax] base erosion and providing significant policy space for South Africa to adjust withholding tax rates (see slide 13).
(See also 'DTA in the media' by Mr Oupa Magashula, SARS Commissioner, slide 12)
The Acting Chairperson appreciated this explanation which put the Committee in a strong position to defend the good work that National Treasury and SARS had done.
Mr Harris understood that Mr Makola's words on low-tax jurisdictions thriving on secrecy did not apply to Mauritius. However, in case South Africa's Mauritius allies read Business Day it might be necessary to emphasise that South Africa did not think of that country as 'a sunny place with shady finances'.
The Acting Chairperson was amused.
Mr Harris thought it important to make that clear. However, it raised a question about the relative investment-friendliness of Mauritius to South Africa. Mauritius' corporate tax rate was half that of South Africa. Should South Africa not be looking at a broader initiative to improve its competitiveness relative to Mauritius? Given the low uptake of South Africa's headquarters company regime, how else could South Africa improve its position relative to Mauritius? He struggled to understand the implications for companies. Was there not a risk that companies would simply leave South Africa and go to Mauritius or to countries like Luxembourg? How often did companies end up being double-taxed in practice?
Mr Van der Merwe clarified that the treaty with Mauritius was not the first where South Africa had a mutual agreement procedure in cases where there was dual residence of a company. South Africa had never failed to reach agreement with the competent authority on where the residence of a company was. The procedure was in the United Nations and the OECD model treaties. The commentary, which was available to the public, in both the UN and OECD model treaties, clarified the issues. SARS had guidelines and corresponded with Mauritius. SARS would make a judgement on the basis of how the company in question operated. Finally, this was application of law. A taxpayer could still follow the judicial process. The exit tax came into operation the day before a person left South Africa. On that day, the person was still a South African resident and South Africa had full taxation rights. The treaties were specifically designed to eliminate double taxation.
Mr Makola emphasised that he had never meant to insinuate that Mauritius was secretive. It was a member of the global forum and had signed many agreements on tax information exchange. He merely wished to put forward the international paradigm in which one lived. Already 'the leg of secrecy had been broken'. Next month one might see the OECD present something to the Group of Twenty countries (G20) on [tax] base erosion. The corporate tax rate in Mauritius was 3%. Although the headline rate was 15%, Mauritius would give an 80% rebate. This was highly attractive to any CEO. He emphasised that this treaty had no impact on South African companies expanding overseas. South Africa's competitiveness was not affected at all. Uptake of South Africa's headquarters company regime had been slow, but National Treasury and SARS was consulting with business to improve South Africa's competitiveness. However, South Africa was not going to join 'a race to the bottom' by reducing corporate tax rate to 3%. Other factors were being taken into account. South Africa had a natural competitive advantage over Mauritius. This was South Africa's overall infrastructure and business facilities. Its policy position spoke to this advantage.
The Acting Chairperson asked him to limit his response because of the shortage of time.
Ms Makola gave an example of the tax relief with reference to a company operating from Mauritius and paying corporate tax on an amount at a rate of 3%. South Africa would tax that amount again but would give a credit for the tax already paid in Mauritius. Therefore there would be no double taxation. However, National Treasury sought to guard against double non-taxation. Lastly, he said that National Treasury and SARS controlled tax through domestic legislation rather than treaties, which could not easily be changed.
Mr Lutando Mvovo, National Treasury Director: International Tax, responded to a question on the Capital Gains Tax (CGT) in the treaties with Luxembourg, the Netherlands, Cyprus, and others. National Treasury and SARS had denied all the treaties that had an exemption on CGT on property-rich companies. National Treasury and SARS were addressing all those jurisdictions.
Protocols, DTAs and TIEAs: Formal Ratification
The Chairperson said that the Committee had four agreements to ratify. These concerned Botswana, Mauritius, Samoa, and Costa Rica. Thereafter the Committee had to ratify two protocols. These concerned Malta and Norway. There was also one convention. This concerned Chile.
Mr Van der Merwe confirmed that the DTAs were those with Chile and Mauritius. The TIEAs were those with Samoa and Costa Rica. However, the protocols were three – those with Malta and Norway, and also with Botswana. He hoped that the last had been tabled, and that the Botswana item was a Protocol not the Agreement itself.
The Chairperson noted the correction. He confirmed that all was in order. There were no declarations.
Report of Standing Committee on Finance on Protocol Amending Agreement between Government of Republic of South Africa and Government of Republic of Botswana for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income with Protocol
The Standing Committee on Finance having considered the request for approval by Parliament of the Protocol Amending the Agreement between the Government of the Republic of South Africa and the Government of the Republic of Botswana for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income with Protocol recommends that the House in terms of Section 231(2) of the Constitution approve the said Agreement.
Report of the Standing Committee on Finance on the Agreement between the Government of the Republic of South Africa and the Government of the Republic of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income
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 Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income recommends that the House in terms of Section 231(2) of the Constitution approve the said Agreement.
Report of Standing Committee on Finance on Agreement between Government of Republic of South Africa and Government of Samoa for Exchange of Information Relating to Tax Matters
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 Samoa for the Exchange of Information Relating to Tax Matters recommends that the House in terms of Section 231(2) of the Constitution approve the said Agreement.
Costa Rica (TIEA)
Report of Standing Committee on Finance on Agreement between Government of Republic of South Africa and Government of Republic of Costa Rica for Exchange of Information Relating to Tax Matters
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 Costa Rica for the Exchange of Information Relating to Tax Matters recommends that the House in terms of Section 231(2) of the Constitution approve the said Agreement.
Report of Standing Committee on Finance on Protocol Amending Agreement between Government of Republic of South Africa and Government of Republic of Malta for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income
The Standing Committee on Finance having considered the request for approval by Parliament of the Protocol Amending the Agreement between the Government of the Republic of South Africa and the Government of the Republic of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income recommends that the House in terms of Section 231(2) of the Constitution approve the said Protocol.
Report of the Standing Committee on Finance on the Protocol Amending the Convention between the Republic of South Africa and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income dated 19 June 2013
The Standing Committee on Finance having considered the request for approval by Parliament of the Protocol Amending the Convention between the Republic of South Africa and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income recommends that the House in terms of Section 231(2) of the Constitution approve the said Protocol.
Report of the Standing Committee on Finance on the Convention between the Republic of South Africa and the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital dated 19 June 2013
The Standing Committee on Finance having considered the request for approval by Parliament of the Convention between the Republic of South Africa and the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital recommends that the House in terms of Section 231(2) of the Constitution approve the said Convention.
The Chairperson adjourned the meeting, which was the last of the second term.
[Mr D Van Rooyen (ANC), the Committee's Whip, was Acting Chairperson for the first half of the meeting]
- Agreement between Government of RSA & Government of Kingdom of Swaziland
- Explanatory Memorandum on Value Added Tax Agreement between Republic of South Africa & Kingdom Of Swaziland
- National Treasury: Ratification Tax Treaty with Chile, Mauritius; Malta Tax Treaty Protocol; Cameroon and Qatar preliminary hear
- Double Taxation and Prevention of Fiscal Evasion Agreement with Mauritius
- Tax Information Exchange Agreement with Uruguay
- Double Taxation and Prevention of Fiscal Evasion Protocol Amending Convention with Botswana
- Explanatory Memo: Exchange of Information Agreement with Barbados
- Explanatory Memo: Double Taxation Convention with Chile
- Explanatory Memo: Agreement for Exchange of Information with Samoa
- Explanatory Memo: African Tax Administration Forum Agreement on Mutual Assistance in Tax Matters
- Explanatory Memo: Value-Added Tax Agreement with Lesotho
- Explanatory Memo: Protocol Amending Double Taxation Agreement with Malta
- Explanatory Memo: Double Taxation Convention with Cameroon
- SARS Tax Information Exchange Agreements Formal Ratification
- SARS Double Taxation Conventions / Agreements Preliminary Hearing
- SARS Tax Information Exchange Agreements (TIEA) Preliminary Hearing
- SARS Double Taxation Conventions / Agreements Formal Ratification
- SARS African Tax Administration Forum Multilateral Agreement Preliminary Hearing
- SARS Value-Added Tax Agreements Preliminary Hearing
- We don't have attendance info for this committee meeting
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