Kuwait, Luxembourg, Netherlands, Switzerland Protocols, Andorra & and Macao Tax Information Exchange Agreement (TIEA): briefings

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Finance Standing Committee

17 August 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The National Treasury briefed the Committee on double taxation agreements (DTAs) with Kuwait, Switzerland, Netherlands and Luxembourg. The purpose of tax treaties was to prevent double taxation of the same income, to create fiscal stability and to prevent tax avoidance and evasion. The tax profile of a treaty country took into account the tax system; special tax vehicles and instruments; treaty network and variations; including common trends and common treaty partners; the interrelationship between the tax systems of the two countries with regard to possible distortion of economic activity, and potential tax avoidance through transfer pricing, and treaty shopping. Treaties presented were with Kuwait, Switzerland, the Netherlands and Luxembourg.

The presentation by the South African Revenue Service (SARS) dealt with protocols amending treaties with Kuwait, Luxembourg, the Netherlands and Switzerland; and exchange of information treaty agreements entered into with Andorra and Macao. Relevant articles were cited for each country. Articles were related to dividends; residence; permanent establishment; interest; royalties; capital gains; exchange of information; assistance in collection; pensions; confidentiality; costs, and exchange of information upon request.

In discussion, the EFF expressed a lack of confidence in South African participation in the OECD process. The notion that countries like the UK tried to go it alone and failed was challenged. It was argued that in terms of the OECD approach to base erosion and profit shifting (BEPS), tax avoidance was still legal. There had to be a solid base of legislation dealing with tax avoidance.  Examples were cited of South American countries who had challenged that on their own. An ANC member urged that the matter be approached dispassionately, and that South Africa could rely on the worldwide double taxation agreement process to create financial stability. Tax avoidance could be dealt with subsequently, through legislation. The Chairperson told the EFF that the majority party and the DA were in fact in agreement with the EFF about matters like aggressive tax avoidance. Both parties had accepted a submission by the EFF about such matters. The Parliamentary Budget Office (PBO) submitted that double taxation agreements were also a safeguard against double non-taxation. A DA Member asked if South Africa would have to give away anything in the treaty process. SARS replied that it was inevitable, especially when dealing with developed countries. A Member suggested that there be an impact analysis of the treaty process. It was asked how the digital economy was to be managed. There was concern over management of risks related to agreements, and what was to bne done if bank secrecy was the policy of a country.

Meeting report

The Chairperson wondered what the Committee should do with double taxation agreeements and treaties, which the executive had already signed off on or were in the process of doing so. He had raised this matter previously with various parties. It seemed that this was how it was also done in most other Parliaments.

In light of this, the Chairperson said it would be disingenous for the officials to take Members throught every minute detail of the agreements as the Committee had other work to do. The officials should instead outline the key principles and those interested in additional information could be briefed further.

The Chairperson further informed Members that the Committee needed to finalise its programme and that the following day’s meeting would commence at 09:00 am.

National Treasury: Preliminary briefing on double taxation agreements with Kuwait, Switzerland, Netherlands and Luxembourg
Mr Luthando Mvovo, Director: Tax Policy, National Treasury, presented. The purpose of tax treaties was to prevent double taxation of the same income, to create fiscal stability and to prevent tax avoidance and evasion. Section 108 (2) of the Income Tax Act prescribed that treaty agreements had to be approved by Parliament, published in the government gazette, and had to have effect as if enacted in the Income Tax Act. The tax profile of a treaty country took into account the tax system; special tax vehicles and instruments; treaty network and variations, including common trends and common treaty partners; the interrelationship between the tax systems of the two countries, with regard to possible distortion of economic activity; and potential tax avoidance through transfer pricing, and treaty shopping.

The treaty with Kuwait had to be renegotiated before new dividends tax could be implemented. A revised tax treaty protocol with Switzerland came into force in 2009. In the same year Switzerland removed restrictions in its domestic law on the exchange of information, including banking secrecy rules, as a result of pressure from the G20. The renegotiation of the Article 25 became necessary. The negotiation addressed potential weaknesses like zero rate on royalties. Renegotiation of the protocol to the tax treaty with the Netherlands became necessary due to the introduction of withholding tax on interest. There had been no provision dealing with taxation of capital gains on property rich companies which resluted in double non-taxation. The change in South African policy related to the introduction of withholding tax on interest, led to the renegotiation of some articles in the tax treaty protocol with Luxembourg. The negotiation addressed potential dual residence by changing the tie-breaker clause from the place of effective management to mutual agreement on a case-by-case basis. It also addressed issues like exchange of information and assistance in tax collection issues.

Discussion
Mr D Van Rooyen (ANC) asked if there had been any impact analysis related to Base Erosion and Profit Shifting (BEPS). In his view, such an analysis would help the discussion as sometimes people spoke as if nothing was being done. These treaties were meant to, among other things, address this problem. An analysis would help to enrich that debate and he wondered if the Committee could be furnished with one.

Dr B Khoza (ANC) probed two issues. Firstly, she asked if an audit had been done about the outflow of people to the treaty countries and if this had been compared with the declarations. She noted that some people would be going there for leisure but it would be important to measure the outflow of people, especially to countries like Luxembourg. Secondly, she asked if National Treasury had a strategy to deal with the digital economy because it was no longer about the “hard cash”.

Mr Sean Muller, Economic Analyst, Parliamentary Budget Office (PBO), remarked that the PBO was interested in the impact on revenue collection. The Committee had to be concerned about this also and about consistency in the country’s tax policy and agreements with other countries. It was a difficult thing to measure but generally speaking, these double taxation agreements either prevented double taxation or prevented double non-taxation. What that meant was that the balance of individuals in terms of cross countries had an affect on revenue collection. The Committee should therefore ask National Treasury how this factor is considered in the process of negotiating these agreements.

The Chairperson said that this was an important point. In additon, he referred to a newspaper article from that day, where the majority party was quoted as saying that it was unable to fulfil its 2014 election mandate because of significant decline in revenue. Major infrastructure projects were being held back because of this. It was not always clear to what extent these negotiated agreements took that into account.

Mr Mvovo replied that the South African Reserve Bank (SARB) had been collecting data on outflow before the agreements, as well as on outflow from other countries. The SARB published a quarterly bulletin of dividends coming in and going out. If there was significantly more outflow to a tax jurisdiction like Mauritius, compared to Germany or others, questions were asked. More money flowed to Luxembourg than to Germany. There was a list of companies operating in other countries. The South African Revenue Service (SARS) could ask what they were doing there. Audits could be done. The SARS could go to another revenue authority for information about people. There was information about South African nationals in other countries. The Davis Tax Commission had recommended that South Africa not go it alone in double taxation /  non-taxation matters, but that it participate in base erosion and profit shifting (BEPS) recommendations. There were action plans in place to participate. Recommendations would be accepted.

Mr Mvovo replied that before the department negotioated an agreement, it received data from the South African Reserve Bank (SARB) on the outflows and inflows between South Africa and the other country. What lead to the introduction of the whole tax on interest was based on the outflows received from the SARB. SARB published a quarterly bulletin of dividends and interest coming in and going out of the country. The Netherlands, Switzerland, Luxembourg and Mauritus had the highest outflow and were therefore the first countries prioritise in the renegotiations. The outflows to Luxembourg and Mauritius were higher than Germany. National Treasury looked at the data from SARB and also the list of the companies that were investing in those countrires. Treasury can not ask companies why they were investing in other countries but SARS had the power to do that.

On the audit of people, Mr Mvovo explained that the Exchange of Information Article was updated in order to give SARS the power to go to another revenue authority and say we need information on this person. There is a push to have an automatic exchange of information so that the other country will not wait for South Africa to go to it first. If that country saw something that was suspicious, then automatically it would be bound to share that information with SARS but that regime will only come into effect between 2017 and 2018.

Mr Mvovo stated that there was a digital strategy in respect of South African residents investing in other countries. However, there was no strategy in respect of foreign multinational executives working here. No country in the world has a strategy. The BEPS Action Plan is seeking to address this issue. The Davis Tax Committee recommended that South Africa not go it alone (the UK failed when it tried to go it alone) and particpate in the BEPS process and follow the recommendations emnating from there.

Mr van Rooyen appreciated the response. However, he re-iterated that his request was just to get an update if there was any analysis done on the impact of these treaties on addressing base erosion and profit shifting phenomenon. It would assist to demystify some of the myths currently prevalent in the public space that nothing was being done about base erosion and profit shifting by multi-nationals. As much as there was a release of quarterly statistics by the Reserve Bank, at times these could be “economic with information”, the Committee still needed an analysis on the impact of these treaties on the fight against BEPS.

Mr F Shivambu (EFF) referred to the Davis Tax Commission recommendations. The process was not concluded. There had to be legislation to prevent practices like multinationals selling to themselves in tax jurisdictions like Luxembourg. It was not helpful to be tied up in the BEPS process. That process had been working for 50 years with no effect. It would not do to wait for the BEPS action process. There had to be a solid base in legislation. It was legal to avoid taxation. A different approach had to be found, outside of electioneering politics. Billions of Rands were going lost. Direct intervention was needed, independent of political campaigning. It was stated that the UK had gone it alone and failed. But it would be worthwhile to seriously consider what countries like Brazil, Argentina and Bolivia had accomplished on their own. Different models had to be considered. There was a compounded taxation crisis that could collapse the economy.

Mr F Shivambu (EFF) said the process of the Davis Tax Committee was not yet concluded. The EFF had made submissions to this body and there were many issues that it was considering. Part of this is whether, the country needed individual legislation to prohibit/ban some the practices that define multi-national corporations. There was also a question on how one should regulate intra company trade where a multinational sells to itself in Luxembourg. This resulted in all the outflows to Luxembourg as mentioned before. South Africa did not have lots of trading relationships with Luxemboug and other tax havens.

Mr Shivambu did not agree with the National Treasury’s approach that the country needed to be tied up to the BEPS process. It was not helpful at all. Internal critics of the OECD process, say that the mechanism and solutions that they had proposed and dealt with for more than 50 years had not worked. If the attitude is that we should wait for the action plan and work within the BEPS process, this will not solve the situation. This was also one of the recommendations made by the High Level Panel on Illicit Financial Flows which was adopted by the AU. Government is supposed to take note of some of the concrete recommendations it proposed and it differed with what National Treasury was saying. The country needed to have a solid legislative foundation and framework, which stated what was illegal. In the current environment, many companies even argued that it was legal to avoid tax sometimes aggressively. He was not aware if there has been any prosecution of companies that had avoided tax. The OECDs interest was not aligned with South Africa’s interest to maximally collect tax from multinational companies. It was misguided to have faith in their process and a different approach had to be considered. This had nothing to do with electioneering. Billions of Rands was being lost. Mining was in crisis and was only expected to contribute R10 billion to the national fiscus because companies were avoiding taxes and other things. It was not about politicking. It was about direct intervention - saying here is a problem, how do we solve it and what is the most durable solution. The attitude of citing that we should not pursue a path because the UK failed was not good. What about what Argentina did, and what Brazil and Bolivia are doing? National Treasury needed to study the different models on how to deal with illicit financial flow, transfer pricing and profit shifting and it needs to take a different approach. The crisis was compounding and had the potential to collapse the economy.

Ms T Tobias (ANC) advised that taxation be approached dispassionately. Double taxation laws could be relied upon to create fiscal stability. It would then be possible to address tax avoidance. She agreed with Mr Van Rooyen that there had to be impact analysis, to see if BEPS issues were being dealt with. The global structure of tax collection had to be taken into account. South Africa had lost its market share to other countries, by importing more goods and commodities. It was unfair to say that SARS had failed altogether. The Competion Commission was engaging with price fixing. Companies had the best lawyers at their disposal. Money had to be spent to investigate. Profit shifting was different from illicit trade. Profit shifting was legal but it was morally wrong. Illicit trade was criminal. Fiscal stability could be created through dealing with double taxation. It would then be known how to legislate.

Ms T Tobias (ANC) advised that taxation be approached dispassionately. Double taxation laws could be relied upon to create fiscal stability. It would then be possible to address tax avoidance. She agreed with Mr Van Rooyen that there had to be impact analysis, to see if BEPS issues were being dealt with. The global structure of tax collection had to be taken into account. South Africa had lost its market share to other countries, by importing more goods and commodities. It was unfair to say that SARS had failed altogether. The Competion Commission was engaging with price fixing. Companies had the best lawyers at their disposal. Money had to be spent to investigate. Profit shifting was different from illicit trade. Profit shifting was legal but it was morally wrong. Illicit trade was criminal. Fiscal stability could be created through dealing with double taxation. It would then be known how to legislate.

The Chairperson remarked that party positions was bound to emerge. The DA was on board with regard to BEPS. SARS had a special unit to deal with BEPS issues, that was aquiring more people. The EFF had displayed a lack of presence, which meant that the same ground had to be covered again. That was not advisable. The researchers could take things forward. The PBO would provide a framework for a workshop, to which members could add. The PBO would make the framework available. The workshop would have to take place on 11 September, as it was not possible in the week following that. The Portfolio Committees of Trade and Industry, and Minerals and Energy would attend the workshop, and possibly those of Labour and Economic Development. The various Portfolio Committees would receive the framework on 1 September, and would be invited to comment. Experts would be invited.

Mr Shivambu insisted that tax avoidance had to be illegalised. A crisis was facing extractive economies.

The Chairperson asked the PBO to provide conceptual clarity on illicit flows as key criminal activity. Currently the country had a narrow focus, not linked to BEPS. There had to be a balance of forces, and sites of struggle had to be chosen. It was essential to focus on what could currently be done. Other parties were not in disagreement with the EFF. The EFF seemed to think that it discovered the process. The EFF submission on profit shifting was heard out and not objected to. Mr Van Rooyen had come up with a new angle.

Mr Van Rooyen said that if an impact analysis was provided, the Committee could feed into it.

Dr Khoza said that the issue of managing treaty risks had to be dealt with.

South African Revenue Service (SARS): Protocol amending the conventions / agreements: preliminary hearing
Ms Oshna Maharaj, Senior Manager, presented. The protocol amending the double taxation agreement with Kuwait became necessary because of the phasing out of secondary company tax and its replacement with a dividends tax. The dividend rate in South Africa was 5% for shareholding of at least 10%; and 10% on all other cases. The protocol amending the convention with Luxumbourgh became necessary in view of the proposed implementation of a withholding tax on interest. Articles of interest in the amending protocol were related to the definition of “resident”; permanent establishment; dividends; interest; royalties; capital gains; exchange of information, and assistance in collection. The articles related to interest and royalties were subject to a Most Favoured Nations provision.

Amendments to the DTA with the Netherlands became necessary in view of the proposed implementation of a withholding tax on interest. Articles of interest were related to dividends; interest; royalties; capital gains; exchange of information, and protocol. The protocol amending the convention with the Swiss Confederation closely followed the OECD Model Convention, which formed the model for the vast majority of double taxation agreements worldwide. A number of articles differed from the normal SA approach. Relevant articles of interest were related to dividends; royalties; pensions and exchange of information.

The agreement with the Principality of Andorra closely followed the OECD Model Tax Information Exchange Agreement (TIEA). The TIEA 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. Articles of interest were related to the exchange of tax information upon request; the possibility of declining a request; confidentiality, and costs.

The agreement with the Macao region of China closely followed the OECD model Tax Information Exchange Agreement. Relevant articles were related to the object and scope of the agreement; and exchange of information upon request.

Discussion
Mr A Lees (DA) asked if South Africa was giving away anything through the treaties.

Ms Maharaj replied that negotiations were not easy. It was inevitable that something had to be given away. It was especially hard to negotiate with the developed countries about matters like zero rates. However, in the case of Mark Shuttleworth, for instance, exchange controls were instituted without having to give away anything. South Africa did not lose taxing rights.

Mr Lees asked for clarity about the dividend tax figure of 5 to 10%, and the domestic increase from 10 to 15%.

Ms Maharaj replied that the withholding rate was bound by MFN provisions and could not be lower. It depended on what was being done in other countries. Switzerland had a withholding rate of 27%.

Ms Tobias referred to the accommodation of a new information model. The SARB decision about Mark Shuttleworth had been progressive.

Ms Maharaj replied that exchange of information was guided by internationally agreed upon principles. SARS would give information to the Financial Intelligence Centre. If a country agreed to it information could be used, but it had to be known what was done with it. The other tax authority had to be allowed to use information for other purposes.

Ms Tobias asked how it would be possible to hand information to intelligence if a coutry was using investments as money for armaments.

Ms Maharaj replied that the process was bound by confidentiality.
 
Ms Tobias asked about OECD initiatives to address issues of exemption. When definitions differed, there was a limiting effect.

Ms Tobias remarked that when a secrecy policy was adopted by a country itself, it could render the BEPS process toothless. The question was what was to be done if bank secrecy was the policy of a country.

Ms Tobias asked about investigation into tax evasion.

Dr Khoza asked what resolution process was followed in the event of disputes. Treaties posed a risk and could be abused. Legal institutional arrangements had to be looked at.

Ms Maharaj replied that there was a neutral agreement procedure. SARS would supply officials to deal with that. Provision for arbitration was made in treaties. The UN approach was followed. Arbitration mechanisms had not as yet been triggered.

The Chairperson remarked that the question was how to marry the BEPS process with the South African taxation review by the Davis Tax Commission, for instance.

Mr Lees asked where South Africa stood with regard to Malta.

Mr Mvovo replied that the agreement with Malta provided protocols for dividends management. The agreement made it clear who had the right to tax.

Ms Maharaj added that the dividend article was revised in the treaty with Malta. South African legislation was advanced.

Dr Khoza remarked that it was critical for the Treasury to consider a comprehensive digital strategy. The cost of capital was changing. There had to be firefighting all the time. The Taxpayer was squeezed. There was jobless growth. Risks had to be spelled out. If not, taxpayers would protest.

Mr Mvovo replied that domestic providers of digital commerce were looked at. Currently things were still based on physical presence.

Mr Mvovo referred to work done outside of BEPS. A developing country like Ethiopia had worked under UN auspices. There were countries that attracted multinationals through tax incentives.

The Chairperson adjourned the meeting.

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