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FINANCE PORTFOLIO COMMITTEE
25 June 2003
DOUBLE TAXATION AGREEMENTS WITH THE NETHERLANDS, GHANA AND KUWAIT: INFORMAL BRIEFING
Chairperson: Ms B Hogan (ANC)
Documents handed out:
The Manager of International Treaties from SARS briefed the Committee concerning treaties with the Netherlands, Ghana and Kuwait. He informed them that the treaties are in their final stage of negotiation and simply await signature. The treaties are meant to facilitate cross border trade and investment. The content of the treaties is consistent with the past 10 years of negotiation. As such, he simply explained the areas in which the treaties differed.
The Chair introduced Mr R van der Merwe (Manager: International Treaties, SARS) and asked him to brief the Committee on the draft of double agreements between South Africa and the Netherlands, Ghana and Kuwait.
Mr van der Merwe noted that these treaties have not yet been signed but he would provide an informal briefing on them. The treaties are designed to facilitate cross border trade and investment by creating certainty for tax payers. For the tax authority, it allows for the exchange of information. He indicated that SARS has worked very closely with National Treasury on the treaties. SARS has also done work with the SADC on these treaties. There is a combined effort to create a model treaty for the Southern African region to build up a full network of treaties between member states.
He explained that large areas of the treaties are exactly the same as other similar treaties. As such, he said that he would explain the differences.
The Chair indicated that Dr G Woods (IFP) has been reviewing the treaties and asked him to comment.
Dr Woods stated that in terms of process, the treaties will come back to the Committee after signing for ratification. He noted that there is a standardisation occurring across international taxation. South Africa is now on the residence based system, as are most other countries. The treaties differ on the detail and the peculiarities. He was interested to see if there are any economic considerations in the treaties that the Committee should be apprised of. Furthermore, he was pleased with the close work between Treasury and SARS.
Mr van der Merwe explained that the treaty with Ghana for setting thresholds of taxation on business income through permanent establishments is very standard. It is similar in detail to other African countries, particularly South Africa's neighbours. Articles 10, 11 and 12 of the treaty deal with passive income: dividends, interest and royalties. The source state has limited withholding rights. The state in which those items of income arise lowers their domestic rate of taxation.
There is an article on management fees, which deals with fees for management, consultancy, or technical services. This article allows a holding tax to be levied in the source state on a gross basis. This is a feature of Ghana's tax system. The rate in Ghana is 20%, but it has been negotiated down for South African taxpayers to 10%.
In Article 23, there is a limitation of benefits stipulation because Ghana taxes on the basis of remittance. If income earned by a citizen of Ghana outside of Ghana is not remitted into the country, that income is not taxed. The limitation of benefits article states that the provisions of the treaty will only apply to income that is remitted back to Ghana.
Mr van der Merwe stressed Article 28 of the treaty that applies to the assistance with recovery of taxation. This represents a new direction that most countries are moving in. In the past, if someone left his country and owed tax it was difficult for his country of origin to recover the money. This article allows South Africa to ask the government to which the South African citizen fled to recover the outstanding tax on behalf of the South African government.
Mr M Tarr (ANC) asked what opportunities exist for people to manipulate their income from different sources and pay lower taxes. This might be problematic with the difference in passive income and other income.
Mr van der Merwe answered that passive income is defined strictly, so an individual will not be able to manipulate his income. The treaty is specific and is backed up by domestic law.
Mr van der Merwe noted that Kuwait was interested to ensure that investment made in South Africa by the state of Kuwait would not be taxed by South Africa. Most of the massive surpluses generated through oil revenue comes through state entities. They wanted to ensure no South African taxation. This is in the area of passive income. It is the dividends going back to Kuwait that they want to make sure remain tax free. This stipulation was not a particular problem in the negotiation. There are already examples of Kuwaiti investment in South Africa because this stipulation was accommodated.
Normally Kuwait would try and include equipment rentals in the definition of royalties. They agreed to exclude it. The only time that equipment royalties would be subject to taxation in Kuwait (that is, equipment belonging to a South African company)is if it is substantial equipment and it is present in Kuwait for more than six months.
Because of Kuwait's tax system, Article 24, which concerns non-discrimination, is different from what is normally negotiated. Kuwait has been moving towards a more universally accepted tax system. Until recently, Kuwait has been taxing non-residents and not taxing their own residents much. This non-discrimination article is in line with the United Nations model. This model suggests that the test should not be between domestically owned, as opposed to foreign owned companies, but rather, should be between different foreign owned companies. Therefore, a South African owned company in Kuwait would be treated no differently than a company owned by the United States.
Mr van der Merwe explained that the treaty with the Netherlands is similar to the treaty signed last year with the United Kingdom. With regard to passive income, there is a level playing field with investment going through the Netherlands and investment going through the UK.
Article 13, which deals with capital gains tax, contains a paragraph brought in by the Netherlands that stipulates the method of taxation for people who leave the country. The reason for the stipulation is to extend the right of the Netherlands to tax residents who leave the Netherlands.
Article 24 deals with offshore activity and is fashioned after agreements that are in place with countries such as Norway and Denmark that have extensive offshore oil industries. It stipulates that you can only tax in the source country once a certain threshold has been passed. The threshold has been lowered so there is a quicker right of taxation.
Article 26, which deals with the mutual agreement procedure, provides another avenue for taxpayers who are aggrieved by the actions of the other tax authority. A tax dispute does not have to go through the normal domestic route of going through the income tax court or other dispute resolution mechanism. A dispute allows a taxpayer to go to the relevant authorities in his country of residence and argue that he has been treated incorrectly. Additionally, there is a paragraph within Article 26 which brings in an arbitration process. The article states that you should endeavour to find the solution. If a solution is not found, the arbitration process will be brought in.
Mr van der Merwe explained that Article 31, which allows for territorial extension. The only other treaty that contains a similar article is the one with France. When the Netherlands negotiate, they are instructed that there should be an opportunity for an extension of the treaty at a future date to include the Netherlands Antilles and Aruba. This article stipulates that this treaty may be extended to these two territories, but only under the condition that the territories impose taxes similar in character to those to which the convention applies. At no stage is South Africa under any obligation to extend the treaty to these territories.
Finally, Mr van der Merwe explained that with regard to Article 17 and pensions, South Africa negotiated that the source state would have a continued right of taxation with respect to pensions. The Netherlands agreed, but did not wish to impose that right in full themselves. They stipulated that for a citizen who worked in the Netherlands and retired to South Africa, the Netherlands would maintain the right of taxation, but would forego that right unless the pension is in excess of 10 000 Euros per annum.
The Chair asked Dr Woods if he had anything to add.
Dr Woods stated that the issues raised are not controversial. He believed that the Committee could say with confidence that the signing process could go forward.
The meeting was adjourned.