BEPS Multilateral Convention & Kuwait Double Taxation Agreement

NCOP Finance

21 June 2022
Chairperson: Mr Y Carrim (ANC, KZN)
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Meeting Summary

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National Treasury and the South African Revenue Service (SARS) gave a briefing on the Protocol amending the Agreement between the government of the Republic of South Africa (RSA) and the government of the State of Kuwait for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes. They explained that in 2007, the South African government changed the secondary tax on companies (STC) to a dividend tax at a shareholder level. The implementation of the dividend withholding tax was contingent on the renegotiation of ten tax treaties that had a zero withholding tax rate on dividends. All the protocols amending these tax treaties have been in force since 2008, except the Kuwait/RSA Protocol, which has still not been ratified by the Kuwait Government for the last fourteen years.

National Treasury stressed the urgency of the matter, mainly due to the 2019 Netherlands Supreme Court ruling in favour of the taxpayers' application on the Most-Favoured-Nation (MFN) clause in the RSA/Netherlands Tax Treaty. Shortly after, the SA Tax Court in Cape Town issued a similar judgment ruling in favour of the same application made by SA taxpayers. Due to these court judgments, dividends paid by RSA to the Netherlands are not subject to zero withholding tax, and vice versa. This causes a loss for the fiscus of both countries.

In the second briefing on the Multilateral Convention, the Committee heard that the Base Erosion and Profit Shifting (BEPS) multilateral instrument (MLI) was aimed at updating the existing network of bilateral tax treaties, to reduce opportunities for tax avoidance and base erosion for multinational enterprises. SA signed the BEPS MLI on 7 June 2017. However, as the country has not yet ratified it and deposited the instruments of ratification with the OECD, the instrument is not yet in force.

Following the discussion which included asking why the BEPS MLI had taken to get to Parliament for ratification, Members considered and approved its reports on the Protocol, as well as the Multilateral Convention. The Democratic Alliance, Economic Freedom Fighters and Freedom Front Plus reserved their position on the reports.

Meeting report

The Chairperson indicated that the Committee would be dealing with two international treaty agreements, both of which had been negotiated and signed off by the respective governments and institutions. Parliament does not have the power to amend international treaties as they are entered into between countries. At most, Parliament could reject them. The agreements are of significance as they have particular tax implications for South Africans.

He requested that Members solely focus on the matters at hand and not enter into discussions regarding the Phala Phala scandal.

Amending South Africa & Kuwait Double Taxation Agreement  
Treasury Chief Director: Tax Policy Unit, Ms Yanga Mputa, informed the Committee that the tax treaty between Kuwait and RSA came into effect in 2006. Subsequently, in 2007, RSA announced changes to the STC to a dividend tax on a shareholder level. The implementation of the dividend withholding tax was contingent on the renegotiation of ten tax treaties that had a zero withholding tax rate on dividends (changing the zero tax rate to two withholding tax rates based on shareholding: 5 and 10% tax rates). These treaties were entered into with Australia, the United Kingdom, Cyprus, Ireland, Kuwait, Netherlands, Malta, Oman, Seychelles and Sweden. All the protocols amending these tax treaties have been in force since 2008, except the Kuwait/RSA Protocol.

The RSA government had waited for more than ten years for the Kuwait Government to sign the Protocol in April 2021. Thereafter, Cabinet approved the ratification of the Protocol in March 2022, however, the RSA government is still awaiting ratification of the Protocol by the Kuwait Government, for it to come into effect. She highlighted the urgency in the matter, mainly due to the 2019 Netherlands Supreme Court judgment ruling in favour of the taxpayers application on the MFN clause in the RSA/Netherlands Tax Treaty. Shortly after, the SA Tax Court in Cape Town issued a similar judgment which ruled in favour of the same application made by taxpayers in this country.

She added that if the Protocol is not ratified by the Kuwait overnment, Treasury will approach Parliament and begin the process of termination.

Discussion
The Chairperson referred to Kuwait’s lack of cooperation saying that he had not come across such a situation before.

He asked if it was correct that Parliament cannot make recommendations to amend the treaties, as they are international agreements signed off by the governments of the two countries. The most it can do is to reject it and request that it be taken back to the Executive for reconsideration. As such, essentially this had been a tabling to Parliament by Treasury.

Senior Parliamentary Legal Advisor, Adv Frank Jenkins, confirmed that this was correct. Section 231 of the Constitution provides for Parliament’s role in international agreements. The first is an agreement that has been signed off by the Executive and then ratified by Parliament – which refers to the agreements before the Committee today. Second, there are Section 231(3) agreements that Parliament only takes note of, as they are technical in nature.

The Chairperson questioned the role of the National Council of Provinces (NCOP) in the ratification of the two agreements, as they are both international agreements, which deal with national not provincial policy. As such, he asked why the treaties were brought before it.

Adv Jenkins confirmed that the agreements did not apply to the NCOP and presumed that they had been tabled for the NCOP to participate in ratifying agreements, so as to not confuse the constitutional role of the NCOP – as it will, at some point, have to attend to treaties that will have provincial implications.

Mr D Ryder (DA, Gauteng) asked if the treaty differs materially to others and if so, how. He asked how many other treaties have been impacted by the court ruling. What were the implications of not having treaties in place in other countries? He asked if SA had to have a treaty with every single country. 

Mr E Njadu (ANC, Western Cape) asked for elaboration on the pressure placed by the court ruling on the country.

The Chairperson asked why the Kuwait Government had been slow in signing off on the agreement. Was there nothing that Treasury could have done in the last five years to ensure that the agreement was signed off by the Kuwait government?

In addition, he asked for clarity on the implications of the Dutch Court ruling against SA.

Treasury  response
Ms Mputa, referring to the delay in signing off the agreement with Kuwait, explained that when finalising an international agreement between two countries, Treasury has to go through the correct diplomatic channels; and in this case, it did so through the Department of International Relations and Cooperation (DIRCO). Due to the repeated delays of the Kuwait Government to sign the agreement in 2017 and 2018, Treasury, in 2019, requested advice from Parliamentary Legal Services on how it could terminate the treaty. Having been informed that termination would be unfavourable, Treasury requested that DIRCO negotiate with the Kuwait Government once more. She added that if Kuwait did not sign off on the agreement, Treasury would approach Parliament for termination.

On whether the treaty differs materially from others, she mentioned that it does not.

Regarding the impact of the court ruling on other treaties, she said that in 2007, Treasury renegotiated ten tax treaties that had zero withholding tax on dividends, as it was in the process of switching from secondary tax on companies, to dividend tax on a shareholder level. After identifying the relevant countries, Treasury wrote letters to them. Sweden and the Netherlands were the first countries RSA negotiated with and during the discussions, both requested that the MFN clause – which requires a country to extend the same trade terms to all trading partners – be included. Following this, all the countries implemented this treaty, except for Kuwait, which still has zero withholding tax on dividends.

She added that due to Kuwait’s non-implementation of the treaty – which went against the MFN clause invoked by the Netherlands –  taxpayers in the Netherlands approached the courts to stop their government from implementing the tax treaty. The government opposed this court application but lost.   Subsequently, taxpayers in RSA followed suit with their Dutch counterparts and took the government to court. Treasury opposed this court application but also lost. Due to the court judgments, dividends paid by RSA to the Netherlands are not subject to zero withholding tax, and vice versa. This, she said, was a loss to both fiscuses.

Head: Legislative Policy Taxes, Customs and Excise at SARS, Mr Franz Tomasek, responding to the question on whether RSA has a treaty with every single country, said that it did not have to. He further explained that the MFN clause was indirectly triggered due to the application of the RSA/Kuwait Tax Treaty, which has a zero withholding tax rate on dividends. 

Multilateral Convention to implement measures to prevent base erosion and profit shifting
Ms Mputa and Mr Tomasek briefed the Committee on the Multilateral Convention to implement tax treaty measures to prevent base erosion and profit shifting.

Ms Mputa explained that the BEPS project was designed to address tax havens and to ensure that multinational enterprises pay more tax in the countries in which they earn their profits. On 8 October 2015, the G20 Finance Ministers endorsed the BEPS final framework presented by the Organisation for Economic Co-operation and Development (OECD), followed by the G20 Heads of States in November 2015.

The BEPS framework consists of 15 actions to equip governments with rules and instruments to address tax avoidance. Action 15 provides for the development of a multilateral instrument capable of swiftly implementing the BEPS treaty-related measures and amending the existing tax treaties. SA signed the BEPS MLI on 7 June 2017. However, as the country has not yet ratified the BEPS MLI and deposited the instruments of ratification with the OECD, the instrument is not yet in force.

Mr Tomasek indicated that the BEPS MLI is aimed at updating the existing network of bilateral tax treaties, to reduce opportunities for tax avoidance and base erosion for multinational enterprises.

Discussion
The Chairperson expressed hope that Mr Tomasek would transfer his vast knowledge and experience to young aspiring tax officials at SARS.

Mr Ryder noted that this agreement had been signed in 2017 yet it was brought to Parliament only this year. He asked the reason for this and if this was due to political reluctance on the part of the SA Government.

He asked if the department had put the treaty out for public comment. 

In addition, he asked if there is an easily accessible list of SA’s effective conventions, treaties or reservations, for individuals organising their tax affairs.

Ms Mputa confirmed that the department had put the treaty out for public comment, in line with the BEPS framework.

On the delay in bringing the agreement to Parliament, she explained that the agreement was signed off by the former Minister of Finance, Mr Malusi Gigaba in 2017 but the process of tabling it in Parliament was delayed because of the subsequent change of Ministers, as well as the pandemic hard lockdowns implemented in 2020. She admitted that Treasury could have tabled the agreement earlier, irrespective of the change in political heads, and took full responsibility.

Mr Tomasek replied about an accessible list of SA treaties, conventions and reservations. SARS is currently working on preparing the synthesised text, so that interested individuals are able to compare the tax arrangements between RSA and other countries. Further, the OECD has a comprehensive set of information on which countries have signed the treaties, what the instrument of ratification looks like and any other notifications that have been made. OECD is trying to make the information accessible and easily understandable for taxpayers across the world. 

Committee Report on Protocol amending Agreement between RSA Government & State of Kuwait Government for avoidance of double taxation & prevention of fiscal evasion on taxes
The Chairperson, having taken the Committee through the brief report, requested its approval.

Mr Njadu moved for the approval of the report. Ms M Mamaregane (ANC, Limpopo) seconded.

The DA, EFF and FF+ reserved their positions on the report until consideration in the National Assembly.

The report was approved and will be considered by the National Assembly.

Committee Report on Multilateral Convention to prevent base erosion and profit shifting
The Chairperson, having taken the Committee through the brief report, requested its approval.

Ms Mamaregane moved for the approval of the report. Mr Njadu seconded.

The Democratic Alliance, the Economic Freedom Fighters and the Freedom Front Plus all reserved their positions on the report until consideration in the National Assembly.

The report was approved and will be considered by the National Assembly.

The Chairperson ruled that public hearings should rather take place in the National Assembly and not the NCOP, as recommended by Mr Ryder.

The Committee adopted the minutes for 14 June 2022 and the meeting was adjourned.

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