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FINANCE SELECT COMMITTEE
28 June 2004
RSA/SWAZILAND DOUBLE TAXATION AGREEMENT, TAXATION LAWS AMENDMENT BILL, APPROPRIATION BILL: ADOPTION
Chairperson: Mr T Ralane
Documents handed out
Appropriation Bill [B3-2004]
Taxation Laws Amendment Bill (B8-04)
Presentation on Appropriation Bill
Presentation on Double Taxation Agreement
Explanatory memorandum of the Double Taxation agreement
Agreement between South Africa and Swaziland for the avoidance of double taxation.
The Committee adopted both the Taxation Laws Amendment Bill and the Appropriation Bill. The DA did not support the adoption of the Appropriation Bill. The Committee also recommended the adoption of the Double Taxation Agreement between South Africa and Swaziland.
Double Taxation agreement between South Africa and Swaziland
Mr A Masters (SARS- Manager: Legislative Research) presented on the Double Taxation Agreement (DTA).
He said that the term DTA is a misnomer because the agreement is noT about double taxation but the avoidance of double taxation. He highlighted the important articles of the agreement:
Articles 5: Permanent establishment
This article determines the basis for being able to tax a company. For instance if a South African company furnishes consulting services in Swaziland for a period of less than 90 days the Swaziland government would not tax it.
Article 8: International Transport
This article normally relates to air and sea transport. Given the fact that Swaziland is landlocked, the agreement would cover rail and road transport. In terms of this article any contractor dealing in air, land or sea transport would be taxed in the country where it is resident.
Article 10: Dividends
This article prescribes the maximum tax that could be charged on dividends in a given situation.
Both South Africa and Swaziland use the credit system for eliminating double taxation. If tax is paid in Swaziland and the rate is 25% then South Africa would give credit for the tax of 25%. Thus if the tax in South Africa is 30%, then it would tax the difference which is 5%. However, if Swaziland's tax rate is 40% and SA's is 30%, there would be no refund due to the company.
Tax sparring is permitted provided that the competent authorities of both countries agree to its application. If Swaziland were to offer a tax holiday as an incentive and South Africa is happy with it, in the absence of tax sparring, South Africa would give credit for tax paid. However because there had been a tax holiday and therefore no tax paid, South Africa would charge its normal tax rate. Effectively this would mean that the incentive that the company got from the Swaziland government was reversed and there was therefore no real incentive for the company to invest in Swaziland. However, if there were such a tax sparring agreement, the company would have received credit based on Swaziland's corporate tax rate.
Article 27: Assistance in Recovery
This article is underpinned by section 93 of the Income Tax, which sets out the procedure for recovery of taxes on behalf of another tax authority. If South Africa has exhausted all avenues of recovery, it can approach Swaziland and ask them to recover the tax on South Africa's behalf.
The protocol confirms that a Swazi branch profits tax of up to 10% of repatriated income does not infringe on Article 23(2) on non-discrimination with respect to permanent establishments.
Mr N Raju (IFP)(Kwazulu-Natal) asked the presenter to explain how tax sparring works.
By was of example, Mr Masters assumed that Swaziland decided to implement a tax holiday. It awards a tender for a construction project to a contractor resident in South Africa. There would be no tax payable by the company in Swaziland. South Africa would look at the double tax agreement and give credit for tax paid in Swaziland. Because no tax was paid, there would be a zero credit. The full income received by the contractor would be taxed at the normal South African corporate rate. If there were a tax sparring agreement and both countries agree to the incentive, South Africa would deem the contractor as having paid tax and give credit for the tax that would have been paid in Swaziland.
Mr E Sogoni (ANC)(Gauteng) asked how the timeframes in Article 5 would work. He also asked if Southern African Development Community (SADC) countries levy the same taxes and if there is a move to make them equal or fairly similar.
Mr Master replied that the timeframes help in deciding whether an establishment is permanent and whether the contracting state has a right to tax the income that accrues to the establishment whilst it is carrying out the project. For example, if a South African contractor is involved in a construction project in Swaziland which lasted for less than six months then there is no permanent establishment in Swaziland. Therefore Swaziland would have no right to tax the income that accrues to the establishment in Swaziland. The tax relates only to income earned in that country.
With regard to rates in the SADC countries, the presenter said that they are varied. They range from 25% to 45%. This is possibly higher than SA's international counterparts. SADC must be careful not to be left behind in reducing rates. High rates make a country unattractive for investment. He said that there was no real thrust to harmonize tax rates in the SADC.
Mr M Goeieman (ANC)(Northern Cape) asked how the 10% referred to in Article 5 was arrived at. In essence he wanted to know why a lower or higher amount was not preferred.
Mr Masters replied that there is no norm but the Organization for Economic Co-operation and Development (OECD) countries would have guidelines. The trend is to have the rate as low as possible.
Mr Ralane said that the essence of the agreement is to ensure that there is no double taxation of investors. It would be unfair to tax a company both in Swaziland and South Africa. This would negatively affect their profits.
The Chairperson said that there are too many foreigners who are involved in informal businesses and do not pay tax. There is a need to educate such people about the importance of paying tax.
The presenter said that informal traders should pay tax. There is a need for a strategy to educate and encourage people to pay. There is also a need for a mechanism to simplify the system to ensure that paying tax is easy and attractive to those who are not yet paying.
Mr Goeieman asked for clarity on Article 10.
Mr Masters replied that Article 10 is a withholding provision in respect of dividends. Where the beneficial owner is a company with a shareholding of 25% or more, only 10% of the dividend could be withheld as tax.
Having considered the request for approval of the agreement, the Committee recommended its approval.
Taxation Laws Amendment Bill
Mr Masters outlined the changes that had been made to the Bill
The clause deals with transfer duties. Reference to reconnaissance permit has been inserted in the clause.
The only new addition to this clause is that the Commissioner's delegation of functions should be in writing.
Reference to the cut-off date is deleted. Investors would pressurize municipalities to demarcate the development zones.
Originally, subclause (d) did not have "at the option of the employer". The clause has been amended by the insertion of "at the option of the employer".
This was inserted following a submission by the Life Offices Association.
This clause relates to retirement funds tax. Initially there was no interest when refunds were paid. Now it would be possible to do so. Refunds would only be possible in respect of any tax period commencing after the date of promulgation of the Act.
Mr Manyosi asked the presenter to give the original wording of clause 12.
Mr Masters replied that the wording of clause 12 has not changed. The amendment only proposed a deletion of reference to the date of 30 June.
Mr Sogoni asked what would be the implication of the deletion of the date.
Mr Masters said that it was realized that 30 June is too soon. Most municipalities are not in a position to start with the demarcation process. Municipalities would not have adequate time to properly plan and demarcate the development zones. This would in turn mean that the Minister would be flooded with requests for the extension of the deadline.
Mr Goeieman was concerned about the deletion of the date in clause 12. He asked how one would ensure that municipalities demarcate development zones as required.
The presenter replied that investors would apply the necessary pressure. Municipalities would be forced to demarcate the zones or else investors would go to other municipalities. The threat of losing investors would force municipalities to act. If municipalities do not do what is expected, National Treasury might consider bringing in a deadline within which there should be compliance.
Having considered and examined the Bill, the Committee reported that it had concluded deliberations on the Bill.
Ms R Engela (Treasury: Budget Office) made the presentation (see presentation document).
The purpose of the Bill is to legislate spending by national Departments as from 1 April 2004 to 31 March 2005. Funds are appropriated per programme. Some funds are appropriated specifically and exclusively for a purpose and may therefore not be used for any other purposes.
Mr M Raju (IFP) asked why there is no allocation for the preparation for the 2010 Soccer World Cup. There should be special amounts set aside for this.
Mr Ralane said that there is a Soccer Bid Company that is responsible for fundraising. The Bill applies to the year 2004/05.
Most members felt that there is no need to specifically legislate for such funds in the Bill. The budget under consideration only stretched to 2005 and not 2010. The national government would make funds available for municipalities and provincial governments for the building of the necessary infrastructure.
The Chairperson read the report of the Committee on the desirability of the Bill.
Ms Robinson said that that the Democratic Alliance did not support the Bill. The party had problems with some aspects of the Bill. She did not indicate what the problems were.
Mr Z Kolweni (ANC)(North West) moved for the adoption of the Bill.
Having considered the Bill, all members but one agreed to pass the Bill. A member of the Committee seconded the adoption.
The Committee adopted its meetings for the month of June.
The meeting was adjourned.
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