Adjustments Appropriation Bill; International Tax Treaties with China & Nigeria

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Finance Standing Committee

28 September 2000
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Meeting Summary

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Meeting report

FINANCE PORTFOLIO COMMITTEE
29 September 2000
ADJUSTMENTS APPROPRIATIONS BILL; INTERNATIONAL TAX TREATIES WITH CHINA AND NIGERIA

Acting chair: Mr S Leeuw (ANC)

 

Documents handed out:
-
Second Adjustments Estimate of Expenditure to be defrayed from the National Revenue Fund during the Financial Year ending 31 March 2000
- Agreement between the Government of RSA and the Government of Nigeria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains
- Explanatory Memorandum on the Double Taxation Agreement between RSA and Nigeria
- Agreement between the Government of RSA and China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
- Explanatory Memorandum on the Double Taxation Agreement between the RSA and China
[e-mail info@pmg.org.za if these documents are required]

SUMMARY
The Committee briefly discussed the remaining adjustments appropriations. Then, it proceeded to a discussion of two international tax treaties, those with China and Nigeria. These generally followed UN and OECD models, and the presenter explained the small ways in which they differed. On the treaty with China, there was some discussion of the provisions for exchanges of professors, and there was lengthy discussion of issues of gender-sensitivity. On the treaty with Nigeria, there was some discussion of negotiations on the matter of source state withholding of tax on dividends.

MINUTES
Adjustments Appropriations Bill (B 60-2000)

The National Treasury presenter, Mr Nico Marais, stated that after the tabling of adjustment estimates in October, additional amounts had been authorised under s. 7(1) by the Minister of Finance.

One of these adjustments concerned a housing conference. In relation to this conference, the Department had been assuming that it would get a contribution of R 206 000 from a municipality, which did not materialise. The adjustment would augment for this shortfall.

A second adjustment was in the Department of Labour and concerned the Social Plan for which technical support was facilitated from the National Skills Fund. This could not be augmented without the approval of the minister, who had allowed funds for NPI to provide the service.

A third adjustment was in the Justice Department and concerned Legal Aid funds. This had not been indicated as a column 2 item, and the Minister had to authorisation additional expenditure under the Exchequer Act. This was not to allow an increase in spending but to shift spending from column 1 to column 2.

Discussion
Mr Andrew (DP) asked which town or city had made a commitment to the housing conference and then not paid and whether the expectation was more than wishful thinking in the first place. The presenter responded that the commitment had been by Pretoria and that the Department had tried to get additional sponsors to make up for it when Pretoria withdrew. Mr Andrew (DP) asked on what basis the Department had thought Pretoria would contribute. P1 stated that there had been initial discussions, followed by an indication by the City Council that it would contribute. Only later did the Council decide that it did not have the funds.

Mr Feinstein (ANC) asked if it was known whether the issues before the Committee had been discussed with other relevant portfolio committees. The presenter stated that he doubted it. Mr Feinstein (ANC) stated that it would be useful because some of them could be matters of policy and these should be the responsibilities of the relevant departments. Mr Milan, an official from the Department of Finance, stated that with this specific Bill, the information had certainly been available to all members and that it was up to other portfolio committees to discuss it or not.

Prof Turok (ANC) asked if there was or would be an explanatory memorandum on the adjustments, adding that it would have been useful. Mr Milan stated that this had been tabled on the same day as the materials. Several members contradicted this. Dr Davies (ANC) suggested that it might well have been that various papers had been tabled to various committees and perhaps these papers had been tabled with the Housing Committee. Dr Koornhof (UDM) added that he had looked for the explanatory memorandum and not been able to find it. The Chair stated that the clerk was saying that nothing had been given to him and that it would be necessary to investigate what had happened.

The Chair read a statement that the Committee had considered the Bill and concluded its deliberations thereon and asked if this was in order. One member said "agreed". The Chair released the officials from the Department of Finance.

Consideration of International Tax Treaties with China and Nigeria
Mr Ron van der Merwe, Manager of International Treaties at SARS, stated that the two treaties before the Committee both related to recent bilateral meetings. The president of China had been in South Africa in April, and Deputy President Zuma had met with Nigerian officials. These treaties had previously been approved but were now before the Committee for formal ratification.

Mr der Merwe began with a few introductory comments to address concerns that he thought might arise. He noted that the capital gains tax was not specifically included in the treaties as it would exist in South Africa, but he stated that it would become covered under art. 2 of the treaties once it existed. Article 2 automatically covered any future taxes similar to those already existing. A capital gains tax is a tax on a profit, so it is like an income tax and will be automatically covered. Mr der Merwe also noted that the state of residence never gives up the right of taxation in the treaties, so there is no problem in moving to a residence tax system. Finally, he noted that the suggestion of a notice in the Gazette to provide more scope for consultations on new negotiations had been taken up without a lot of new comments coming but with more transparency through the press reporting on it.

Mr der Merwe indicated that he would proceed to point out places where the two treaties differed from South Africa's standard form for an international tax treaty or where pieces of the treaties were otherwise noteworthy.

Treaty with China
Article 4, Paragraph 3: Tie-Breaker Rule
Mr der Merwe indicated that which country has a prior right to claim a company as a resident in a possible dual residence situation was a complex issue. South Africa's normal approach would be based on the place of effective management. China does not use this concept but only the location of the company's head office. To overcome this division, the negotiators agreed that in a case where these two approaches give different results, the residence of the company will be resolved by mutual agreement.

Article 5, Paragraph 3(b): Company Operating without Permanent Establishment
Mr der Merwe stated that this is an important provision that can help in a situation such as where a consultancy operates in South Africa by just sending in employees who work out of the office of the client for whom they are doing the consulting. The paragraph provides for the country in which they work to tax them if they are in the country for more than a certain period of time. In the treaty with China, this period is an aggregate of more than twelve months in a twenty-four month period.

Article 10: Dividends
Mr der Merwe noted that South Africa does not have dividends, so it hoped to get China to agree to a low withholding rate on dividends. They agreed to a limit on the source state's withholding of five percent of the gross amount of dividends.

Article 11: Interest
The parties agreed on a limit of ten percent of the gross amount of interest for the source state withholding tax.

Article 12: Royalties
China insists that payments for industrial, commercial, or scientific equipment are considered a royalty. Even though South Africa would consider these as part of business income, this is a bottom-line position for China. So, these are included in royalties but with a provision that only 70% of the gross amount is considered a royalty, thus yielding an effective 7% rate.

Article 13: Capital Gains
Paragraphs 4 and 5 come from the UN model and are in a fair number of South Africa's treaties. Paragraph 4 concerns the alienation of shares where there is a profit from capital stock and implies that the profit is taxed wherever the immovable property is situated. Paragraph 5 concerns a gain from the sale of shares amounting to more than 25% of a company, and it implies that this gain will be taxed where the company is resident.

Article 20: Teachers and Researchers
Some, though not all of South Africa's treaties, contain a provision like article 20. Mr der Merwe stated that it is included where there is a fair possibility of there being an exchange. The rule is that a visiting professor who comes to South Africa for less than two years is not liable in South Africa on remunerations from outside South Africa. For example, a professor who comes from Beijing to the University of Cape Town (UCT) will not be taxed in South Africa if he or she comes for less than two years and continues receiving payment from Beijing. If UCT pays the professor, then he or she is taxed.

Prof Turok (ANC) asked if income received in Beijing can be taxed here if the professor is here more than two years. Mr der Merwe replied that the source is where the services are rendered, irrespective of where the payment comes from.

Another ANC member asked what happens if a professor comes and leaves and returns again during the two-year time period. Mr der Merwe stated that on the wording of the treaty, it does not matter if the time is broken as it refers to two years from first arrival.

Prof Turok (ANC) stated that he was less concerned about such tactics of evasion but wanted to pursue the important point related to the question of aid. For example, in China helping South Africa, he wanted to know if a situation could ever arise where a professor would be subject to double taxation. Mr der Merwe replied that the normal international principle in cases of this situation concerned granting a prior right of taxation. Thus, if a professor came to South Africa for more than two years, South Africa would have a prior right of taxation. As a result, China would have to give the professor a tax credit for tax paid in South Africa, so there could not be double taxation.

Dr Davies (ANC) asked about how the tax status would change after two years. Mr der Merwe stated that the professor would be exempt if here for less than two years and that there is no need for further exemption in any case because there will not be double taxation. He also noted that the rule does not kick in after the expiration of the two years. If a professor is here for three years on a contract, then the rule kicks in right away based on him or her being here three years. He also stated that local professors sometimes get upset, saying that foreign professors do not pay tax, but they forget that the foreign professors are paying tax in their home countries. Prof Turok (ANC) joked that he and other South African professors are safe. He also noted that we want as many Chinese professors as possible especially if they are cheap.

Ms Taljaard (DP) asked if this exemption will be replicated in terms of the source/residence change. Mr der Merwe stated that it is not in a draft form of the law but that it does not go in the law as such but simply in negotiations with treaty partners. Mr Andrew (DP) asked if treaties override national law. Mr der Merwe stated that they do.

Article 20, Paragraph 2: Students
Mr der Merwe stated that this paragraph entitles students who do not fall under paragraph 1 to the same deductions as those to which a national resident is entitled. This pertains to a student who goes from one country to the other on a scholarship. In South Africa, scholarship income is not taxable. A Chinese student will get this same treatment, and no harm is done. The paragraph is really designed for a situation arising in the other country.

Discussion
Mr Andrew (DP) asked if there was any reason for the treaty not being gender-sensitive. Mr der Merwe stated that it followed international models and that treaties could be made gender-sensitive only with great care so as not to lose the impact of the wording. The Chair stated that South Africa must try to influence treaties and pursue constantly that treaties be gender-sensitive.

Prof Turok (ANC) stated that this issue had come up with another piece of legislation a while ago. He wondered why there cannot simply be a statement at the end of every bill to say that the use of the term "he or she" does not change the meaning of a parent bill. He said that it is time for South Africa to put its foot down.

Dr Rabie (NNP) asked if there are any models used other than the UN model. Mr der Merwe replied that the leading international model comes from the OECD. Prof Turok (ANC) noted that both of these models were drawn up by men. Mr Andrew (DP) asked him how he knew this. The Chair interjected to say that the record is clear that women have historically been denied the opportunity to participate in drafting.

An ANC member said that we should not reject the agreement on these grounds but that we should try to influence international conventions so that genders are used equally. Mr der Merwe stated that he would certainly do this in treaties not as yet signed, possibly using article 3 on general definitions.

Dr Davies (ANC) stated that the approach should not be to say that "he" means "he or she" but to write "he or she".

Prof Turok (ANC) stated that difficulties had arisen the last time because existing legislation had "he" and there were concerns about a judge saying that the use of "he or she" in a later act would mean that the parent act could not have meant to refer to "she". The solution is to say "he or she" and to say that "he" in the parent act should be read as "he or she".

Mr Andrew (DP) stated that it was not the time or place to discuss this but that Prof Turok's approach was unworkable. It is sometimes necessary to distinguish males and females so there cannot be a blanket approach like Prof Turok has proposed. He stated that the matter should be tabled. Ms Botha (ANC) added that the Committee on Women's Issues has received a legal opinion and that this should be considered along with the Constitution.

Dr Davies (ANC) raised the matter of Taiwan and asked whether China's considering it de jure part of China raised any issues in terms of Taiwanese persons using the treaty to claim tax benefits in South Africa. Mr der Merwe stated that the reference to "where the tax laws of China apply" would exclude both Hong Kong and Taiwan. Dr Davies (ANC) asked if China claims that its tax laws apply to Taiwan or not. Mr der Merwe stated that it does not and that South Africa still has a treaty with Taiwan, although it has likely been downgraded in importance.

The Committee then recommended that Parliament approve the Agreement.

Treaty with Nigeria
Mr der Merwe stated that this mostly followed the normal lines of South African treaties.

Article 5: Sales Units
This provided for issues of fixed places of business and sales units. It deals with preparatory and auxiliary aspects of the establishment.

Article 7, Paragraph 1: Force of Attraction
Nigeria required that the UN's force of attraction rule be included. This would attribute profits to a branch and result in the taxation within a country of all profits attributable to activities of the branch located in that country. There are problems with this from an administrative point of view, so Nigeria agreed to apply it only where the method of sale by head office is actually tax evasion. Thus, it becomes an anti-avoidance provision.

Article 8: Shipping
Mr der Merwe stated that there had been consultations with South African Airways (SAA) before the finalisation of the text here. Under paragraph 1, an airline company would be taxable on profits only in the country of its residence. However, Nigeria asked that where only one country's airline is engaged in international flights, that country might tax the other country's airline up to 1% of its earnings. SAA currently pays 2% of its gross in Nigeria, and this 1% is of gross less certain expenses, so it represents a better deal for SAA. This arrangement continues so long as Nigerian Airlines does not fly internationally. If there is reciprocity, then each country taxes its own airlines.

Article 10: Dividends
The source state is limited to 7,5% where a shareholding is 10% or more, and to 10% on portfolios. South Africa got Nigeria to agree to reduce these. There is also an anti-abuse provision in paragraph 6 which prevents the limitations on source state income from applying where the structure is not for bona fide commercial reasons.

Article 23: Non-discrimination
Mr der Merwe mentioned paragraph 5, which allows for South Africa to charge a Nigerian company a higher tax rate by up to five percentage points to allow for other taxes that it does not pay.

Discussion
Dr Davies (ANC) asked a policy question about all the talk of getting Nigeria to agree to a lower rate and why it is that we want to reduce the taxing capacity of another state. Mr der Merwe replied that Nigeria is anxious to create a situation where South African companies will look favourably on investing there. A country looking for investment looks at how far it is prepared to go in lowering rates. He added that Nigeria's new government has a more outward-looking approach and that the deal has worked within their guidelines.

Prof Turok (ANC) stated that as someone who knows something about Nigeria, he could say that Nigerians know more about import-export than anyone here.

Ms Taljaard (DP) asked to what extent the SAA tax issue would change if there were a strategic equity partnership, for example if SAA acquired a stake in Nigerian Airways. Mr der Merwe stated that it would be regarded as reciprocity if there were a code share. Ms Taljaard (DP) stated that there is currently an agreement between SAA and Nigerian Airways on the New York route and asked if this is enough for reciprocity. Mr der Merwe replied that the tax on SAA falls away if there is a code share.

Dr Woods (IFP) indicated that he would perform the task assigned to him and make a few comments to add to reassurances about the treaty. He stated that in the last six years, Mr der Merwe has negotiated more international tax treaties than anyone in the world and has been a frequent presenter before the Committee. The treaties before the Committee conform almost entirely to the OECD model with but slight variations. So there should be a general confidence.

Dr Woods (IFP) noted that he wished to draw attention to a few areas. First, he noted that he was interested that the negotiators ensure that they use economic analyses and papers from the Department of Finance to make sure that they are really getting good deals. Second, he noted that for now, dividend taxes are better if lower, but that this could be different in the future. Third, he went on to assert that one agreement contains details about income taxes and separates capital gains and the other does not, even though both foreign countries tax capital gains. And, fourth, he noted that the definition of residence will be critical with the legislative changes on their way. He asked the presenter to clarify if there would need to be any changes once there is a change to a source-based system.

Mr der Merwe stated first that before negotiation of a treaty, there is an attempt to assemble together all appropriate figures about the country in question, and about trade and investment to determine expected flows. This is to enable South Africa to make the best possible deal. Second, he noted that South Africa is not alone in exempting dividends from taxation and that in some treaties dividends would be exempt at source.

Third, Mr der Merwe stated that the mention of capital gains in the treaty with Nigeria is because Nigeria has a capital gains tax, and the treaty is to mention taxes that currently exist under the law of either country. A capital gains tax cannot be included in the list until it is promulgated, and China has no such tax. Dr Woods (IFP) interjected that he was under the impression that China did have a capital gains tax and that he was even inferring this from article 13. Mr der Merwe replied that China does tax capital gains but only as part of profit subject to normal tax. Dr Woods (IFP) asked if article 13 is just anticipatory. Mr der Merwe replied that it is not. He stated that the principles must be settled to cater to possible situations and that article 13 provides for this. Because capital gains taxes are a possible future tax, article 13 must exist to give some principles for the area.

Mr der Merwe stated that new legislation uses a test of ordinary residence and effective management and that it is something they are looking at in terms of the interaction of this with treaties.

In answer to how many treaties have been negotiated and how many remain to go, Mr der Merwe stated that forty-eight are fully operational with another fourteen or fifteen in the pipeline. Not many other countries have been identified as priorities after that.

An ANC member stated that it seemed favourable to Nigeria that the taxes had been made lower. This would lead to capital flows to Nigeria rather than to South Africa. He asked who has really won. Mr der Merwe stated that in South Africa there is no withholding tax on dividends and that it is impossible to be better than this. He added that job creation must be looked at not just from an investment point of view but also from the point of view of the South African industry investing outside South Africa. For these industries to thrive, we need to look after South African taxpayers outside the country.

Ms Sonjica (ANC) asked how the treaty would deal with people who trade on the streets. Mr der Merwe replied that most Nigerians who trade on the streets in South Africa are now resident in South Africa, so they are taxed as South African residents and the treaty has nothing to do with it.

The Committee recommended that Parliament approve the Agreement.

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