Double Taxation Agreement with Malaysia: briefing and finalisation

NCOP Finance

06 September 2005
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
7 September 2005
DOUBLE TAXATION AGREEMENT WITH MALAYSIA: BRIEFING AND FINALISATION


Chairperson: Mr T Ralane (ANC) [Free State]

Documents handed out
Comparison between OECD, South Africa and Malaysia Tax Convention Models
Explanatory Memorandum on the Double Taxation Agreement between South Africa and Malaysia
Agreement between RSA and Malaysia for Avoidance of Double Taxation and Prevention of Fiscal Evasion
Powerpoint Presentation on Double Taxation Agreement (see Appendix)

SUMMARY
The South African Revenue Service outlined the Double Taxation Agreement with Malaysia and the Committee approved it.

MINUTES

SA Revenue Services briefing
Mr R van der Merwe (SARS Manager: International Treaties) stated that the purpose of the Double Taxation Agreement was the removal of barriers to cross-border trade and investment by eliminating double taxation. His presentation outlined the salient features in Article 5 which dealt with permanent establishment, Article 10 on dividends, Article 11 on interest withheld, Article 12 on taxation of royalties, Article 13 on taxation of fees for technical services and Article 21 on students, apprentices and business trainees.

Article 23 dealt with the details for the elimination of double taxation. There was exemption for dividends declared by non-resident companies operating in Malaysia, where the participation by the South African shareholder in that Malaysian company exceeded 25%. The Protocol at the end of the Agreement clarified the process to follow should the exemption be amended. It had been agreed that SARS drop the request in the Double Taxation Agreement for tax bearing, because South Africa did not have a tax holiday scheme. SARS and the Malaysian government thus agreed that SARS would provide a credit for the Malaysian tax that would have been paid in the absence of the tax holiday. Furthermore if South Africa did in fact have a tax holiday scheme then there would be no need for this provision, because there would then be no double taxation. It was thus agreed that this provision be included in the Double Taxation Agreement to accommodate any future introduction of a tax holiday scheme, at which point the South African government would have to consider including a tax bearing provision in the Double Taxation Agreement.

Discussion

The Chairperson commented that the document entitled "Comparison between OECD, South Africa and Malaysia Tax Convention Models" was very useful in allowing the Committee to assess the different positions. He added that the tax credit would have to be provided in South Africa because Malaysia appeared to be a tax haven.

Mr Van der Merwe disagreed that Malaysia was a tax haven. It was only the Labuan Offshore business activity area that was a tax haven, and that was fairly limited. There were many areas in which South Africa could tax operations in Malaysia.

The Chairperson noted that the chronic problem experienced by the Committee was that it always received the documentation at the eleventh hour, and requested that all relevant documentation be provided to Members before the meeting took place. Members were not able to properly prepare for the engagement with SARS because they received the documentation only at the meeting venue.

Mr E Sogoni (ANC) [Gauteng] asked Mr Van der Merwe to explain exactly how South Africa would benefit from the Protocol.

Mr Van der Merwe responded that Article 23 was the crux for eliminating double taxation. It provided that one of the states must allow a credit for the tax paid in the other country in order to avoid double taxation. The absolute rule was that the state of residence must allow the tax credit. Thus in this case South Africa would allow a tax credit for tax paid in Malaysia. SARS was able to negotiate the figure down from the 20% withholding tax margin currently employed by Malaysia to 5%, which was reflected in the Double Taxation Agreement. A withholding tax margin of 20% would be crippling.

Mr Sogoni expressed regret that due to time constraints the Committee could not engage Mr van der Merwe further on this matter. He did not fully understand Article 23 and suggested another meeting should be held on the tax policy between South Africa and Malaysia.

The Chairperson noted that it was not within the mandate of a National Council of Province Committee to infringe on the sovereignty of another state and it could not change the agreement. Thus there was no reason for delaying the approval of the Agreement.

The Committee recommended the approval of the Double Taxation Agreement.

The meeting was adjourned.

Appendix
DOUBLE TAXATION
CONVENTIONS I AGREEMENTS

17 August 2005

Purpose of Agreements

  • To remove barriers to cross-border trade and investment

How to treaties remove tax barriers

  • Elimination or double taxation
  • Certainty of tax treatment
  • Reduce withholding tax rates
  • Prevention of fiscal evasion
  • Assistance in collection
  • Resolution of tax disputes/interpretation

Introduction

  • Closely follows the OECD Model Convention, which forms the foundation for the vast majority of Double Taxation Agreements (DTA's) worldwide
  • A number of articles are different from the normal SA approach. These articles and other articles of interest in the South Africa Malaysia Double Tax Convention are as follows...

Article 5: Permanent Establishment

  • Construction
  • 12 months in OECD Model
  • 6 months in UN Model
  • South Africa Malaysia DTA
    • Building site, a construction, installation or assembly project or any supervisory activity in connection therewith - more than 12 months.
    • Furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose - periods or periods exceeding 183 days in any 12 month period
  • Paragraph 5: Dependent agent
  • Where an agent maintains a stock of goods or merchandise belonging to the enterprise in and executed this is deemed to be a PE. respect of which orders are regularly obtained

Article 10: Dividends

  • Withholding tax of 5% or 15% proposed by OECD Model
  • In practice, withholding taxes vary widely internationally
  • Dividend rate in South Africa - Malaysia DT Convention
  • 5% for shareholding of at least 25%
  • 10% on all others

Article 11: Interest

  • withholding tax of 10% proposed by OECD Model
  • In practice, withholding taxes vary widely internationally
  • South Africa- Malaysia DT Convention: 10%

 

Article 12: Royalties

  • No withholding tax proposed by OECD Model
  • In practice, withholding taxes vary widely internationally
  • South Africa - Malaysia DT Convention
  • Royalties limited to 5%

Articled 13: Fees for Technical Services

  • Technical fees derived from one Contracting State by a resident of the other Contracting State who is the beneficial owner of the thereof and is subject to tax in that other State in respect thereof may be taxed in the first mentioned State at a rate not exceeding 5 per cent of the gross amount of such fees.

Article 21: Students, Apprentices and Business Trained

  • Shall be exempt in respects of:
  • All remittances from abroad for the purposes of that student, apprentice or business trainee's maintenance, education, study research or training, and
  • The amount of such grant, allowance or award

Protocol

  • Clarifies Article 23. Under the SA tax system, there is an exemption for dividends declared by non-resident companies where the participation by the SA shareholder is more than 25%. Should the exemption change there shall be a renegotiation of the Article to consider including a tax sparing provision.
  • The benefits of the Agreement shall not be available in respect of the carrying on of any offshore activities under the Labuan Offshore Business Activity Tax Act 1990. The term offshore business activity' is defined.

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