Double Taxation Agreement with Malaysia: briefing and finalisation

Meeting report

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.