Double Taxation Agreements between SA & Spain and SA and Tanzania: adoption

FINANCE PORTFOLIO COMMITTEE
23 August 2006
DOUBLE TAXATION AGREEMENTS BETWEEN SA & SPAIN AND SA AND TANZANIA: ADOPTION

Chairperson: Mr N Nene (ANC)

Documents handed out:
Double Taxation Convention between South Africa and Spain
Double Taxation Agreement between South Africa and Tanzania: Explanatory Memorandum
Double Taxation Agreement between South Africa and Tanzania: Part1 & Part2
South African Revenue Service Presentation on the two double taxation agreements

SUMMARY
The South African Revenue Services presented double taxation agreements between South Africa and Spain and between South Africa and Tanzania. The South Africa/Spain convention closely followed the Organisation for Economic Co-operation and Development Model Convention which formed the foundation for the vast majority of Double Taxation Agreements across the world but some of the provisions were different from the South African model.

The Organisation for Economic Co-operation and Development model proposed withholding tax of 5% or 15% but these varied widely internationally. The South Africa/Spain agreement said in article 10 that the dividend rate was 5% for a shareholding of at least 25% and 15% for all others.

There were very few differences between the South Africa/Tanzania convention and the normal South African model. For dividends, there was a withholding tax of 10% for a shareholding of at least 15% and 20% for all others. For interest, South Africa and Tanzania agreed on 10% of the gross amount and for royalties the rate was set at 10% for all cases. 

The Committee approved both conventions unanimously.

MINUTES

SA Revenue Services (SARS) briefing

Mr R van der Merwe (SARS Manager: International Treaties) said that the purpose of the agreements was to remove barriers to cross-border trade and investment. Treaties did this by eliminating double taxation and creating certainty in tax treatment. They also reduced withholding tax rates on passive income such as dividends. They prevented fiscal evasion and assisted countries in getting information about what their citizens were doing in other countries. They operated on the basis of reciprocity so the countries helped each other collect taxes.

South Africa/Spain Double Taxation Convention 
Mr van der Merwe said that the convention closely followed the Organisation for Economic Co-operation and Development (OECD) Model Convention which formed the foundation for the vast majority of Double Taxation Agreements across the world. Some of the provisions were different from the South African model, which was based on the OECD model with aspects of the United Nations (UN) model included. 

Some of the interesting provisions of the South Africa/Spain agreement were in the Permanent Establishment requirements in article 5. Permanent Establishment was the threshold that had to be crossed before a foreign business was taxed on its profits in the source state. In the construction industry, the OECD model set the threshold at 12 months and the UN model at six. The South Africa/Spain agreement said that a building site, a construction, installation or assembly project or any supervisory activity in connection therewith, would have a threshold of more than 12 months.

Usually no country gave away its right to tax immovable property. Spain however, had a provision in their tax Acts that was similar to South Africa’s fringe benefit provisions where they extended taxation to shares. Paragraph 4 of article 6 said that: “Where ownership of shares entitles the shareholder to use of immovable property owned by the company, the benefit may be taxed in the hands of the shareholder.” That is, this provision maintained Spain’s right to tax shares.

The OECD model proposed withholding tax of 5% or 15% but these varied widely internationally. The South Africa/Spain agreement said in article 10 that the dividend rate was 5% for a shareholding of at least 25% and 15% for all others. For interest, the OECD model proposed withholding tax of 10%. Again, these varied internationally and in article 11, South Africa and Spain agreed on 5% of the gross amount. For royalties, the OECD model did not propose any taxes so in article 12, South Africa and Spain agreed to limit royalties to 5%.

For protocol, paragraph 2 inserted a limitation of benefits provision with regard to passive income and capital gains in respect of companies which had more than 50% shareholding by shareholders not resident in that state. If the company conducted substantial business the benefits would still be given. Paragraph 3 provided the imposition of a branch profits tax in Spain and the normal imposition by South Africa of its tax on branches of non-resident companies. Branch profits tax was allowed at a maximum rate of 5% (in line with the limitation in article 10) and the South African tax could be 5 percentage points higher than the corporate rate (29%).

South Africa/Tanzania Double Taxation Convention 
Mr van der Merwe said that there were very few differences between this convention and the normal South African model.

The Permanent Establishment threshold in article 5 was set at six months for the construction industry. For the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose and for the performance of professional services (such as doctors, lawyers and engineers), the threshold was periods exceeding 183 days in any 12 moth period.

Paragraph 2 of article 8 provided for the taxation at source of the profits from shipping or rail transport. The profit was limited to 5% of turnover and the tax thereon could not exceed 50% of the amount of the profits so limited. The profits from the use or rental of containers were taxable only in the state of residence.

For dividends, there was a withholding tax of 10% for a shareholding of at least 15% and 20% for all others. For interest, South Africa and Tanzania agreed on 10% of the gross amount and for royalties the rate was set at 10% for all cases. For pensions, paragraph 3 of article 17 said that payments made under the Social Security system of a state were taxable only in that state. Article 25 empowered both countries to collect taxes on each others’ behalf on the basis of reciprocity.

Discussion
Ms J Fubbs (ANC) asked if article 12 in the South Africa/Spain convention applied to all royalties.

Mr van der Merwe replied that there was a definition of royalties in article 12 and it included things like copyrights and trademarks. However, the definitions did not include payments for the right to use natural resources as this was dealt with under article 6 about immovable property which gave the country of source the exclusive right of taxation.

The Chairperson asked why it was important to separate the protocol provisions from the main body of the convention.

Mr van der Merwe replied that this was done as issues like branch profits were not included in any of the convention models so they had to be made into separate provisions to include them into the treaty. Some countries did place them into the main body but drafters had to take into account the specifics of domestic law. Protocol provisions were also used where the two countries had different interpretations of the same provision. The provision would then help to remove any confusion.

Mr B Mnguni (ANC) asked if the Southern African Development Community (SADC) free trade zone would be affected by the South Africa/Tanzania agreement.

Mr van der Merwe replied that SADC had its own unit for tax matters and a protocol had been signed on tax agreements. It was agreed that there should be a network of treaties like the one between South Africa and Tanzania to remove barriers. SADC had developed its own model convention which was unique to the region and included aspects of the OECD and UN models and the peculiarities of the SADC countries. It was due to be put in front of SADC ministers for their approval, but it had to be noted that models were not legally binding documents; they were only guidelines.    

Dr van Dyk (DA) asked if the discussions that led to the agreements dealt with whether the tax levels in one country would encourage entrepreneurs to leave their countries to go to other countries where taxes were lower. 

Mr van der Merwe replied that there had not been any discussions on this topic.

In closing, the Committee approved both conventions.
 
The meeting was adjourned.