Tax Treaties : RSA / Portugal, Saudi Arabia & Switzerland: Ratification

FINANCE SELECT COMMITTEE
05 September 2007
TAX TREATIES : RSA / PORTUGAL, SAUDI ARABIA & SWITZERLAND: RATIFICATION

Chairperson: Mr T Ralane (ANC)

Documents handed out:
Presentation on Tax Treaties: Portugal, Saudi Arabia and Switzerland to be ratified
Double Taxation Conventions/Agreements
Explanatory Memorandum on Double Taxation Agreement Between South Africa and the kingdom of Lesotho
Explanatory Memorandum on Double Taxation Convention Between South Africa and Portuguese Republic
Explanatory Memorandum on Double Taxation Convention Between South Africa and the kingdom of Saudi Arabia

Explanatory Memorandum on the Treaty between South Africa and the Swiss Federal Council
Explanatory Memorandum on the Double Taxation Agreement Between South Africa and Sudan

Audio recording of meeting

SUMMARY
The National Treasury and South African Revenue Services briefed the Committee on tax treaties recently entered into, that required ratification by Parliament, between South Africa and, respectively, Portugal, Saudi Arabia and Switzerland. The general process of ratification was outlined, and the specific terms of the treaties that differed from the standard protocols were mentioned. The Revenue Services outlined the principles of double taxation agreements, and noted that the purpose was to remove barriers to cross-border trade and investment. Once again any differences with the model conventions were outlined. It was noted that Saudi Arabia made a distinction between taxation of nationals and non-nationals, which was the reason why this agreement differed from those with other countries. In relation to Switzerland, the agreement now included for the first time an article in terms of which South Africa could obtain information about taxes.

Members raised some concern with the references to the Bin Laden companies, as the name had particularly negative connotations, and asked questions about preferential procurement of oil, the need for determinants on crude oil, company tax in Saudi Arabia, the position of tax exemptions, taxation of company dividends, and the source-based system of taxation. The differences in the tax regimes of different countries were clarified. Members of the Committee expressed their pleasure at the conclusion of the agreement with Portugal, and the investment amounts coming in from foreign operations.

MINUTES
Tax Treaties between RSA and  Portugal, Saudi Arabia and Switzerland to be ratified: National Treasury (NT) briefing
Ms Yanga Mputa, Director: Legal Tax Design, National Treasury, briefed the Committee on the tax treaties approval process and the economic developments that resulted from tax treaties. She explained that tax treaties were a reflection of the fundamental tax policy choices of each country. Parliament had to approve every tax treaty before it became binding and in South Africa this approval was done in accordance with section 231 of the Constitution, read with section 108(2) of the Income Tax Act. Ms Yanga said that the treaties would incorporate matters that were in South Africa’s best interest.

Mr Yanga then went on to describe each of the treaties.

The South Africa (SA) – Portugal treaty was signed on 13 November 2006 and its aim was to strengthen existing economic relations. Investment by Portugal into SA amounted to R33.8 million in 2003 while imports from Portugal amounted to R749 million in 2006. Investment by SA into Portugal was R5.1 million in 2003 and exports to Portugal were R1.3 billion in 2006.

The SA – Saudi Arabia treaty was signed during the Presidential visit to Saudi Arabia in March 2007. The aim of this treaty was to establish economic benefits and strengthen the relations with the countries of the Gulf Region. Saudi Arabia was the major supplier of crude oil to South Africa, with SA importing 34.2% of its crude oil from Saudi Arabia. Approximately 5 000 to 10 000 South African expatriates were in Saudi Arabia. Generally Saudi Arabia did not levy income tax on its nationals.

The SA – Switzerland treaty was a renegotiation of the existing tax treaty. The first tax treaty between SA and Switzerland came into force on 11 July 1968, at a time when SA tax policy was not yet fully developed. The proposed new tax treaty, signed on 8 May 2007, would terminate the existing tax treaty. Existing economic ties between SA and Switzerland continued to grow strongly.  This was evidenced by the Trade and Investment Network Switzerland/South Africa (TINSSA) launched in April 2004 and “Business Kick-off 2010”, which was launched in 2006, whose objective was to act  as a channel for Swiss companies to reach South African companies and discuss joint projects around the 2010 Soccer World Cup. De Beers, Dimension Data and Investec were some of the many South African owned or managed companies operating in Switzerland. South Africa’s portfolio investments in Switzerland amounted to R1.4 billion in 2004.

Double Taxation Conventions/Agreements: South African Revenue Services (SARS) Briefing
Mr Ron van der Merwe, Manager: International Treaties, South African Revenue Services highlighted the critical issue in all the treaties. He firstly said that the purpose of the agreements was to remove barriers to cross-border trade and investment.  The removal of barriers to entry included the elimination of double taxation, reduction of withholding tax, prevention of fiscal evasion and the resolution of tax disputes or interpretations.

Mr van der Merwe submitted, in respect of each agreement, a comparison of the OECD Model Tax Convention, the South African Model Agreement for Avoidance of Double Taxation, and the wording of each Convention. He indicated that the Saudi Arabia double taxation convention closely follows the Organisation for Economic Cooperation and Development (OECD) Model Convention which formed the foundation of the vast majority of Double Taxation Agreements (DTAs). Article 7 differed from the South African model; it set out the specific determination of deductions. A separate paragraph made reference to profits derived from the export of goods. Article 10 related to passive income where the State had limited type of intervention, if at all. The tax charged in respect of dividends in this DTA must not exceed 5% of the gross amount of dividends, if the beneficial owner was a company holding directly at least 10% of the company's capital. For other shareholders, the tax rate must not exceed 10% of the gross amounts of all dividends.  Article 11 related to interest. Saudi Arabia had a problem with the term “interest” for religious reasons.

In relation to the double taxation agreement with Portugal, Mr van der Merwe highlighted Article 25, which spoke about the Mutual Agreement Procedure. This article stated that competent authorities of the Contracting States could communicate with each other directly for the purpose of reaching an agreement. The Protocol to this Convention noted that an additional clause, Article 24, was also included, to clarify the position in relation to exemption from Secondary Tax on Companies (STC), which was currently afforded to branches of companies that were not resident in South Africa. The provisions of paragraph 5 would only apply while this was in effect. Since Portugal did not have a similar system, it was not to benefit from the provisions of Paragraph 5.

In relation to the agreement with Switzerland, Mr van der Merwe said that Article 11 regulated the interest,  by stating that interest may be taxed in the country in which it arose. However, that taxation was limited to 5%. In Article 24 the convention stated that the two states shall reach agreement. Article 25 was the highlight with respect to this treaty. He said that Switzerland never used to have an exchange of information article. He said that this was now included, for the first time, in this treaty and it was important as now South Africa could get information with respect to its taxes.

Discussion
Mr E Sogoni (ANC) asked about the Bin Laden Company, a Saudi company with operations in South Africa. He acknowledged that no other country had the right to a name, but asked if the name of this particular company did not bring about controversy. He asked what the main business operations of the Bin Laden Company were. Mr Sogoni said that his questions were raised in relation to fighting against terrorism; he was concerned that there could be misperceptions. He also went on to ask if the amounts of imports from Saudi Arabia would not increase the trade deficit or balance of payments.

Ms Mputa responded that the Bin Laden Company was a large construction company. She said that the scepticism surrounding the company name was a matter of politics.

The Chairperson asked what would be done about the trade deficit increase. He asked if South Africa could negotiate a special regime with respect to oil.

Ms Mputa responded that preferential procurement of oil questions were difficult to answer because the decisions did not lie within National Treasury’s domain.

Mr Z Kolweni (ANC) said that it seemed as if Swiss companies needed South Africa more than South Africa needed them, and requested clarity in this regard. He added that there must be a determinant with respect to crude oil.

Ms Mputa commented that although Saudi Arabia might be a tax haven for personal taxes, this was not so for companies; if a South African company was operating in Saudi, it would be taxed. She said that Saudi Arabia had a preferential system of tax when it came to companies within the Gulf.

The Chairperson highlighted the reasons for the concern regarding the Bin Laden Company by saying that he was concerned that there was a danger that another country could attack the area where the Bin Laden Company was operating within South Africa. He emphasised that the reasons that a country such as America could give for such action was the fight against terrorism. He suggested that National Treasury investigate the implications.

The Chairperson added that the treaties looked similar and requested that Mr van der Merwe go through dissimilar issues and the highlights in other treaties that were critical.

Mr M Robertson (ANC) asked whether a nurse working in a Saudi Arabian hospital was tax exempt for a period.

Mr van der Merwe responded that only teachers and professors qualified for this exemption. The Saudi Arabian government was at liberty, in terms of the treaty, to tax a nurse working, and in terms of domestic law, it was up to each country to determine whether or not to levy taxes on those working abroad. In South Africa, if the nurse working in Saudi met the exemption under South African law, the nurse could not be taxed in SA. He said that the treaty itself did not impose tax; it just regulated which country would get to tax what income.

Mr E Sogoni (ANC) asked for clarity on the fact that South Africa was not taxing dividends, and that seemed to have changed.

Mr van der Merwe said that there was no taxation of dividends paid from a South African company to a non-resident shareholder. The Minister mentioned in the budget speech an intention to change that principle by allowing a source-based taxation.

Mr B Mkhaliphi (ANC) asked what would happen if a teacher or professor working abroad requested to be paid in South African currency.

Mr van der Merwe responded that South Africa had a source-based system of taxation. Where services were rendered, irrespective of where or how the taxpayer was paid, South African taxation would be imposed. He stated that the treaties did not take away the taxing right of the State at all.

The Chairperson asked how the religious tax regime operated.

Mr van der Merwe said that he could not comment on that as he was not an expert at this matter.

Mr E Sogoni (ANC) asked why the Protocol that clarified Article 24 in Portugal was different to the one in Saudi Arabia.

Mr van der Merwe responded that there was a substantial difference between Saudi Arabia and Portugal. This article served as protection of Portugal. He said that Portugal had an article dealing with non-discrimination, which Saudi Arabia did not have. Saudi Arabia did not have this article because their whole tax system was based on treating their nationals and non-nationals differently.

The meeting was adjourned.