Collaborative Africa Budget Reform Initiative: Treasury briefing & Double Taxation Agreements with Mozambique: approval

FINANCE PORTFOLIO COMMITTEE
13 November 2007
COLLABORATIVE AFRICA BUDGET REFORM INITIATIVE: TREASURY BRIEFING & DOUBLE TAXATION AGREEMENTS WITH MOZAMBIQUE: APPROVAL
 
Chairperson: Mr N Nene (ANC)

Documents handed out:
Double Taxation Conventions/ Agreements presentation
Double Taxation Conventions / Agreements
Ratification: Mozambique presentation
Ratification of Collaborative Africa Budget Reform Initiative (CABRI) presentation

Audio recording of meeting

SUMMARY
National Treasury briefed the Committee on the double taxation agreements and the ratification of a tax treaty with Mozambique. The objective of tax treaties was to promote economic growth by providing certainty on cross border investments and to prevent double taxation. The agreement allowed both SA and Mozambique to collect taxes, covered in the Convention, on behalf of each other. Members asked questions of clarity on the terms of the agreement, whether it violated GATT international agreements, taxation of pensions and annuities, the reason for the drop in exports dropped dramatically while imports had doubled, agreements with Nigeria, and the effect of the treaty on micro or informal traders. The Committee resolved to recommend the approval and adoption of the Double Taxation Convention between SA and Mozambique.
 
National Treasury briefed the Committee on the Collaborative Africa Budget Reform Initiative (CABRI). The key objective of CABRI was the promotion of efficient and effective management of public finances to foster economic growth and enhance service delivery for the improvement of living standards in Africa. The organisation’s legal status was based on a draft memorandum of understanding, which formed the basis of the existing structure of the informal network. Its funding was derived from membership fees as well as donor funding. Questions from Members focused on the role of CABRI, the cost of CABRI for SA, CABRI and the Public Finance Management Act and the influence of donors. The Committee noted that as this matter had not been officially referred to the Committee, it could not take a final decision, but would consider it again at a later stage.

MINUTES
Double Taxation agreement: Briefing by National Treasury
Ms Yanga Mputa, Director: International Tax, National Treasury and Mr Ron van der Merwe, Manager: International Treaties, National Treasury, briefed the Committee on the double taxation agreements and the ratification of a tax treaty with Mozambique. The objective of tax treaties was to promote economic growth by providing certainty on cross border investments and to prevent double taxation.

Tax treaties must be approved by parliament before they were binding. The aim of the tax treaty with Mozambique was to strengthen existing economic relations. It was signed in South Africa (SA) on 18 September 2007. SA was the largest foreign direct investor in Mozambique. The Industrial Development Corporation (IDC) had approved funding for ten projects in Mozambique and was considering additional projects in the area of mining and mineral beneficiation, agriculture, tourism, chemicals, forestry, transport infrastructure and energy.

There were over 100 SA companies operating in Mozambique, which included Steers, Vodacom, PEP, SAB Miller, Ackermans and Standard Bank. Investment by Mozambique in SA was minimal. Mozambique was SA’s second largest export market in Southern Africa, with the trade balance in favour of SA. Exports to Mozambique in 2006 amounted to R 6.2 billion and imports amounted to R 318 million. Cross border movement included Mozambique migrant workers in SA mines, the exchange of tourists, Mozambiquan students in SA and people from Mozambique coming to shop in SA.

The South Africa-Mozambique double taxation convention closely followed the Organisation for Economic Co-operation and Development (OECD) Model Convention, which formed the foundation for the majority of Double Taxation Agreements (DTAs) worldwide. The Double Tax Convention between SA and Mozambique focussed on construction, furnishing of services, including consultancy services as well as the performance of professional services.

The DTA agreed on 8 % of interest from the source state and 8 % of the gross amount on royalties between SA and Mozambique. With regards to pensions and annuities it was agreed that payments under a social security system were taxable only in the state paying the pension. The agreement provided for an exemption from tax in the host state for a period not exceeding two years, in respect of visiting professors. The remuneration, however, should be derived from outside the host State.

Tax paid for purposes of a foreign tax credit included exemptions or reductions granted in accordance with laws that established schemes for the promotion of economic development in Mozambique or South Africa. The agreement allowed both SA and Mozambique to collect taxes covered in the Convention on behalf of each other.

Discussion
Mr B Mguni (ANC) referred to Article 10 of the SA and Mozambique DTA and wanted to know if this article did not violate the General Agreement on Tax and Tariffs (GATT).

Mr van der Merwe said that the DTA did not violate any GATT agreements. The provisions in Article 10 were a standard agreement, which were used worldwide in agreements.

Mr S Marais (DP) referred to Article 17 and asked for clarification as this stated that pensions and annuities may be taxed but also stated that payments under a social security system were taxable. He was concerned that the wording might create confusion.

Mr van der Merwe said that the principle of a tax treaty was that it did not impose taxation, but gave a taxation right to the state. It was then up to the State to impose a tax or not and that then became a matter for its domestic law. If the word “shall” was used, it referred to one state imposing tax and the word “may” indicated that either one of the two states involved could tax a taxpayer.

Mr Marais referred to the trade flows between SA and Mozambique. The presentation had indicated that exports dropped dramatically while imports had doubled. Mr Marais wanted to know what the cause was for this change.

Ms Mputa said that trade flows favoured SA, although analysis of trade figures indicated that the input from Mozambique was increasing. She advised Mr Marais to take up trade policy issues with the Department of Trade and Industry.

Mr M Johnson (ANC) referred to the bilateral agreement signed on 18 September between SA and Mozambique. SA had not been able to do justice to the bilateral agreement. He asked if SA was only signing agreements for the sake of doing so. Mr Johnson wanted information on the experiences of National Treasury regarding these types of agreements. He also wanted more information on the agreement with Nigeria.

Ms Mputa said that Nigeria has not yet ratified a treaty with SA.

Mr Johnson referred to people in Nelspruit (Mpumalanga) who were travelling in and out of Maputo. He wanted to know what the effect would be of the DTA on ordinary people and small and micro traders.

Mr van der Merwe said that the tax treaty was for use by business people. It provided security regarding tax for South African businesses. If an informal trader conducted business in SA but had no physical place of business in SA, then SA would not be able to tax the trader. If the employer of an employee was based in SA and if the employee was in SA for more than 183 days in any 12-month period, then SA could gather taxes.

Mr Bici (UDM) referred to a situation where the one state asked other state to collect taxes. He wanted to know which state would proceed with a case if there were no response or a negative response from the taxpayer.

Mr van der Merwe said that tax treaties empowered states to impose taxes on the behalf of another state.

The Committee resolved to recommend the approval and adoption of the Double Taxation Convention between SA and Mozambique.

Collaborative Africa Budget Reform Initiative: National Treasury Briefing
Ms Lesley Fisher, Director: Budget Reform, National Treasury, briefed the Committee on the Collaborative Africa Budget Reform Initiative (CABRI). CABRI was a professional network of senior government officials in Ministries of finance and planning from across Africa. SA National Treasury played a leading role in establishing CABRI with Mozambique and Uganda in 2004. The key objective of CABRI was the promotion of efficient and effective management of public finances to foster economic growth and enhance service delivery for the improvement of living standards in Africa.

CABRI aimed to support budget officials in the management of public finance systems and develop approaches, procedures and practices for improving these systems. The organisation’s legal status was based on a draft memorandum of understanding, which formed the basis of the existing structure of the informal network. Its funding was derived from membership fees as well as donor funding. In December 2006 it was recommended, at the CABRI’s General Assembly, that its International Agreement be negotiated by six countries. Thereafter new members could join through an accession process. Countries would have two years in which to present their application for accession. The final product of negotiations between countries was a signed text, which was not yet binding. Ghana, Kenya, Mali, Senegal, SA and Rwanda signed the agreement but only Kenya had so far ratified it. The SA Minister of Finance signed the CABRI agreement on 7 August 2007. SA would host CABRI and act as the interim secretariat.

The membership of CABRI increased from 17 countries to 28 in a year and fostered a more committed and active membership base.

Ms Fisher asked that Parliament ratify the CABRI agreement in terms of Section 231. The official languages were English, French and Portuguese. Members had felt quite strongly that they wanted to be able to communicate effectively. Parliament should only note SA’s commitment to host CABRI, and that an annual financial contribution would be payable by Member states. A brochure pack had been circulated. The State Law Advisors and the Department of Foreign Affairs had both certified the agreements and both supported the agreements.

Discussion
Mr Marais asked if CABRI was purely a capacity building initiative. He also wanted to know what the role would be of academic institutions in CABRI.

Ms Fisher said that CABRI defined their role broader than just capacity building. CABRI also aimed to achieve synergy between public finance, budgeting and infrastructure. It was not a training initiative but aimed to promote dialogue and determine solutions. Donor dependent countries’ reform tended to be not as vocal. There was a lot of debate on whether membership should be voluntary or compulsory. Members should join when they felt they were ready and able to join CABRI. She noted that academic institutions and service providers were involved in CABRI dialogues and discussions, and could be invited to give input to CABRI on specific issues.

Mr Marais asked what the cost of CABRI would be for SA.

Mr Nene asked for clarification on the cost, with specific reference to salaries that would be paid to CABRI officials.

Ms Fisher said that SA’s contributions included a 10 % contribution to the salary of the CABRI Chief Director as well as a contribution to the Overseas Development Institute (ODI). National Treasury also provided in-kind support like office space and support staff. The aim was for CABRI to eventually function in a financially independent way. The German Development Agency GTZ provided the support of a financial advisor as well as administrative support. The financial contribution for SA was estimated to be between R1 million and R1.5 million.

Mr Mguni referred to the contract that was signed by the Minister. He said that it seemed as if the 2-year period would be restrictive for member states and asked for clarification.

Ms Fisher said that the current interim management committee consisted of Uganda, Mozambique, South Africa and Mauritius, with Kenya chairing the committee. It was envisaged that the Francophone countries, like Mali and Senegal would be invited to the next management committee. Membership was not considered to be cumbersome. The membership committee met two or three times a year. Experience sharing and peer learning was considered to be a critical focus of CABRI.

Mr Johnson referred to the range of organisations that existed, including the African Union, the Pan African Parliament, New Partnership for Africa’s Development and others. He wanted to know how all of these organisations would talk to each other as well as to CABRI. Mr Johnson wanted to know what the role of members of parliament would be given the range of organisations and initiatives. He would like to understand what the collaborative role of South Africa could be. He would like to know how to engage in future. So much money was being pumped into the structures, and he did not necessarily see the role that MPs were to play.

Ms Fisher said that CABRI started off very slowly and that a lot of time was spent to determine if there was a need for this organisation. During the SA study tour leg some African countries sent up to ten members to attend. Senior budget officials from African states found the SA study tour very useful.
 
The Chairperson said that National Treasury could not speak to the role of the parliamentarians; this was a matter to be decided on a study of the Constitution.

Ms Fisher added that CABRI’s role was not just a capacity building initiative. There were many issues of public finance and budgeting where synergy across the continent could be reached. This would include roads dams, and other national and regional structures. CABRI was not intended to be a training initiative, but dialogue between members to discuss problems and to determine solutions between themselves. Other countries that were donor-dependent had different needs, and did not always fulfil them, because they would be dictated to by what the donors wanted, so they could not be as vocal in terms of their priorities. The parliamentary oversight role was also important. CABRI will allow members to discuss and resolve issues around areas. She suggested that for further info members go to the website to see what areas were being discussed. 

Mr S Asiya referred to the Public Finance Management Act (PFMA) and asked under which section of the PFMA would CABRI be able to operate.

Ms Fisher noted that the SA donation would be subjected to the PFMA. If CABRI was established as a legal entity, it would be subject to external audit based on the Generally Accepted Accounting Principles.
 
Ms N Mokoto (ANC) wanted to know how much influence the donors had on CABRI. She also asked what benefit the donors would get if they donated money to CABRI.

Ms Mokoto also asked what authority CABRI had to make sure that policies adopted at an international level was being carried forward.

Mr T Mahlaba (ANC) said that SA was the only country that contributed to NEPAD secretariat. SA could not intervene in the manner in which NEPAD was working, because it was not a South African organisation. Donor funds were required for the survival of CABRI. Some countries who were members of CABRI were dependent on donor funds. Mr Mahlaba said that before CABRI became a legal entity it should be determined to what extent members were prepared to be members on a voluntary basis. Mr Mahlaba was not convinced that CABRI should be ratified.

Ms Fisher said that issues raised by Mr Mahlaba were extensively debated by CABRI. Initially penalties were considered but it was decided against afterwards. Certain states that could benefit from financial management and improved governance should be encouraged to join CABRI. Once CABRI was established as a legal entity it would determine what strategies, to follow like for instance withholding voting rights on important issues if membership fees were not paid.

Ms Fisher said that donors provided funding on an ad-hoc basis to CABRI. Funding came on a per project or per event basis. A careful balance of membership fees and assistance from development agencies was required. Long-term stability was a major concern for CABRI.

Mr Nene said that it was the first encounter that the Committee had with CABRI. He said that CABRI had not yet been officially referred to the Committee and as such could not be approved at this point.

The meeting was adjourned.