Sudan & Australia Tax Treaties: ratification; Special Pensions Amendment Bill: adoption & Mineral & Petroleum Resources Royalty Bill: briefing

Meeting report

Ratification on Tax Treaties with Sudan and Australia
Sudan Tax Treaty
Ms Yanga Mputa (Director: Tax Policy Unit- National Treasury) dealt with reasons for the tax treaty as well as its economic benefits. A treaty could only come into effect once ratification took place. The Tax Treaties were viewed as being in the best interests of SA.

While tax treaties can affect trade flows, it impacts mainly on investment flows. She referred to the slides dealing with exports to Sudan and imports from Sudan respectively. It was clear that SA was exporting more to Sudan than they were importing.

With regard to investment flows, Ms Mputa said that this was still minimal at this stage.

Australia Tax Treaty
Ms Mputa said that the SA-Australia tax treaty was not new but provided a protocol to the existing treaty (entered into in 1999). The reason for the changes to the treaty was the Minister’s announcement regarding Secondary Tax on Company (STC) changes in his 2007 budget speech. These could not be dealt with in terms of domestic law, which meant that treaties with certain countries (including Australia) had to be renegotiated.

Regarding investment flows between the two countries, Ms Mputa said that Australian investment into SA increased from 946 million in 2003 to 2 billion in 2005. There has been a significant increase in Australian investments in SA over the past decade. This has occurred mainly in the agricultural and mining sectors.

SA investment into Australia has increased from 8.5 billion in 2003 to 8.6 billion in 2005. With regard to trade flows between the countries, Australia is one of SA’s largest trading partners. The bulk of goods sold to Australia were finished goods, like cars.

Ratification of Double Taxation Conventions/Agreements- Sudan DTA and Australia Protocol
Ms Oshna Maharaj (Assistant Manager: International Treaties- SARS) read briefly through the document titled ‘ Ratification Double Taxation Conventions/Agreements- Sudan DTA Agreement and Australia Protocol’.

The purpose of the Agreements was to remove barriers to cross-border trade and investment.

SA-Sudan Double Taxation Agreement (DTA)
Ms Maharaj said that a number of articles in the agreement were different from the normal SA approach. She highlighted these articles and certain other articles of interest. She read through these articles in the presentation document:

Article 4: Resident
Article 5: Permanent Establishment
Article 9: Associated Enterprises
Article 10: Dividends
Article 11: Interest
Article 12: Royalties
Article 14: Independent Personal Services
Article 16: Directors Fees
Article 20: Teachers and Researchers
Article 21: Students and Trainees
Article 25: Mutual Agreement Procedure

Discussion
The Chair said it appeared as if the preliminaries on both the Sudan DTA and the Australia Protocol had been done already.

Ms Maharaj said that the Australia Protocol was at the stage of final ratification. No preliminary process had been undertaken on this treaty.

Dr D George (DA) referred to investment and trade flows with regard to the relationship with Australia. Investment outflows were greater than inflows. The same applied to trade flows. Regarding the Sudan relationship, the situation was other way around. He asked if this affected the way in which the agreements were structured.

Mr Frans Tomasek (General Manager: Legislative Policy, SARS) said that there was a relationship between the direction of flows and the structure of the agreement.

Mr N Singh (IFP) referred to the fact that the first agreement with Australia was entered into in 1999. He asked how often these agreements were amended.

Mr Tomasek replied that treaties usually remained in place for ten to twenty years before they were revised. There was an extensive process of negotiation and ratification. Thus renegotiating an international treaty was not something undertaken easily. They needed to draft a treaty that could be there ‘for the long haul’.

Mr Singh asked if the latest agreement included the latest taxation laws amendments passed recently.

Mr Tomasek responded that whether one was dealing with a developed or developing countries was significant in negotiations. SA was sometimes the developing country, while sometimes it was the developed country; depending on who the other partner was. A developing country treaty usually followed the United Nations Model; while the developed country treaty tended to follow the Organisation for Economic Co-operation and Development (OECD) model. Those were the general rules of thumb although this could be altered by contracting parties if so desired.

Ms J Fubbs (ANC) wanted more detail on the economic relations with Sudan.

Ms Mputa said that the treaty promoted economic growth by providing certainty to cross-border investment. It provided the threshold for investors to invest in the other country because it created certainty regarding the tax laws of that country. With regard to Sudan, the investment flows are still minimal, but once tax laws started being negotiated two years ago, SA companies started showing interest in investing in Sudan. This was because of the certainty these treaties provided regarding tax laws of the other country. One would therefore be likely to see an increase in the level of investment in Sudan in the next five years.

Mr M Johnson (ANC) criticized the fact that treaties were being brought to the Committee simply to be rubberstamped. Negotiations on the Sudan treaty had been taking place for the past two years, yet the Committee had received very little detail regarding this process since then. He was not comfortable ratifying a treaty about which he knew so little. Either the Committee had to be involved in the process from the beginning, or an extensive workshop had to be held to inform Members about the detail of the treaties.

The Chair interrupted, saying that this issue had been addressed the previous year. A workshop had already been held to discuss these matters. A preliminary hearing had been held on the Sudan treaty. There had therefore been ample opportunity to engage further if they had needed more information. Perhaps more workshops and be needed regarding the Australian treaty. Perhaps it would be necessary for SARS and NT (National Treasury) to inform the Committee when ratification was about to happen. Members would then be able to go back and refresh their memories on what was discussed in the preliminary hearings.

The Chair proposed the adoption of the Sudan DTA and the Australia Protocol. The Committee agreed to their adoption.

The Chair said that the National Treasury had requested to be allowed to table the Tax Treaties with Mexico and the United Arab Emirates for preliminary hearings. Due to time constraints, further interaction would probably be necessary. Presenters would briefly introduce the issues to the Committee in the interests of time.

Tax Treaties with Mexico and the United Arab Emirates (UAE)
Ms Mputu said that the tax treaties were being entered into for the purposes of (1) policy and (2) administration.

She read the document titled “Preliminary Hearings: Tax Treaties with Mexico, United Arab Emirates”, which dealt with:

-Purpose of Tax Treaties

SA/Mexico Treaty
-Reasons for the SA/Mexico Treaty
-SA/Mexico Tax Treaty- Investment flows
-SA/Mexico Tax Treaty- Trade flows

SA/UAE Treaty
-Reasons for the SA/UAE Treaty
-Economic Developments
-SA/UAE Treaty- Investment flows
-SA/UAE Treaty- Trade flows

Preliminary hearings- Double Taxation Conventions and Agreements for UAE and Mexico
Ms Maharaj only had time to read through a few articles of the Double Taxation Treaties with Mexico and the UAE.

SA/Mexico DTA
-Article 1- Persons Covered by the agreement
-Article 4- Resident
-Article 5- Permanent Establishment
-Article 8- Shipping and Air Transport
-Article 10- Dividends
-Article 11- Interest
-Article 12- Royalties
-Article 14- Income from Employment
-Article 17- Pensions and Annuities
-Article 18- Government Services
-Article 20- Students and Trainees
-Article 27- Refunds

SA/UAE DTA
-Article 4- Resident
-Article 5- Permanent Establishment
-Article 7- Business Profits
-Article 10- Dividends
-Article 11- Interest
-Article 12- Royalties
-Article 21- Limitation of benefits
-Article 26- Collection of Taxes

Discussion
Ms Fubbs asked why SA was importing asbestos from UAE, given that there were laws which stated that it was not to be used in building.

Ms Mputu said that it was difficult to comment on this, since this question fell within the scope of the Department of Trade and Industry (DTI).

Ms Fubbs said that she would approach DTI but still felt that those who crafted the treaties needed to have more knowledge about this matter.

The Chair pointed out that the actual transactions took place within another Department. National Treasury merely records the transactions.

Ms Mputu added that trade flows did not depend on treaties as investment flows did. Other agreements within DTI dealt with trade flows.

Ms Fubbs said that she would pursue the matter through DTI.

Ms Fubbs was concerned about the huge differential between what the UAE was investing in SA, in comparison to what SA was investing in the UAE.

Ms Fubbs referred to the fact that according to Article 4 of the SA/UAE DTA, the contracting state shall by mutual agreement settle the question and determine the mode of application of the agreement to the individual. She asked if there was a relationship between this provision and Article 21, which deals with Limitation of benefits.

Mr Tomasek answered that the difficulty was that taxpayers had to be vested in a particular country. For an individual it was easier to determine which country that was, than for a company. Thus different rules would apply in the case of each. Because some companies would benefit from creating this confusion, it became necessary to allow the tax authorities in the respective countries to decide on the matter by mutual agreement. If they were not able to do so the party would not benefit from the provisions of the treaty. The use of the Limitations of benefits clause was rare, but it was often used by the United States. Thus, its southern neighbour, Mexico also tended to use that provision in their treaties. The provision ensured that persons were prevented from abusing treaties and from treaty shopping.

Mr Singh expressed concern about the fact that the UAE hosted such a large number of SA expatriates. He asked if Treasury took this into account before entering into these agreements, given South Africa’s skills shortages; or if they were only concerned about the financial aspects.

Ms Mputu replied that one should not just look at this as a loss to SA. Instead one should consider the fact economic relations between the countries were being improved in the process. People were going to work abroad, as it was economically viable for them to do so, but they were coming to spend the money in SA.

Mr Singh asked how NT could account for the huge increase in SA investment into the UAE in 2005/2006.

Ms Mputu explained that this huge jump in investment in the UAE could be attributed to the fact that Standard Bank group had opened a branch in the UAE. Since they were trading in gold, the bank exported R2.5 billion in gold to the UAE for the capitalization of Standard Bank UAE.

The Chair asked if this was a once-off transaction.

Ms Mputu answered in the affirmative.

The Chair asked why the Committee was not briefed on the treaties with India and Brazil.

Ms Maharaj said that they had only been finalized recently. They had been signed but there had been no opportunity to conduct preliminary hearings.

Mr Tomasek added that that due to time constraints the documents were signed after negotiations. Since there was no preliminary briefing, it would require them to do a more comprehensive final briefing.

The Chair could not understand why they rushed to have the treaties signed when they could not take effect without the Committee’s ratification.

Mr Tomasek agreed that Governments had the power to decide not to ratify a treaty even after negotiations have been completed.

Mr B Mnguni (ANC) added that the negotiations would then have been a waste of money.

The Chair said that if this happened, the parties responsible would be held accountable for not following proper procedure.

Mr S Marais (DA) asked when these treaties were signed. He asked why the Committee was only hearing about this now. He accused SARS of making a laughing stock of the Committee.

The Chair reminded the presenters that the real power lay with the Committee since they had the power to ratify or reject.

Ms Maharaj promised that SARS would send the Committee the details regarding the processes undertaken regarding the treaties with India and Brazil.

Adoption of Special Pensions Amendment Bill
Ms Jo Ann Ferreira (Chief Director: Legislation- National Treasury) referred to the document titled “Proposed Amendments to the Special Pensions Amendment Bill [B29- 2008].

Clause 2 was amended to allow for the deletion of the disqualification relating to a person convicted of an offence after 2 February 1990.

Clause 7 was amended to allow for the extension of the period within which a spouse or orphan must apply for the pension. It was extended to 36 months.

Discussion
Mr Singh referred to the persons who would qualify for pension if the Bill was passed (due to the deletion of the disqualification relating to a person convicted of an offence after 2 February 1990). He asked if there were resources to deal with the possible new applications.

Ms Ferreira said that the 70 persons whose pensions had been stopped were already approached and would be dealt with on an individual basis. Resources will be made available in the adjustment budget and in the Medium Term Expenditure Framework.

Ms Fubbs asked how Government was informing people about the pensions, so that people who were eligible would know that they were able to claim.

Ms Ferreira said that the same process would be followed as was done before the 2006 cut-off. There had been communication campaigns and there was also regular communication with Military Veterans Associations and political parties. NT had however taken note of the views expressed in public hearings that they needed to do more to inform people of these pensions.

Mr Singh said that on the one hand NT had indicated that the Bill would cost R6.4 billion to implement, while the Objects stated that this would cost R6.8 billion.

Ms Ferreira explained that the R6.86 billion reflected in the Memorandum on the Objects of the Bill under “Financial Implications for the State” was the total cost of implementing the Bill. The implementation of the amendments would cost R3.7 billion.

The Chair said that NT would have to report back to the Committee on their communication campaign and the way in which they informed communities about the special pensions.

Mr Moloto asked how the Committee would acknowledge the contribution of those who had been under 30 (in 1996) and therefore fell outside the scope of the Bill. He proposed the tabling of a motion in which the House resolves that:
-the Department of Labour should provide training programs to the ex-combatants in consultation with the relevant ex-combatant organisations
-Government would meet the cost of providing counseling and related medical treatment for ex-combatants suffering from post traumatic stress
-Government would provide the resources to implement this resolution effectively
-a system of regular reports to Parliaments should be implemented and that the first report should take place within 6 months of the enactment of this amendment

Mr Singh indicated his support for the motion but felt that they should not single out this function as being that of the Department of Labour. Instead it should refer to “the relevant department”.

Mr Johnson added that it should refer to job guaranteed training.

The Chair said that this would be difficult to implement. The whole idea might fail if they were too ambitious.

Mr Marais asked what the financial implications would be of accepting the resolution. It could mean that Government may have to re-allocate funds for this task. He was not sure whether additional funds would be allocated for this purpose.

Mr Moloto said that he was not suggesting that the Department of Labour should cut other programmes. Government should find the resources for this purpose.

Mr Mnguni said that instead of “job guaranteed training”, it should refer to “accredited training”.

Mr Singh asked if they were proposing the provision of free health benefits.

Mr Moloto said that he was referring to counseling for post-traumatic stress. This would be for a limited period and where necessary only.

The Chair proposed a motion of desirability for the adoption of the Special Pensions Amendment Bill. The Committee agreed.

Minerals and Petroleum Resources Royalty Bill
Mr Keith Engel (Chief Director: Legal Tax Design-National Treasury) said that comments on the latest version of the Bill had been of a technical nature. The policies had remained unchanged.

There are two categories of minerals; namely refined and unrefined. The list of minerals falling into these respective categories is in Schedules 1 and 2 of the Bill. Industry is still commenting on the schedules.

Refined minerals receive a preferential formula and receive fewer deductions to provide more incentive for beneficiation.

The Earnings Before Interest and Taxes (EBIT) calculation allows profit-like adjustments for the rate, thereby addressing marginal mines (unlike the flat rate which had not taken profitability into account; resulting in overcharging when times were bad and undercharging when times were good).

Mr Engel gave the detail of the EBIT calculation and key special adjustments (slides 7 and 8).

Regarding composite minerals the general rule was to allocate EBIT deductions according to a reasonable method consistently applied.

The issue of gross sales (for Refined and Unrefined minerals), were dealt with in Slides 10 and 11 respectively.

Slide 12 indicated that rollover relief would apply if minerals were sold pursuant to the sale of a going concern. It also shows how unincorporated bodies would be taxed.

In order to monitor success of the royalty, the Bill gives the Minister the power to request individual taxpayer information (since usually only SARS could request such information).

Discussion
Mr Singh referred to the statement on Slide 14 that consideration paid to the State for old order rights can act as an offset. He asked what happened in the case where partly state subsidized trusts representing communities got most of their income from lease rights.

Mr S Lowe (ANC) referred to the bullet point 2 on slide 8 of the presentation, which stated that there would be “no deduction for the royalty itself”. He asked if this addressed the problem of the communities (especially the rural communities).

Mr Engel said that the Bill did not deal with the issue of the communities. The Bill dealt with royalties to be paid to the State by mining houses. This Bill was designed to tax industry. The issue regarding the communities was dealt with in the Minerals and Petroleum Resources Development Act (MPRDA). That Act contains provisions which preserve the rights of the communities. The issue of leases was not dealt with in this Bill at all.

Mr Lowe said that companies had applied for permission to mine the mine dumps. He asked which category of mineral mine dumps would fall into.

Mr Engel said that this was not dealt with by this Bill at all. If the MPRDA were to be amended to include mine dumps, the dumps would automatically be taxed in accordance with this Bill.

Mr Lowe asked why there was a 100% write off for oil and gas.

Mr Engel answered that oil and gas will be charged a royalty. But, like all minerals, there would be a deduction for capital expenditure. Oil and gas had however needed a special provision in the Bill.

Mr Lowe referred to the exemption for sampling and asked if it referred to an exemption on the prospecting of the minerals.

Mr Engel said that the exemption would be limited to what was in the MPRDA. Thus they would apply the exemption to prospecting and exploration, if this was provided for in the MPRDA.

Before adjourning the Chair read an apology from Mr Tomasek. It stated that the treaties with India and Brazil had been Mutual Assistance Agreements for Customs and not Double Taxation Agreements. They had therefore been tabled for information purposes only, but SARS would brief the Committee on them if so requested.

The Chair adjourned the meeting.