Draft Financial Management of Parliament Bill [B75-2008]: finalisation & Double Tax Agreement with Netherlands: briefing by National Treasury, SARS & Approval for Ratification

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Finance Standing Committee

15 September 2008
Chairperson: Mr N M Nene (ANC)
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Meeting Summary

The Parliamentary Legal Advisor detailed the changes that had been made to the Bill in accordance with what had been agreed on in the previous session on the Bill. The amendments were contained in clauses 6, 9, 16, 34, 47, 48, 50 and 56. The danger of conflicts of interest in supply chain management and procurement were pointed out, and it was queried if the Bill specifically excluded the awarding of a tender to a spouse. Other questions related to the absolute prohibition on contracts, the disclosures of conflicts of interest in accordance with the Schedule, the clauses covering the appointment to the tender committee and who was eligible to be appointed to the tender committee. Having considered the Bill, clause by clause, the Committee adopted the Draft Financial Management of Parliament Bill with amendments. The Committee further adopted its Report.

The Committee was briefed on the Double Taxation Convention and Protocol with the Netherlands by National Treasury (NT) and the South African Revenue Services (SARS). National Treasury set out the history, noting that this Convention was to replace an original double-taxation treaty signed in 1972, which needed to be changed because of South Africa’s conversion of its domestic Secondary Tax on Companies to a dividend tax at shareholder level. The revised tax treaty also addressed certain aspects that were not present in the old treaty. The figures for the investment flows and trade flows between South Africa and the Netherlands were also outlined. The technical provisions of the tax treaty were described, and it was noted that some of these provisions, in articles 2, 10, 17, 27 and 28, had been amended by a further protocol signed two months previously. It was noted that some of the provisions were specific to needs of the Netherlands. Committee Members enquired how these treaties compared with others that may have been signed with other European Union countries, whether there was a multi-lateral agreement with a number of EU countries. The impact the additions and losses in revenue as a result of this agreement was queried. Members further asked whether there had been other revisions, which version of the agreement was currently in force and further details around the Netherlands pension provisions for World War II victims. The Committee resolved to recommend ratification of the Agreement to the House, and adopted the Report on this matter.

 

Meeting report

Financial Management Of Parliament Bill: Finalisation
The Chairperson stated that the Committee had discussed several amendments at the previous session. The Committee would be briefed on the changes included in the latest draft of the Bill, and then move to the clause-by-clause consideration.

Adv Frank Jenkins, Parliamentary Legal Advisor, outlined the amendments that had been included in the Bill since the last session. He tabled a revised draft and pointed out that the changes took the form of insertions, substitutions and deletions to clauses 6(I), 9, 16(2)(h), 34, 47(4)&47(5) 48, 50(1) and 56 (see attached document for full details).


Discussion
The Chairperson commented that he hoped that the Members agreed that all the amendments discussed previously were now incorporated in the new draft. He then proceeded with the clause-by-clause consideration of the Bill.

Mr M Johnson (ANC) noted the issue of conflicts of interest in supply chain management and procurement. He asked if the Bill specifically excluded the awarding of a tender to a spouse, or situations where possible conflicts of interest could arise.

The Chairperson responded that at this stage the Committee was trying to check if the amendments that the Committee had agreed upon in the prior session had been properly included. Members had also agreed that the regulations would strengthen the spirit of the Bill. Supply chain management and procurement was dealt with in Schedule 3 of the Bill.

Ms N Sibhidla (ANC) added that this issue was also covered in clause 46 (d) and (e)

Adv Jenkins responded that the intention was not to make it impossible for Parliament to contract to relevant service providers. However, anyone connected with parliament itself who also owned a service provider would be automatically disqualified, as provided for in clause 46 (Prohibition on contracts). The rest of the disclosures of conflict of interest would be dealt with in the regulations.

Mr Singh accepted that the tendering was covered in clause 46 and Schedule 3 of the Bill. He wanted to know which clause covered appointment to the tender committee.

Adv Jenkins responded that there was an absolute prohibition on Members contracting with Parliament.  Should the situation arise where a spouse of a service provider was on the tender committee, this would be an issue of conflict of interest and disclosure. One would have to look at this eventuality on a case-by-case basis.

Mr S Asiya (ANC) asked if the regulations superceded the principal Act.

The Chairperson responded that this was taken care of in Chapter 9, dealing with Regulations and Instructions.

Mr S Marais (DA) queried the name of the Bill and the possible clash with the name of another Bill.

The Chairperson responded that the name that was gazetted would be the final name and this was Financial Management of Parliament Bill.

Mr Singh referred to clause 44, which stipulated that Members of Parliament were barred from the tender committees. He sought clarity on who was eligible for appointment and what the reasons for this would be.

Adv Jenkins responded that the policy was usually that the tender committees would be composed of Parliamentary staff, unless there was a conflict of interest. The Committees were generally made up of senior Parliamentary officials.

The Chairperson reiterated that the main aim of this would be to guard against conflict of interest.

The Chairperson asked for, and received confirmation from Members, that there were no further questions in respect of the amendments.

The Chairperson then noted that the Committee had considered the whole Bill, as amended.

The Chairperson proceeded to read the report of the Committee on the draft Bill.

The Committee adopted the draft Bill and the Committee’s Report.


Double Tax Convention and Protocol with The Netherlands: National Treasury (NT) And South African Revenue Services (SARS) briefings and requests to ratify
Ms Yanga Mputa, Director: Tax Policy Unit, National Treasury, briefed the Committee on the request for ratification of the tax treaty with the Netherlands.  She took the Committee through the treaty ratification process. She explained that before any tax treaty could come into force, it had to be ratified by Parliament. This particular Treaty was the renegotiation of an existing tax treaty. The first treaty between South Africa and the Netherlands came into force on 20 January 1972.  The revised tax treaty signed on October 2005 would terminate that previous tax treaty. It had been ratified already by the Netherlands, but South Africa delayed ratification pending renegotiation of the article dealing with the taxation of dividends, due to the proposed changes to South African domestic tax legislation, particularly the conversion of Secondary Tax on Companies (STC) to a dividend tax at shareholder level. The revised tax treaty also addressed certain aspects that were not present in the old treaty. She also reported the figures for the investment flows and trade flows between South Africa and the Netherlands.

Mr Ron van der Merwe, Senior Manager: International Treaties, South African Revenue Services (SARS) discussed the technical provisions of the tax treaty. The purpose of these agreements was to remove barriers to cross border trade and investment. This was done by eliminating the possibility of double taxation, creating certainty of tax treatment, reducing withholding tax rates, dealing with exchange of information between authorities, assisting in tax collection, the resolving of disputes and ensuring consistent interpretation. As background, he outlined the ways in which treaties removed tax barriers.  His presentation consisted of two parts: The Ratification of the South Africa – Netherlands Double Taxation Convention and the Ratification of the South Africa – Netherlands Protocol amending the Double Taxation Convention.

The Ratification of the South AfricaNetherlands Double Taxation Convention

This part referred to the original agreement signed in 2005. The treaty 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 (DTAs) worldwide. A number of the articles were different from the normal South African approach.

He then outlined the articles of interest.

Article 4, Paragraph 1 (b) was inserted at the request of the Netherlands. This was important as only residents may qualify for the benefits of the treaty, and it dealt with the State’s interpretation of liability for tax.
Article 5 dealt with permanent establishment.  A permanent establishment was the threshold that must be crossed before business profits may be taxed in the source State. With regard to construction, a resident of one State could enter into activities in the other State and not create a permanent establishment until a period of 12 months had elapsed. This was a bilateral provision.
Article 8 dealt with shipping and air transport. The basic rule in paragraph 1 was that the State of residence retained the sole right of taxation. A simple example would be that SAA's profits would be taxable only in South Africa while KLM would be taxed in the Netherlands, even if operating between the two countries. Paragraph 2 provided for a rule establishing the place of effective management of a shipping enterprise. Paragraph 3 dealt with profits from the rental of ships and aircraft.
Article 10 (Dividends) would be discussed under the protocol, as this was the article that was primarily amended by the new protocol.
Articles 11 and 12 operated on the same basis that South Africa and the Netherlands would tax their own residents.
Article 17, dealing with Pensions, Annuities and Social Security Payments, was slightly different from the 1972 agreement. He added that this issue had been somewhat problematic for the Netherlands, as there were a number of schemes operating between the Netherlands and Belgium. This was an anti-abuse provision for the Netherlands. It was not really an issue for South Africa.
Article 19 on Professors and Teachers was outlined.
Article 24 related to Offshore Activities. Throughout the agreement thresholds for taxation were created in the host State. Offshore activities inherently referred to natural resources and therefore the thresholds were significantly reduced to create quicker source taxation in the source State.
Article 26 dealt with the Mutual Agreement Procedure. He briefly explained the normal form of the Mutual Agreement Procedure. Paragraph 5 provided that if the solving of the problem was difficult, then it could be resolved by means of arbitration, but this should be agreed to by both the States and the taxpayers concerned.
Article 28, dealing with Assistance in Recovery, was updated to use the latest model article
Article 30, Paragraph 3, detailing the approach with Members of Diplomatic Missions and Consular Posts, was detailed.

The protocol of the 2005 agreement set out a number of agreed interpretations in respect of this treaty. This was to draw attention to the fact that the countries were following international consensus in interpreting a number of the articles in the treaty. It was noted in particular that the provisions of paragraphs 9, 10, 11, 12 and 14 applied only to the Netherlands and dealt with specific issues from their side.

South AfricaNetherlands Protocol amending the Double Taxation Convention: Request for ratification
Mr van der Merwe then noted that some of the provisions of the 2005 agreement had been amended by the protocol signed 2 months previously. The basis for formulation was the same.
Article 2 related to the taxes covered, and Paragraph 4 was included for the sake of completeness. These were changes that affected the operation of agreements between the two countries.
Article 10 set out the South AfricaNetherlands protocol dividend rates.
Article 17 now contained the insertion of a new paragraph 3. The Netherlands essentially gave up their right to tax the pension of victims of World War II and their next of kin. If the pension was paid to residents of South Africa, they may be taxed by South Africa.
Article 27 concerned the exchange of information. This was an update to the latest international usage and would provide the opportunity to exchange information in respect of tax of any kind, regardless of any laws on bank secrecy. It was very much in line with South African policy in that exchange of information should be as complete as possible in attempt to combat tax evasion.
Article 28 dealt with assistance in collection of taxes and was also an update to the latest OECD model.

Discussion
Mr Johnson referred to the explanatory memorandum and asked when the agreement would be ratified and once ratified, when it would terminate.


Mr Marais queried the other Double Taxation Agreements that South Africa had with the countries of the European Union, asking where these were, whether any of the EU countries were excluded from such agreements, and how other DTAs would compare with this. Furthermore, he asked if there was not an agreement with the EU as a whole. He stated that it was difficult to control the movement of goods within the Euro-zone as there were effectively no borders and queried the practical effect any agreement with an EU country had in light of this.

Mr van der Merwe replied that the other DTAs with the long-standing countries of the EU had similar terms. The treaties with the newer EU members, however, had a different focus. They matched the developing country policy needs with different provisions in the treaty. There was no single multilateral EU double taxation agreement. Most of the tax agreements in the world were bilateral in nature. The only multilateral examples he could think of were the ones held by the Nordic states.
 

Dr D George (DA) asked what impact the additions and losses in revenue would have on the fiscus. He asked if SARS had any modelling in place to see what the impact would be.

Mr van der Merwe responded that the agreements were to be used to encourage investment. They were not so much concerned with how much revenue was brought in.

Mr N Singh (IFP) clarified that the original agreement had been concluded in 1972 and revised in 2005. Subsequent to that it had been renegotiated, which produced the version that now needed to be ratified. He asked how many revisions there had been in between these phases, and also which version of the agreement was currently being enforced.

Mr van der Merwe responded that the 1972 agreement would only terminate once the 2005 agreement was put into operation. This was to ensure that there were no gaps in the operation of the treaty. Treaties did not change as often as domestic law. Once enforced, a treaty would operate in a primary way. If there was a conflict between a treaty and domestic law, the treaty would prevail. A treaty was only renegotiated under exceptional circumstances, where there had been a significant change in one country's domestic law. This treaty was renegotiated because of South Africa’s recent change where the Secondary Tax on Companies (STC) was being replaced with a dividend tax on shareholders.

Mr Singh asked if the pension provision was limited to victims of World War II, or if any it applied to all pensions issued by the Netherlands government.

Mr van der Merwe responded that this applied only to the pensions of World War II victims. It did not apply to normal pension funds.

The Chairperson read the Reports of the Committee.

The Report was accepted by the Committee, and the Committee voted in favour of recommending the ratification of the Treaty

The meeting was adjourned.

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