Protocol Amendments for Avoidance of Double Taxation, Prevention of Fiscal Evasion & Mutual Assistance in Tax Matters: National Treasury & SARS briefings

Meeting report

Mr Lutando Mvovo, Director: International Tax, National Treasury (NT), briefed the Committee on the double-tax agreement (DTA) protocol between the Republic of South Africa (RSA) and Oman. The RSA-Oman tax treaty was one of the nine tax treaties that had a zero rate withholding tax on dividends. The treaty had to be renegotiated before the new dividends tax could be implemented. The new dividends tax came into operation on 1 April 2012. This protocol was signed on 15 November 2011 in Muscat, Oman.

He moved on to the DTA protocol between RSA and Mauritius. The current (old) treaty was signed in 1996 and came into effect on 1 July 1997. The revision of the DTA, at the behest of RSA, was mainly to:

• Improve tax cooperation between the two countries;
• Change the domestic tax landscape (for example, change from source to residence system, the introduction of a capital gains tax, withholding tax on interest);
• Increase intermediation of Mauritius for inbound (and outbound) investments; and
• Discourage potential abuse of the DTA through base erosion and profit-shifting practices.

The new tax treaty was signed on 17 May 2013 in Maputo. The key tax policy items that were renegotiated were dividends, interests, royalties, tax sparing, capital gains and cooperation in tax matters. The major benefits of the revised treaty are a minimized risk of base erosion and significant policy space for SA to adjust withholding tax rates.

Mr Ron van der Merwe, Senior Manager, South African Revenue Services (SARS), briefed the Committee on some of the benefits from a tax administration perspective -- mutual agreement procedure, exchange of information and assistance in collection of taxes.  He started with the protocol between RSA and Oman. Only Article 8, on shipping and air transport, and Article 10, relating to dividends (see report), were changed.

He highlighted some of the important changes in the new DTA with Mauritius. The first, Article 4, referred to persons who are residents in either country or state. It read “that if a person other than an individual was a resident of both contracting states, the competent authorities of both states should by mutual agreement settle the question and determine the mode of application of the agreement to such person. In the absence of such agreement, such person should be considered to be outside the scope of the agreement except for the provisions of Article 25”.

The second, Article 5, dealt with permanent establishment (PE). A PE occurred when a resident in one state operating in another state was taxed after crossing a time threshold. According to the DTA with Mauritius, a building site or a construction, installation or assembly project, or supervisory activity in connection therewith, have to be ongoing for more than 12 months before a PE exists. Regarding the furnishing of services by an enterprise through employees, those employees have to be in the country for a period exceeding 183 days in any 12-month period before a PE exists. Similarly, individuals who provide professional services or other activities of an independent character must be in the country for a period exceeding 183 days in any 12-month period before a PE exists.

The third change was under Article 8, which stated that “profits of an enterprise of a contracting state from the operation of ships or aircraft in international traffic, should be taxable only in the resident state”. The fourth, Article 10, referred to the dividend rate in the SA-Mauritius DTA, which had been established at 5% for shareholding of at least 10%, and 10% on all others. The fifth, under Article 11, was the change in the interest rate, which had been established at 10% in all cases. There were exemptions for interest received or paid by the state and wholly-owned institutions and for debt instruments listed on recognised stock exchanges. Paragraph 4 noted the recognised stock exchanges as the JSE and the Stock Exchange of Mauritius.

The sixth change, under Article 12, was regarding royalties, where a 5% royalty rate had been fixed in all cases. In Article 18, a new pension and annuities change had been incorporated which states that payments under a social security system were taxable only in the state which pays the pension. Also, under Article 20, professors and teachers have now been exempted from taxation in the host state for a period of two years if the payment was received from outside the state. The aim of this was to increase the exchange of skills across borders. The ninth change, under Article 25, was enforced to ensure that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for an exchange of information. Under Article 26, a change had been introduced whereby the two states have been empowered to collect taxes on behalf of each other.

Finally, the protocol under paragraph 1 provided for a “Most Favoured Nation” (MFN) provision with respect to Article 10. SA would thus enter into negotiations with Mauritius to provide comparable treatment as might be provided for a third state in future. Also, with reference to Article 23, paragraph 5, dealing with non-discrimination, it was understood that should SA abolish the secondary tax on companies without replacing it with a similar tax, the provisions of that tax would cease to have effect from the date on which it was abolished.

Mr Van der Merwe referred to the protocol amending the convention between RSA and Botswana, He said the only change in the convention was that old Article 25 was deleted and replaced by the new article on the exchange of information. This new article was in line with Organisation for Economic Cooperation and Development (OECD)/UN models, and extended to taxes of every kind and description. The new article ensured that bank secrecy or the absence of a domestic tax interest could no longer be used to deny a request for an exchange of information.


He briefed the Committee on the Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2011 protocol. The purpose of the convention was to allow for the effective exchange of information and administrative assistance between the tax authorities of the states which were party to the convention, and to increase cooperation among tax authorities to combat tax avoidance and evasion. Articles of interest in the convention, as amended by the Protocol (see document for more information), include:

Article 1: Object of the convention and persons covered
Article 2: Taxes covered
Article 4: Exchange of information
Article 5: Exchange of information on request
Article 6: Automatic exchange of information
Article 7: Spontaneous exchange of information
Article 8: Simultaneous tax examination
Article 9: Tax examinations abroad
Article 11: Recovery of tax claims
Article 12: Measures of conservancy
Article 17: Service of documents
Article 21: Protection of persons and limits to the obligation to provide assistance
Article 22: Secrecy
Article 26: Costs
Article 27: Other international agreements or arrangements
Article 30: Reservations

States were obliged to enter into declarations in terms of Annex A: paragraph 3 of Article 2 with respect to taxes covered; Annex B: paragraph 1(d) of Article 3 with respect to the meaning of the term “competent authority”; and Annex C: paragraph 1(e) of Article 3 with respect to the meaning of the term “national”. South Africa’s formal ratification of the reservations, declarations and notifications were:

Notifications
Annex A – taxes to which the convention would apply:

Article 2, paragraph 1.a.i - income tax; withholding tax on royalties; tax on foreign entertainers and sportspersons; turnover tax on micro businesses; secondary tax on companies, terminate as from 31 March 2012; dividend tax; withholding tax on interest.

Article 2, paragraph 1.a.ii – capital gains;

Article 2, paragraph 1.b.iii.A – estate duty; donations tax;

Article 2, paragraph 1.b.iii.B – transfer duty;

Article 2, paragraph 1.b.iii.C – value-added tax;

Article 2, paragraph 1.b.iii.D – excise tax; and

Article 2, paragraph 1.b.iii.G – securities transfer tax.

Annex B – Competent authority: The Commissioner for SARS or an authorised representative of the Commissioner.

Declaration
Annex C – Definition of the term “national” for the purposes of the Convention: Any individual who possessed the nationality or citizenship of SA and any legal person, partnership, association, or other entity that derived its status as such from the laws in force in SA.

Reservation
Pursuant to Article 30, paragraph 1.a of the Convention, SA had entered a reservation and would not provide any form of assistance in relation to the taxes of the other parties included in the following categories of Article 2, paragraph 1:

Article 2, paragraph 1.b.i – Taxes on income, profits, capital gains or net wealth which were imposed on behalf of political subdivision or local authorities of a party;

Article 2, paragraph 1.b.ii – Compulsory social security contributions payable to general government or to social security institutions established under public law;

Article 2, paragraph 1.b.iii.E – Taxes on the use or ownership of motor vehicles;

Article 2, paragraph 1.b.iii.F – Taxes on the use or ownership of movable property other than motor vehicles; and

Article 2, paragraph 1.b.iv – Taxes in categories referred to in subparagraph (iii) above which are imposed on behalf of political subdivisions or local authorities of a party.

Pursuant to Article 30, paragraph 1.d of the Convention, SA entered a reservation and would not provide assistance with regard to the service of documents as described in Article 17 of the Convention. This reservation did not apply to the service of documents as described in Article 17, paragraph 3 of the Convention.

Discussion
Mr D Joseph (DA) referred to the protocol agreements between South Africa and Mauritius, and asked what the reason was for the long gap on the updates of the treaty.

Mr Van der Merwe said the reason for the delay could be attributed to SA’s approach to cross-border taxation. When the country first negotiated the treaty, it had operated on a source system. The country now taxed on the basis of resident.

Mr Joseph asked if any Southern African Development Community (SADEC) guidelines had been consulted when deciding on these agreements.

Mr Van der Merwe replied that SADEC did have a double taxation agreement which South Africa had followed most of the time in its negotiations.

Mr A Lees (DA) asked National Treasury (NT) to quantify how much money had been lost on an annual basis before these changes were implemented. A lot of time and money had been spent to redo these protocols.  What were the benefits in terms of rands and cents?

Mr Mvovo replied that outbound investments to Mauritius were much higher than inbound investments. He described it as a huge concern.

Mr B Mashile (ANC) wanted to know how the “most favoured nation” principle worked.

Mr Van der Merwe replied that the “most favoured nation” clause was used in treaties when one wanted to ensure that whatever had been negotiated in a treaty would not put one in a worse position when that country renegotiated in future.

Mr Mashile asked what sort of cooperation SA received from the African Union (AU).

Mr Van der Merwe said that there had been very little cooperation from the AU in terms of taxation.

Mr Joseph asked if the treaties were open-ended, or subject to a time frame.

Mr Van der Merwe replied that there was no time frame attached to double taxation periods. It would operate and change as economic relationships between the two states changed, or when there were major changes to the tax systems which would require an amendment of the treaty.

Mr Joseph asked if the competent authority (p24) should not be the Minister of Finance -- or the President, for that matter.

Mr Van der Merwe replied that the competent authority could not be the Minister or the President. The information that was dealt with were those of taxpayers, and was therefore covered by confidentiality clauses of the Income Tax Law, which was administered by the Commissioner.

Approvals
The Chairperson put the following report to the Committee: The Agreement between the Government of the Republic of South Africa and the Government of the Republic of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, tabled in terms of section 231 (2) of the Constitution, 1996. The Committee approved the set agreement.  Mr Mashile submitted the proposal, which was seconded by Mr Chaane.

The Chairperson put the report regarding the agreement between the Government of South Africa and the Government of the Sultanate of Oman to the Committee. The Committee approved the set agreement. Ms Faku submitted the proposal, which was seconded by Mr Joseph.

The Chairperson put the report regarding the Protocol amending the Convention between South Africa and Botswana to the Committee. The Committee approved the set protocol. Mr Mashile proposed, and Mr Josephs seconded.

The Chairperson put the report regarding the Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2011 protocol to the Committee. The Committee approved the set Convention. Mr Chaane proposed, and Mr Joseph seconded.

The meeting was adjourned.