National Treasury & South African Revenue Service on Double Taxation Agreements & ratification thereof

Meeting report

Opening remarks by Chairperson
The Chairperson said that the bona fides of the previous Committee were accepted. The only reason their work was incomplete was due to the time constraints related to the elections. The work was divided into two categories. This was due to the work of the Committee Secretaries, who were thanked and acknowledged. The one part of the work was the formal ratification, starting with the African Tax Administration Form. The South African Revenue Service (SARS) was asked to give a brief overview, and for an indication of who would handle the presentation.

The Chairperson asked for guidance as to how this had been dealt with before. He did not know how these were done, but Parliament needed to apply its mind, as this was overwhelming. The Committee did not really have the capacity to evaluate and assess things. He asked the Committee Secretary and the Parliamentary Budget Officer (PBO) to look at this. Parliament became a rubber stamp for these matters. There were now 21 agreements and the question arose, what was Parliament’s role in this? The PBO was asked for some guidance, as he questioned his own knowledge about the African Tax Administration Forum. How could oversight be exercised in this situation? It was his sense that this was often rubber-stamped. He asked that the National Treasury be engaged with about this in future, as there had to be a better system of dealing with this matter, because ultimately Parliament had to account for this. He asked if he was correct about this, or if the Executive had to account for this. Members were asked to comment on process issues. He asked if Members had any ideas on how to manage this process.

Dr D George (DA) said that he was a Member of the previous Committee and it had worked quite well. When the previous Committee had these kinds of instruments to look at, they received a briefing and then applied their minds, read the necessary documentation, asked questions that were answered, and then the process continued. There was not much space to make changes. It was clearly just an informational thing to know what was in it, then have a commentary and if there were any serious issues, then they could be taken up.

The Chairperson asked how other parliaments in the developing world processed these agreements. Before these things were voted on, a process was needed to understand what was being approved. He asked if these issues could be looked into. His job was to draw the attention of Parliament to its role. In the meantime, the PBO was asked to do some work on this matter and provide a briefing of about two pages with some ideas on how the Committee should process the agreements, so that it was more relevant or appropriate to a Parliamentary Committee.

SARS briefing on the African Tax Administration Forum (ATAF)
 
Ms Oshna Maharaj, Manager: International Development and Treaties: SARS, said that the African Tax Administration Forum (ATAF) Agreement established the ATAF as an international organisation, and was entered into force on 8 October 2012. There were 36 member states that were party to the ATAF multilateral agreement on mutual assistance in tax matters: Benin, Botswana, Burkina Faso, Burundi, Cameroon, Chad, Comoros, Cote d’Ivoire, Egypt, Eritrea, Gabon, Gambia, Ghana, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

The purpose of the multilateral ATAF agreement on mutual assistance in tax matters was to allow for effective exchange of information and assistance between tax authorities of the member states which were parties to the agreement; and to increase co-operation among tax authorities to combat tax avoidance and evasion. The ATAF Agreement and the South African Development Community (SADC) Agreement followed the Articles of Exchange of Information and Assistance in Collection in the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) Model Tax Conventions quite closely.

Ms Maharaj said that the articles of interest in the ATAF Agreement were as follows:

• Article 2: Objective – The objective of the Agreement was to enable the contracting parties to assist one another in tax matters.
• Article 3: Taxes covered – this Agreement would apply to all taxes on income, on capital, and to taxes on goods and services imposed by or on behalf of the contracting parties.
• Article 4: Exchange of information
• Article 5: Tax examinations abroad
• Article 6: Simultaneous examination
• Article 7: Assistance in collection
• Article 8: Confidentiality
• Article 9: Costs – here, subject to paragraph 2, the contracting parties shall waive all claims for reimbursement of ordinary costs incurred in the execution of this Agreement.
• Article 11: Other international agreements of arrangements
• Article 12: Mutual agreement procedure
• Article 15: Ratification and entry into force – this Agreement should be ratified by member states in accordance with their constitutional procedures.
   

South Africa’s formal ratification of the notification stated that the instrument of ratification for accession, which would be sent to the depository, advised that the South African Parliament, in accordance with the requirements of South African law, had approved the ratification or accession of the Agreement. The following notification would also be sent:

Notification: Article 14: Competent Authority – The Commissioner for the South African Revenue Service, or an authorised representative of the Commissioner. (See document).                                    

Mr D Ross (DA) said that this was a complex agreement, and the Committee had been bombarded with new information, which were matters related to international affairs and also perhaps dealing with foreign affairs. A lot of work had been done in accordance with international standards and agreements. He asked if the agreement simply had to be ratified.

The Chairperson asked how one had to proceed with this. He asked if there was a mover and a seconder.

The Chairperson read: “The Standing Committee on Finance having considered the request for approval by Parliament of the ATAF Agreement on Mutual Assistance in Tax Matters recommends to the House in terms of Section 231, Subsection 2 of the Constitution, approves said Agreement put to the House for ratification.”
 
Dr George proposed approval, but there was no seconder.

The Chairperson said that because there was no seconder, the Committee could not approve this Agreement.

Ms Tobias said that the Committee could not second when they were not clear on all aspects of the presentation.

The Chairperson said that he had asked that question and no one had answered, hence the discussion had moved on.

Ms Tobias said that the Committee was interested, but it was still in the process of processing the information.

The Chairperson said that apparently the Committee did not have much of a choice. This had been put to the previous Committee, and had been accepted in principle. The aim here was not to go into great detail. He reminded Members that they had agreed to certain things. If they wanted to review matters then they had to argue the case. The Committee had said that the outstanding matters from the previous term of Parliament had been accepted in principle, and only if there was something earth-shatteringly new that could be presented as an argument, then the decisions of the previous Committee could be reviewed. They would have voted on this, as Dr George had said, except that they had run out of time.

The Chairperson suggested that these issues be handled very swiftly and the questions raised here would have to be dealt with in the next round. The PBO and Secretaries had been asked to sit together and work this out. He felt very uneasy about these things. There were broader issues that had to be raised with the National Treasury, like what exactly was expected from Parliament. It was not actually anything more than an endorsement, because most of these Agreements could not be changed. He felt uncomfortable about the structural and policy issues within which these matters were dealt. This could not be dealt with now, because it had to be raised with the House Chair. This would be done. There was a need to find out how much latitude the Committee had, and what its scope for reviewing some of the Agreements was.

He said he did not know the value of what was being done here, although he did have a broad sense. He did not know the right thing to do, because he was not a tax expert and there was a lack of capacity here. The PBO was already staggering under the weight of all the tasks given to her, so this matter would be reviewed later. He asked for brevity on these ones but for the second set, explanations would be preferred.

SADC Agreement on Assistance in Tax Matters

Ms Maharaj proceeded with the briefing on the Southern African Development Community (SADC) Agreement on Assistance in Tax Matters. The Southern African Development Coordinating Conference (SADCC) was transformed into the SADC on 17 August 1992, when the SADC Treaty was adopted. This redefined the bases of cooperation among member states into a legally binding arrangement.

The purpose of the SADC Agreement on Assistance in Tax Matters was to allow for effective exchange of information and assistance between the tax authorities of the member states that were parties to the Agreement; and for increased co-operation among tax authorities to combat tax avoidance and evasion.

Ms Maharaj said that the cooperation included, amongst other matters, exchange of information, simultaneous tax examinations, tax examinations abroad, recovery of tax claims, mutual agreement procedures and facilitation of joint audits. She said she would take the Committee through the articles that were drafted differently to the ATAF ones.

With regard to Article 3, custom duties were not covered, as it was covered under the Bilateral Custom Agreement that had also been provided to Parliament for approval, and other multi-lateral agreements, so this was a pretty standard agreement.

In Article 9 on costs, the difference was that all reimbursement of costs incurred in the execution of this Agreement were waived. This would refer to ordinary costs in the execution of the Agreement.

Article 15: Ratification and Entry into Force, stated that member states should ratify this Agreement in accordance with their constitutional procedures.

Dr M Khoza (ANC) said that as this was a Standing Committee on Finance, she thought that some quick financial statistics on the subject and a problem statement would be useful to assist with understanding what was being resolved, making it easier to process, especially as a new Committee.

The Chairperson said that that would be done in the future. The matter was now for consideration and ratification. He asked if there was mover and a seconder

The Chairperson read: “The Standing Committee on Finance having considered the request for approval by Parliament of the SADC Agreement on Assistance in Tax Matters recommends to the House in terms of Section 231 Subsection 2 of the Constitution to approve the said Agreement.”

The Agreement was moved.

Mr Franz Tomasek, General Manager, Legislature and Policy: SARS, said that the process was to bring the preliminary hearings, which was the next step to be ratified. They would not match exactly, because there were constraints around signatures between the two parties. An indication depended on when one could get the Ministers together to sign the Agreements. The situation was that it was brought before signature, and then the signature process had to happen. This could take years.

The Agreement was seconded

The Agreement was approved.

Tax Information Exchange Agreements: formal ratification briefing

Ms Maharaj said she would start with the Cook Islands because South Africa had proposed its tax information model to the Cook Islands. This was currently the international standard, which was the exchange of information on request. The Cook Islands accepted the South African model in full -- all it had to do was change the title page, preamble and signature block. For Barbados and the Principality of Monaco, the presentation was a duplication because those countries also accepted the South African model. With regard to the principality of Liechtenstein, Belize and Argentina, there were one or two differences but only in drafting, as the international standard was still the same. Ms Maharaj took the Committee through the differences in the above-mentioned Agreements.

Cook Islands
The Agreement with the Cook Islands closely followed the Organisation for Economic Cooperation and Development (OECD) model Tax Information Exchange Agreement (TIEA), which formed the foundation for the vast majority of TIEAs worldwide. The TIEA ensured that bank secrecy, or the absence of a domestic tax interest, could no longer be used to deny a request for exchange of information.

Articles of Agreement between South Africa and the Cook Islands were:
Article 1: Scope of the Agreement
Article 2: Taxes Covered
Article 4: Exchange of Information upon Request
Article 5: Tax Examinations Abroad
Article 6: Possibility of Declining a Request
Article 7: Confidentiality
Article 8: Costs
Article 9: Mutual Agreement Procedure

Ms Maharaj said that the Articles of Agreement were the same for Barbados, Monaco and Granada.

Mr Ross asked how often a request was declined and a conflict of interest registered between parties. He asked further what the consequences were, specifically with the public policy of the other country.

Mr Tomasek replied that it was very rare that an agreement was not reached. This could be because of bona fide reasons, and it was fair enough that two competent authorities could not reach an agreement. If there were no bona fides involved here, that became something of concern to the Global Forum on Exchange of Information for tax purposes, which monitored the implementation of exchange information agreements across the world. They had a peer review process where every once in a while, a country was reviewed to see if they met the standards. South Africa had now met the standards and had gone through phase one and phase two reviews. If there were cases with male fides or disagreements, that would become something that fed into the peer review process and one would have that as a back stop. But this question was tackled theoretically, because in practice it did not happen.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval by Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Cook Islands for the Exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

The Agreement was approved.

Barbados
The Chairperson stated: “The Standing Committee on Finance having considered the request for approval by Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Barbados for the Exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves the said Agreement.”

The Agreement was approved.

Monaco
The Chairperson stated: “The Standing Committee on Finance having considered the request for approval by Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Monaco for the Exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves the said Agreement.”

The Agreement was approved.

Argentina, Lichtenstein and Belize
Ms Maharaj said that with regard to Argentina, to whom the South African model had also been proposed, there was a minor drafting difference. This difference related to Article 8 on costs – ‘direct costs incurred in providing assistance shall be borne by the requested Party.’ This was within the standard, but there were no costs for external advice and litigation. In any case, however, an expansion memorandum on the TIEAs existed which included those costs under direct costs. So there was no difference with the International Standard or with the South African model.

A difference arose with Liechtenstein, because the South African model was based on one of the models of the OECD. The OECD had two models and some countries chose the second model. In the case of Liechtenstein, they chose to split Article 1 and 2 and included Article 2 on Jurisdiction, which was normally included in Article 1 of the South African model. The title of Article 1 had been changed to Object and Scope of the Agreement. There was just one drafting difference in the slide, and that was in the third line of the second paragraph: ‘…recovery and enforcement of tax claims,…’ that was not inconsistent with the standard, and was still in line with the standard because it was just a drafting difference. It was found that the numbering of the Articles had changed because of the Article 2 on Jurisdiction that had been removed from Article 1.

In Article 5: Exchange of Information upon Request, in (b) there was no reference to legal and beneficial owner, but this was still in line with the international standard because the international standard required that one needed to know the legal and economic beneficial owner in the ownership chain. There was also one drafting difference in (b)(ii). This referred to ‘founders, members of the foundation council and beneficiaries.’ So here there was not just a reference to trust, but also to foundations, because Lichtenstein could create foundations in their jurisdiction, so they wanted to specify that they would provide information on those foundations.

In Article 9: Costs, Lichtenstein wanted to specify what the direct costs where. This was still in line with the Expansion Memorandum of costs, and what was normally done with these protocols was to have them as a memorandum, with competent authorities setting out what the direct costs were. In this case, the direct costs would include, but were not limited to, the following: reasonable cost of reproducing documents or records, reasonable fees imposed by financial institutions or other record keepers for copying research or records, reasonable costs for stenographic reports, interviews or testimonies, and legal fees for non-governmental councils appointed or retained. The direct cost did not include ordinary administrative or overhead expenses incurred by the requested party in reviewing or responding to the information requests. Those costs were actually the indirect costs, and this was still consistent with what South Africa had in its model. 

In the case of Belize, in Article 1: Scope of the Agreement, there was just a difference regarding ‘concerning taxes and tax matters.’ This was not included in the South African model, but it was an alternative in the OECD second model.

In Article 8: Costs, there was no reference to external advisers and litigation for direct costs by the requesting party, but that was still implied because models had an explanatory memorandum and if there was a dispute about meaning, then South Africa could refer to the explanatory memorandum.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Argentina for the exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

There was no seconder, so the Agreement was not approved.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Agreement of the government of the Republic of South Africa and the government of Lichtenstein for the Exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

The Agreement was approved.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Agreement of the government of the Republic of South Africa and the government of Belize for the Exchange of Information relating to Tax Matters, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

The Agreement was approved.

The Chairperson asked what still had to be done.

Ms Maharaj said that there were two VAT agreements and the Foreign Account Tax Compliance Act (FATCA) which Mr Tomasek would be presenting.

The Chairperson said that he had a list of 13 ratifications.  

Ms Maharaj said the ones outstanding were the United States of America, Swaziland, Lesotho, India and Turkey.

Agreements between SA, Swaziland and Lesotho on mutual assistance and co-operation and prevention of fiscal evasion with respect to VAT

A representative of the Department of Finance said that the two agreements entered into with Swaziland and Lesotho were virtually the same. The agreements were standard Session Agreements that provided for mutual assistance and co-operation for the prevention of fiscal evasion with respect to value-added tax (VAT). The Agreement entered into was to make provision and regulate matters pertaining to value-added tax.

The Articles of interest in these two Agreements were:
Article 3: Refund System
Article 4: Exchange of Information
Article 5: Notification of Assessment, claim or decision
Article 7: Resolution of Difficulties

The Memorandum of Understanding on processing and administering the value-added tax refund system between the South African Revenue Service (SARS), the Swaziland Revenue Authority (SRA) and the Lesotho Revenue Authority (LRA) included the following Articles:

Article 4: Exclusions

Article 5: Refunds Procedures

Article 6: Designated Border Posts

Article 7: Non-Designated Border Posts

Article 8: Tax Invoices

Article 9: New Registrable Goods

Article 10: Determining and Monitoring of amounts refundable

Article 11: Obligations for the SRA and the LRA –

               ·         communicate appointment of the Manager;
               ·         exchange information where non-compliance was suspected or detected;
               ·         ensure the Manager performed the necessary functions.

Article 12: Obligations for SARS:

              ·         exchange information where non-compliance was suspected or detected;
              ·         pay 100% of the RSA VAT directly to the tax authority;
              ·         remittance of VAT refunds to be made on a weekly basis; and
              ·         offset rejected claims against future refund claims.

The figures relating to indirect exports made between the three countries were provided.
From 2010 to 2013, between South Africa and Lesotho there was an average refund to qualifying purchases of R436 million per annum, which worked out to R34 million per month. For Swaziland, there was much less, purely because Lesotho was land-locked. Swaziland had introduced VAT in 2012, so it was relatively low for the period 2010 to 2013, with the annual average at R65 million. This was refunded via indirect exports, which South Africa now refunded directly into the tax administration.

Discussion

Ms S Nkomo (ANC) asked if the information on the last two pages, which dealt with the figures, could be submitted to the Chairperson. This was very interesting, and was what one of the Members had requested earlier.

The Chairperson said that the Committee Secretary would ensure that this was done within the next 48 hours.

Mr Ross expressed concern about the refunds in Swaziland being so low, because South Africa had had a lot of sugar exports from Swaziland. There were many press statements with regard to tax evasion on sugar exports. He hoped this had been addressed. He asked if a broader picture with regard to fiscal evasion in terms of VAT could be provided.

The Department of Finance replied that in the current state, the movement of goods between South Africa and Swaziland was going under direct export so they were carrying zero percent VAT. This was largely due to SARS’s effort to try to manage the movement of goods in its proper form. Once an Agreement started to kick in, there would be a movement from direct to indirect, because they would start using the Agreement as a basis to procure the revenue from both sides. So, for example, if sugar was moved, then intermediaries tended to be avoided. Sugar would still tend to be direct exports, because they were commercial goods moving in large quantities. Using this system, South Africa would get to know the role players in the direct export market and the indirect export market.

Mr Ross asked whether an effective value-added tax system would encourage trade between Lesotho and South Africa and Swaziland and South Africa.

The Department replied in the affirmative, because this would encourage trade, as currently the intermediary came in and bought the goods in South Africa. The intermediary then took the goods, paid VAT to the South African supplier and waited possibly for six to eight weeks for a refund. When he/she entered their country, they did not have to spend another 14% VAT in their country. There would probably be cash in hand -- certainly from a timing point of view. This was viewed as encouraging, and also meant fewer complications in terms of fraudulent transactions. With Lesotho, the qualifying purchaser would still make her/his claim, but sent the claim to the Lesotho Revenue Department. SARS believed its modernised customs approach at designated border posts would work, because it worked through normal customs declaration procedures.

Mr Ross asked if the refund system had been established, and if it was effective at present. Was there a tax manager for South Africa, between the two countries, to ensure proper implementation? Would harmonising common system procedures be a prerequisite for good value-added tax? What was the progress in this regard?

The Department replied common system procedures were not really a prerequisite, because one could have deferring VAT rates. All one could do was if South Africa charged 14%, and Lesotho paid 15%, South Africa would still refund 14% to the revenue department in Lesotho, and it would be up to them to refund the extra 1%.

With regard to the designated border post, Mr Ross asked if it was effective and if the tax administration was working.

The Department replied that this was intended to work well at designated border posts because South Africa had the infrastructure of modernised customs procedures, and the personnel who worked hand in hand with foreign countries’ customs as well. The non-designated border posts were allowed by South Africa as exceptions, purely because it might not make economical sense to move goods via Maseru Bridge when one actually lived, for example, closer to the Sani Pass border post. There were procedures that required notification of a day or so.

A Committee Member expressed uncertainty about the mechanism for dealing with the default on refund obligations. He asked where this was established, and if it was it in a memorandum or in an agreement.

A member of the SARS replied that the SARS Refund mechanism was established in law in Section 75 of the Value-Added Tax Act, housed in the section where it was stated that the South African national executive could enter into an agreement with the government of another country for the management of a VAT system and for the refund of VAT with regard to trade between the two. So that resided in the Agreement, which was basically the domestic law of South Africa.

The Memorandum of Understanding purely filled in the nuts and bolts, and reiterated that the procedures themselves should also follow the law. The Memorandum had to abide by the domestic laws of the country.

There was no legal requirement that regulated how frequently a batch claim had to be submitted. What was a legal requirement was, for example, how long a claim could be valid before expiry. This was a 90-day period. 99% of what was done in the MOU, would be found in law. There was a small percentage regulated under tax administrative best practices.

The Department of Finance said that there was a section embedded in the obligation section of the MOU for situations where a country was unable to comply. For example, there would be obligations for Swaziland, Lesotho and South Africa in such instances.

Mr Tomasek said that at the moment a refund was made to the trader or the person crossing the border, the person crossing the border had to pay VAT on that side. They could actually change the value of the goods if they were that way inclined. It would then throw one back into a more cumbersome system, because if one country failed to meet its obligations the agreement would be terminated, and then one would be back to this system. This system was much cleaner from a country perspective, as a refund on the one side became the VAT one had to pay on the other side, so all the intermediary processing that needed to happen was cut out. If one stopped complying and did not fix it, the Agreement would be terminated and one would be thrown back into the old less favourable situation. This kind of situation did not happen generally internationally, because people did tend to try to stick to the agreement, especially in the tax space. 

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Swaziland on mutual assistance and co-operation and the prevention of fiscal evasion with respect to value-added tax, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

Agreement was approved.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Agreement of the Government of the Republic of South Africa and the Government of Lesotho on mutual assistance and co-operation and the prevention of fiscal evasion with respect to value-added tax, recommends to the House in terms of Section 231, Subsection 2 of the Constitution approves said Agreement.”

The Agreement was approved.

Protocol amending Agreements between SA, India and Turkey for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income
 
Ms Maharaj said that the amendments to the Republic of India and the Republic of Turkey agreements were virtually the same, because the same Article was amended, except that a last sentence was added to Paragraph 2 of Article 25: Exchange of Information for the Republic of India.

The added sentence stated: ‘Paragraph 2 includes a further alternate OECD provision which allowed information received by a Contracting State to be used for other purposes when the competent authority of the supplying State authorised such use and such use was allowed under the laws of both States’.

Ms Maharaj said that the difference in the Agreement with the Republic of Turkey was that Turkey did not have a Paragraph 2 sentence, where a competent authority could make a request to use information for other purposes. The reason was that at the time when South Africa negotiated it, Turkey did not request that this paragraph be included. India did at that time and in the update to the South African model, South Africa would be proposing that paragraph in all future negotiations.

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Protocol amending the Agreement between the Government of the Republic of South Africa and the Government of the Republic of India for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, recommends to the House in terms of Section 231 Subsection 2 of the Constitution approves the Protocol.”

The Protocol was approved

The Chairperson stated: “The Standing Committee on Finance having considered the request for approval from Parliament of the Protocol amending the Agreement between the Government of the Republic of South Africa and the Government of the Republic of Turkey for the avoidance of double taxation and the prevention fiscal evasion with respect to taxes on income, recommends to the House in terms of Section 231 Subsection 2 of the Constitution approves the Protocol.”

The Protocol was approved

Agreement with the USA to improve international tax compliance and to implement Foreign Account Tax Compliance Act (FATCA)
Mr Tomasek said the United States of America (USA) had enacted the Foreign Account Tax Compliance Act (FATCA) in 2010 to combat offshore tax evasion by encouraging transparency and obtaining information on accounts held by US taxpayers in other countries. This Agreement was not subject to a Committee hearing, as the previous Committee had waived the hearing because this Agreement needed to be signed by 25 April 2014. The difficulty with this Agreement was that it was a ratification because it had already been signed. This did happen when there was a particular pressure on time for a signature. South Africa was in the pre-implementation phase at this point.

FATCA called for foreign financial institutions (FFIs) to provide the Internal Revenue Service (IRS) with information on US account holders annually, or else a 30% withholding tax (WHT) would be imposed on certain US source payments to the FFIs, such as interest. The world had pushed back when confronted with this Agreement, and the US had come up with two types of model inter-governmental agreement (IGA):
Model I – Reciprocal/non-reciprocal exchange of information; and
Model II – Non-reciprocal, direct reporting to the IRS.
This was intended to relieve the burden on FFIs and address potential legal impediments to providing information to the IRS under domestic law.

Model I was of primary focus to South Africa. Some of the IGA characteristics of Model I were:

·         No direct report to the IRS by FFIs;
·         FFIs reported to the domestic tax authority and the exchange of information took place under existing tax treaties;
·         The result was no WHT tax imposed on FFIs by the US;
·         Cabinet approval to negotiate and sign was received on 4 September 2013. Affected FFIs in South Africa would report the required information to             SARS, which would exchange information with the US automatically in accordance with the Double Taxation Convention (DTC) that already existed           between South Africa and the US; and
·         Articles of interest in the South Africa – US IGA were as follows:

* Article 1: Definitions. - This agreement overrode FATCA and the US because it stated that if one complied with this agreement, one did not have to worry about having the withholding tax implied. This meant one had to have, from the US perspective, some definitions that tied in with their definitions, and that was why there were a lot of definitions.

* Article 2: Obligations to obtain and exchange information with respect to reportable accounts.
* Article 3: Time and manner of exchange of information.
* Article 4: Application of FATCA to South African financial institutions.
* Article 5: Collaboration on compliance and enforcement.
* Article 6: Mutual commitment to continue to enhance the effectiveness of information exchange and transparency.
* Article 7: Consistency in the applications of FATCA to partner jurisdictions

Mr Tomasek said that Annexure I and Annexure II formed an integral part of the Agreement.

·         Annex I set out due diligence requirements for identifying and reporting on US reportable accounts and on payments to certain non-partipating                 financial institutions.
·         Annex II set out entities and accounts that were not the subject of reporting – normally entities and accounts that were either unavailable or only             incidentally available to non-residents, e.g. government entities, central banks, and pension funds.

The MOU ensured that third party reporting was allowed in accordance with paragraph 3 of Article 5. The ultimate responsibility for compliance remained with the FFI.

Discussion
Dr George asked for clarity about whether it was only banks that were being spoken about.

Mr Tomasek replied that he was using banks as shorthand. He was well aware that the Agreement applied to many financial institutions. The National Treasury had spoken to umbrella bodies to make sure they could co-ordinate the responses, rather than trying to speak to everyone individually. It continued to have working groups and joint working groups with bodies. A lot of work had to be done. It cost a lot less than a withholding tax would cost. So from their perspective, they were put in a common model where they were subsidiaries of other banks internationally. This was a model that everyone was working to, so they were now in a consistent space.

A Committee Member said that looking at the implications brought to mind the issue of tax arbitrage. He asked if the possible impact of this adverse arrangement on our ailing economy had been considered.

With regard to the potential for arbitrage, Mr Tomasek said he could make available a list of all the countries that had committed into entering into an Agreement with the US. It was quite an extensive list. The consequence of financial institutions or countries not being part of this Agreement was that their financial institutions were faced with a very high withholding tax. This was a global movement and when early adopters were spoken of, it meant that there was acceptance of the concept across countries. Once the infrastructure was in place with the US, there was a very small marginal cost to roll it out for everybody else. Internationally, one was starting to see a move where countries were saying, “because we have all the infrastructure in place let’s start exchanging information.” There have been comments from the G20 that they supported the concept of automatic information exchange. This model brought things back to a standard approach, which the banks believed they could handle.

USA/FATCA Agreement
Mr Luthando Mvovo, Director: National Treasury (NT) said the NT was approached by umbrella bodies when the US first announced the enactment of FATCA. They had asked the NT to negotiate in agreement with them, so it did not have to deal with them directly. A working group was formed that looked at the design of the Agreement, and worked through it together. Unanimous agreement on the issue was reached. The financial institutions that were covered included banks, long term insurance brokers, asset managers and private equity funds, so the definition of foreign financial institutions was very wide.

The Chairperson stated: “The Standing Committee on Finance, having considered the request for approval of Parliament between the Government of the Republic of South Africa and the Government of the United States of America to Improve International Tax Compliance and to Implement the Foreign Account Tax Compliance Act, the Annexes thereto and the Memorandum of Understanding, recommends to the House in terms of Section 231 Subsection 2 of the Constitution approve the Agreement.

The Agreement was approved.

Process going forward

The Chairperson asked for clarity about the process moving forward.

A member of the Committee support staff said that the process was basically that the Department -- in this case, SARS and the National Treasury -- would come and brief the Committee on what it was they were about to agree on with a particular country before it came to the Committee, or was formally referred to the Committee. They would then go back and conclude the negotiations and sign. Once that was done, it would come back to the Committee to continue the process that the Committee had just completed.

Mr Mvovo said the reason the NT did preliminary hearings was to address the issues the Chairperson had raised at the beginning of the session about its role being merely to rubber stamp things. The preliminary hearing was to show that a country had been negotiated with, the reasons for the negotiation and to ask the agreements to be considered before the Minister signed.

The Chairperson said that there were still capacity issues involved. There were people who had the expertise which the average politician did not have.

Ms Maharaj said that in summary, the Swaziland protocol amending the double taxation agreement between South Africa and Swaziland was the exact same presentation as the Turkey protocol, because South Africa had updated the exchange of information. That sentence was now in the South African model and it would be proposed in future negotiations.

Regarding the Austria protocol, one amendment was made, and that was in Article 1. In paragraph 1(e) of the additional protocol convention, the following sentence was added: ‘to the extent known the name and address of any person believed to be in possession of the requested information…’ The reason this was done was so that the words: ‘to the extent known’ were included to make it easier, in cases where the name and address of the person in possession of the information was not known. This also brought it into line with the international standard.

With Tax Information Exchange Agreements, with the preliminary hearings, there was Jamaica, St Kitts, Grenada and the Isle of Man. The Grenada Agreement was exactly same presentation as the Cook Islands, because they accepted the South African model.

Ms Maharaj said that in relation to Jamaica, there was a difference to the Cook Islands presentation. The difference was with Article 1: Object and Scope of Agreement. The title was different. South Africa normally had Scope of Agreement. The reason was that Jamaica wanted an Article 2 on Jurisdiction. They wanted to split Article 1, so an Article 2 on Jurisdiction was added, and that was why the numbering of the Agreement was different. This was in line with the international standard, and also in line with the South African model.

Another difference was in Article 5: Exchange of Information of Request. Jamaica did not want to make reference to Legal and Economic Ownership, but reference to Ownership Chain in (b). This was still in line with the international standard. The Ownership Chain was legal economic ownership, so it was about knowing owners in the ownership chain.
In (d) there was a reference to Foundations, and information one needs to have on Foundation members, Foundation council and beneficiaries. This was also in line with the standard. Jamaica could actually create Foundations in their Jurisdiction, so they were prepared to give South Africa information on those Foundations.

Article 9: Costs was in line with the international standard. It was just that Jamaica wanted to enter into an MOU between competent authorities dealing with the direct cost that the requesting state will cover, and indirect costs that the requested state would cover.

There was a difference in re-numbering, because Article 10 was included in Implementation of Legislation. This was also in line with the OECD model. This was normally not included in the South African model because a country should not be entering into negotiations if their domestic law did not allow the exchange of information. As a result, Implementation of Legislation in the Article was not included, but Jamaica wanted this included. Each country had the necessary legislation to give effect to the Agreement.

St Christopher, St Kitts and Nevis had some of the same differences. Article 1: Object and Scope of Agreement was different because St Kitts wanted Article 2 on Jurisdiction, so it was split from Article 1. There was a reference again in Paragraph 2 to Recovery and Enforcement, but it was still in line with the standard, because it actually referred to the collection of taxes as well.

Article 5: Exchange of Information on Request. St Kitts wanted to make mention of their Foundations and they did not want reference to legal and economic ownership; and wanted to refer to ownership change chain which was exactly the same thing. This was about knowing information about persons in the ownership chain.

Then there was a reference in (b) to Foundations, Foundation Members; Members of the Foundation Council and Beneficiaries. St Kitts also had Foundations in their Jurisdiction. They would give South Africa their information if South Africa requested information on their Foundations.

There was a drafting difference in Article 9: Costs. This made mention that ordinary costs borne by the requested party and extra ordinary costs in connection with litigation etcetera borne by requesting Party. This was exactly in line with South African model, just that there was a reference to ordinary costs which were indirect cost and then extra ordinary costs which were direct costs. St Kitts also wanted provisional implementation of legislation that would not affect Agreement in any way. South Africa agreed to include Article 10 on Implementation of Legislation and that was why there was a re-numbering of Articles.

As was stated, Grenada was exactly same as the Cook Islands presentation, as they accepted the proposed model. With regard to the negotiation of these TIEAs and very limited protocols, South Africa did not travel to the jurisdictions, but actually negotiated through e-mail.

The Chairperson said that presumably none of these agreements were urgent, as the Committee was not expecting the National Treasury back before the end of this year. He asked this, because the Committee had a very busy programme before the end of the year and some indication was required as to whether formal ratification was required.

Mr Mvovo said that Treasury was not coming back to the Committee this year, as
it still had to arrange dates for signing.

NT briefing on Double Tax Agreements

Mr Mvovo said that he would explain why the National Treasury negotiated, and the benefit in our domestic law. Double tax agreements were different to the presentations that had been made on key aspects of information exchange agreements, because they dealt with many issues called “Comprehensive Agreements”, because they dealt with how one checked dividends, interest rates, royalties, the definition of a residence and when a resident of another country was taxed.

The purpose of Double Tax Agreements, stated in the preamble to the Agreement, was to prevent double taxation of the same income. There were treaties on how to deal with double taxation which would limit the right to tax passive income, and the country of residence had to provide credit or exemption.

The NT stated that it had presentations for trade DTAs (Double Taxation Agreements) for Hong Kong, United Arab Emirates (UAE) and Isle of Man. The termination of Double Tax Agreements was handled by two diplomatic channels, and one gave six months’ notice before termination of the agreement. There was also an Article that dealt with disputes called the Mutual Agreement Article. Treaties also prevented tax evasion and tax avoidance.

How did these treaties fit into the domestic law of the country? There were three sections in the Constitution. Through Section 231(1), the negotiating and signing of all international agreements was the responsibility of the national executive. In terms of Section 231(2), an international agreement binds the Republic only after it has been approved by resolution in both the National Assembly and the National Council of Provinces, unless it is an agreement referred to in subsection (3). Section 231(4) states that any international agreement becomes law in the Republic when it is enacted into law by national legislation; but a self-executing provision of an agreement that has been approved by Parliament is law in the Republic, unless it is inconsistent with the Constitution or an Act of Parliament.

In Income Tax law, Section 108(2), it is stated that once the agreement is approved by Parliament and published in the Government Gazette, it has effect as if enacted in the Income Tax Act.

SARS and the National Treasury negotiated tax agreements jointly. SARS then implemented or interpreted the agreement.

Considerations before negotiating an agreement, or when a request for an agreement was received, include investment flows between South Africa and the other country. This came from the Reserve Bank, so inbound and outbound investment was looked at. The main corporate players and trade flows, imports and exports, between South Africa and that country were also investigated.

United Arab Emirates
Agreement with United Arab Emirates: This treaty was initiated by South Africa and the aim was to enhance economic relations. Based on the information from the Department of Trade and Industry, SA had over 206 companies doing business in the UAE. UAE was the 24^th largest investor in South Africa.

Hong Kong
Agreement with Hong Kong: This treaty was initiated by Hong Kong. Hong Kong was regarded as the gateway to mainland China, so countries used Hong Kong to invest in China. The Hong Kong stock exchange is the sixth largest in the world and the third largest in Asia. Over 30 South African companies invested in Hong Kong in sectors such as aviation, construction and oil. SA had concluded negotiations with Hong Kong.

Isle of Man
Isle of Man: The initiative came from the Isle of Man, who wanted to negotiate a comprehensive agreement. South Africa had concerns, as the Isle of Man was viewed as a low tax jurisdiction. The Isle of Man does not have corporate taxes. They tax banks and real estate at a 10% rate. South Africa had decided against a comprehensive agreement, and to negotiate a limited agreement that would cover an exchange of information. There were over 75 South African companies on the Isle of Man. Most of these companies are investment holding companies, so an agreement was negotiated that would cover individuals and the exchange of information.

Ms Maharaj said that SARS normally did a presentation on the content of agreements, and the National Treasury would explain why South Africa had entered into negotiations with a country and provide the statistics. She had quite a number of slides to go through.

The Chairperson said that this could be done on Friday. He asked the Committee for guidance as to whether it was possible to meet on Friday.

Dr George said that he was not available to meet on Friday and neither was Mr Ross.

The Chairperson said he just wanted guidance on how to manage the time. It was his observation that the first part of the meeting had been unduly long, especially with formal ratification on what had already been processed. Also the number of questions raised was not commensurate with the length of the inputs.

Ms Maharaj said that the slides could be gone through quickly, but the Chairperson interjected and said she should not do that.

A Committee Member said that the Committee should do its job properly, as these were very serious matters and should be treated as such.

The Chairperson said that to be an effective and productive Committee, it should not just go through the motions, but actually exercise rigorous oversight. In the current term, the Committee was going to be effective in its oversight, so the number of questions people asked and the length of the input had nothing to do with productivity. This was not the way to conduct effective oversight. This was just going through the motions. None of the Committee Members had raised a single disagreement with any of the clauses in the Agreements. He asked what the value was of having this sort of meaningless exchanges. He said he would apply his mind and work with the Budget Office to find out.

The Committee decided to meet on Friday, if all matters had not been completed today.

Double Taxation Conventions/Agreements: Preliminary Hearing

Briefing on the Agreement between SA and United Arab Emirates (UAE)
Ms Maharaj said that Article 1: Persons Covered, had paragraph 2, which provided that nothing in the Agreement should affect the right of either contracting state to apply its own laws and regulations relating to the taxation of income and profits derived from hydrocarbons situated in that state.

Article 4: Residence. The UAE wanted to clarify residence of the UAE. It would include a company or entity which was incorporated or created under the law of the UAE.

Article 5: Permanent Establishment. This included farms or plantations. There were two models that South Africa had worked off. In the UAE/South Africa Double Tax Agreement (DTA), it was negotiated that for building site construction or assembly, installation project or any similar activity in connection therewith for more than 12 months, to be regarded as a permanent establishment.

Article 8: Shipping and Air Transport. Interest on funds directly connected with the operation of ships or aircraft in international traffic should be regarded as profits derived from the operation of such ships or aircraft.

Article 10: Dividends. The dividend rate in the South Africa/UAE DTA was: 5% for shareholding of at least 10%; and 10% on all others.

Article 11: Interest. A 10% limit on source state taxation was negotiated.

Article 12: Royalties. A 10% limit on the source state taxation.

Article 14: Income from Employment. Employees on ships or in international traffic were exempt in the other state from taxation for a period of four years.

Article 18: Government Services. Salaries, wages and remuneration, other than pensions, which were paid to the contracting state for services rendered to that state, would be taxable only in that state.

Article 19: Professors and Teachers. This provided for the exemption from taxation in the host state for two years.

Article 20: Students and Teachers. The same exemption and relief as residents from the contracting state being visited applied here.

Article 27: Refunds. Taxes withheld at the source in a contracting state should be refunded at the request of the taxpayer.

Article 28: Miscellaneous Rules. Paragraph 2 of Article 10 and paragraph 2 of Article 11. Dividends and interest which were paid by a resident of the contracting state to the government of the other contracting state, were exempt from tax in the first mentioned state.

The Protocol dealt the the fact that the UAE wanted clarification on the term “state”. South Africa then included Government of the UAE, a local government of the UAE, and an agency of the Federal or local government of the UAE.

Briefing on the Agreement between SA and Hong Kong
Article 4: Resident. Paragraph 3 provided that in cases of dual residence of a person other than an individual, it would be deemed to be a resident of the party in which its place of effective management was situated.

Article 5: Permanent Establishment. In the Hong Kong/South Africa DTA, South Africa negotiated for a building site, a construction, assembly or installation projects, or any supervisory activity in connection therewith – more than six months.

Article 10: Dividends. The dividend rate in the SA/Hong Kong DTA: 5% for shareholding of at least 10%; and 10% in all other cases.

Article 11: Interest. 10% limit on source state taxation.

Article 12: Royalties. 5% limit on source state taxation.

Article 19: Students. There was an exemption from taxation on the host state, provided that payment received by student was from outside the host state.

Article 24: Exchange of Information. This would be done on request and in accordance with the international standard.  

Article 26: Miscellaneous Rules. These were in line with international practice, that stated that the Agreement did not take away the right of the parties to apply tax avoidance measures contained in their domestic law.

Limited Double Taxation Conventions/Agreements: Preliminary Hearing

Briefing on the Agreement between SA and the Isle of Man    
Ms Maharaj said that this Agreement dealt only with individuals and transfer pricing.

Article 5: Income from Employment. Paragraph 1 allowed for source and residence taxation. Paragraph 2 took away the source state taxing right, if certain conditions were met.

Article 6: Directors’ fees. This allowed for a shared right to tax directors’ fees and other similar payments.

Article 7: Entertainers and sportspersons. This allowed for a shared right to tax income.

Article 8: Pensions and annuities. This allowed for a shared right to tax income.

Article 9: Government Service. This allowed for resident state taxation of salaries, wages and other similar remuneration.

Article 10: Students. Provided an exemption from tax in the host state.

Article 12: Principle applied to the adjustment of profits of associated enterprises.

Closing remarks

The Chairperson asked Members to focus on specific issues, like what they thought about a particular clause or section, as this would help with its oversight role. He said this was an utterly absurd system. He had never come across this before and did not know why Parliament allowed it. The House Chair had to be spoken to about this. There was a need to look at ways to deal with these things, and one of the proposals that Members might want to think about was that Members came here with their initial proposals, which would be an informal briefing. Subsequently, a subcommittee of researchers and Members would sit with the National Treasury and SARS and go through it. They would then prepare a report for the Committee as a whole. If this was not done, then the Committee would just be going through the motions.

The House Chair would be spoken to about the situation this afternoon. He signalled to the National Treasury that this Committee would not do what other Committees did. The Committee would have a Content Advisor by November. The person had been identified and had a tax background, and was an economist. In the meantime, the Committee would let this pass and would elect a sub-committee to approach this more appropriately.

The meeting was adjourned.