Double Taxation Agreements with Ghana, Turkey, Gabon, Congo (DRC): ratification

Meeting report

FINANCE PORTFOLIO COMMITTEE

SA Revenue Services presentation on the agreements under negotiation with Morocco, Sri Lanka, Serbia and Montenegro, and Namibia
SA Revenue Services presentation on the Agreements concluded with Ghana, Turkey, Gabon and the Democratic Republic of Congo
Comparative presentation of the OECD model tax convention on income and on capital, the SA model agreement for the avoidance of double taxation and, the convention between South Africa and Morocco
Agreement between South Africa and Ghana
Explanatory memorandum on Agreement between South Africa and Ghana
Agreement between South Africa and Gabon
Explanatory memorandum on the Agreement between South Africa and Gabon
Agreement between South Africa and Democratic Republic of the Congo
Explanatory memorandum on the Agreement between South Africa and Democratic Republic of the Congo
Agreement between South Africa and Morocco
Agreement between South Africa and Serbia and Montenegro
Agreement between the South Africa and Turkey
Explanatory memorandum on Agreement between South Africa and Turkey
Agreement between South Africa and Turkey regarding Mutual Assistance between their Customs Administrations (only tabled, not presented. Hard copy available on request)
Agreement between South Africa and Norway regarding Mutual Assistance between their Customs Administrations (only tabled, not presented. Hard copy available on request)

SUMMARY
Mr Ron van der Merwe from the South African Revenue Service (SARS) presented double taxation agreements concluded between South Africa and Ghana, Turkey, Gabon and the Democratic Republic of Congo for formal ratification. The Committee approved recommendations that all four of these treaties be approved by the National Assembly.

Informal presentations were also made on the double taxation agreements under negotiation or renegotiation with Morocco, Sri Lanka, Serbia and Montenegro and, Namibia. Discussion was limited to queries concerning issues of inclusion, the practicalities of tax collection and -determination and the clarification of wording and terminology. Customs agreement were tabled between South Africa and Turkey, and with Norway

MINUTES

SA Revenue Services briefing
Mr Ron van der Merwe (Manager: International Treaties) defined the purpose of double taxation conventions and agreements (DTAs) as the removal of cross-border trade and investment barriers. This was done in six ways. Firstly, double taxation was eliminated either by allocating rights of taxation to a single state; or, if there was shared taxation, it was done via the provision of a line of credit to the foreign taxpayer. Secondly, it introduced certainty of tax treatment in that treaties normally remained valid for much longer than tax laws. Thirdly, it reduced withholding tax rates. It prevented fiscal evasion through an exchange of information and provided for assistance in the collection of taxes. Finally, it provided an alternative route for the resolution of tax disputes.

Mr Van der Merwe then presented the various agreements in terms of how they differed from the Organisation for Economic Co-operation and Development (OECD) model convention, which formed the basis for the vast majority of DTAs worldwide.

Agreement between South Africa and Ghana

Article 2: Taxes Covered
Here specific reference was made to tax on capital gains. This was not vital, as it was actually a tax on income.

Article 5: Permanent Establishment
The permanent establishment for information was the taxing threshold for business profits in one of the two states. There were certain time limits, which were set in respect of specific industries. Construction sites would only be taxable in the state in which the construction was taking place after a period of six months.

Article 10: Dividends
The dividend rate was 5% where there was a shareholding of at least 10%; and, 15% in respect of portfolio dividends.

Article 11: Interest
The withholding tax rate was 5% for banks and 10% for all others.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Article 14: Independent Personal Services
For the source state and the country of residence, the test for taxation in terms of these independent services (doctors, lawyers etc.) was the existence of a fixed base, e.g. the maintenance of a surgery or chambers. For the source state, there was the additional threshold of a 183-day physical presence in any 12-month period.

Article 18: Pensions and Annuities
Pensions under a social security system were taxable only in a state that paid the pension. All other pensions were taxed in the state where they arose (the source state).

Article 20: Management Fees
In many of the countries around South Africa a withholding tax was paid on what was called management fees or fees for technical services. Countries without an advanced collection mechanism often did this. It was an easier way of collecting tax on certain types of income. Ghana’s normal rate was 20% on the gross amount of these fees, but was negotiated down to 10% for the purposes of this agreement.

Article 21: Professors and Students
The intention of this article was to encourage the exchange of expertise between the two treaty countries. With regards to professors and teachers this meant that the salary that they would receive in the host state would be exempt from taxation in the host state for a period of up to two years, provided that the remuneration came from outside the host state.

Article 23: The Limitation of Benefits
Under Ghana’s domestic law, income which was earned outside Ghana by a resident of Ghana was only taxable there if it was remitted. Thus, if a Ghanaian resident earned income in South Africa and was taxed here, that individual’s income would only be subject to taxation in Ghana if it was remitted to Ghana. Income not remitted and not taxed would therefore not qualify for benefits.

Article 25: Non-discrimination
This article provided that Ghana’s branch profits tax and the South African tax on branches would not be considered discriminatory.

Mr K Durr (ACDP) asked why Ghana taxed foreign income earned by its residents only if they remitted the money.

Mr Van der Merwe explained that there were some countries that followed this principle, in particular, where the promotion of the export of capital was the object. Singapore and the United Kingdom were examples of such countries. Mr Van der Merwe surmised that this might not be in the best interests of Ghana. While it would be pointed out to them, it would ultimately be a matter for Ghanaian law-makers to consider.

The Committee agreed upon a recommendation that the House approve the agreement.

Agreement between South Africa and Turkey

Article 4: Resident of a Contracting State
This was an important component of these agreements as the people who benefited from them were people who were residents of one or both of the contracting states. Because of, for instance, conflicting components in the legal dispensations of the treaty partners, it was possible for either an individual or for a legal person to be considered a resident of more than one country. Under this article was included what was referred to as a "tie-breaker" rule. This rule determined to which of the treaty partners the primary claim could be awarded for the residence of a particular legal person. The various tests of this rule included where the board of directors sat, where the chief executives met, where the majority of the economic activity took place etc. For South Africa the major concern has always been the place of effective management, whereas Turkey concentrated more on the place of the legal head office in making its determinations. Hence, the agreement that the competent authorities had to resolve any such disputes by mutual agreement.

Article 10: Dividends
The dividend rate was 5% where there was a shareholding of at least 25%; and, 10% in respect of all other dividends. If one chose to do business in Turkey through a subsidiary company, and the dividend was declared back to South Africa, Turkey would impose a withholding tax. In order to level the fields between the tax treatment of a branch and a subsidiary company they imposed a Branch Profits Tax, which was negotiated to be at the same rate as for a shareholding of more than 25% in a subsidiary company. This was dealt with in paragraph three and limited Turkish branch profits tax to 10%.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Article 13: Capital Gains
The source state retained a taxing right for all capital gains tax if an asset (not dealt with in the other paragraphs) was sold within a year of acquisition.

Article 18: Pensions and Annuities
Payments from a social security system were taxable only in a state that paid the pension.

Article 21: Professors and Students
The salaries of visiting teachers and professors would be exempt from taxation in the host state for a period of up to two years, provided that the remuneration came from outside the host state.

Dr Davies (ANC) asked about the significance of the mutual assistance between customs administrations agreement with Turkey and whether the Committee had any obligations with regards to it.

Mr Van der Merwe replied that the customs administrations agreement was merely technical in nature and was normally only tabled in the House. It was a paragraph three agreement and was therefore not required to undergo the full ratification process.

The Committee agreed upon a recommendation that the House approve the agreement.

Agreement between South Africa and Gabon

Article 5: Permanent Establishment
Construction sites would only be taxable in the state that the construction was taking place in after a period of six months. Where services were rendered through the physical presence of the employees of a company from the treaty partner for longer that 183 days over a twelve-month period, it would presuppose a fixed base and the income from those services would be taxable in the source country. The test for independent personal services (e.g. doctors and lawyers) would be the same.

Article 6: Income from Immovable Property
This article dealt with situations similar to which South African fringe benefits legislation was applied. For example, where an employer owned a beach cottage and allowed an employee the use of the cottage for a specific period, South African domestic legislation would demand that a value be placed on that benefit and that it be taxed in the hands of the employee. For the purposes of this agreement, this principle was extended to shareholders on the basis that the benefit was nothing other than a form of dividend. Inclusion of this provision resulted as it was done under Gabonese domestic law.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Mr Y Bhamjee (ANC) required further clarification on how the benefit of immovable property was measured.

Mr Van der Merwe replied that according to his understanding, if a company’s shareholder was allowed to benefit from the fixed property of the company, any income generated from such benefit could be used as a measure of the taxable dividend that it would equate to under Gabonese domestic law. He surmised that when it came to the measure of the enjoyment of the immovable property as the taxable dividend, there would have to be some kind of formula which one would be able to appeal to. He further emphasised that there would in any way never have been double taxation in this regard, as South Africa did not tax shareholders for benefit that they might derive from immovable company property.

Dr Davies inquired whether there was any significance in some of these treaties being referred to as agreements and others as conventions.

Mr Van der Merwe replied that South Africa’s preferred term was "agreement", but that no further significance lay therein.

The Committee agreed on a recommendation that the House approve the agreement.

Agreement between South Africa and the Democratic Republic of the Congo

Article 5: Permanent Establishment
Construction sites would only be taxable in the state that the construction was taking place in after six months. Where services were rendered through the physical presence of the employees of a company from the treaty partner for longer that 183 days over a twelve month period, it would presuppose a fixed base and the income from those services would be taxable in the source country. The test for independent personal services (e.g. doctors and lawyers) was the same.

Article 7: Business Profits
In paragraph three the wording of the United Nations (UN) model was used at the request of the DRC, but the interpretation was the same as for the OECD model. Paragraph two of the article described how income was attributed to a permanent establishment of a foreign business in the host country. Paragraph three then delimited how expenses would be allowed. Whereas the OECD used general wording, the UN version was much more detailed. The provision basically provided that expenditure which was incurred by the foreign head office of the branch in the host country — and which was linked to the business of the permanent establishment of that branch —should be allocated to that branch in the determination of its profits.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Article 18: Pensions and Annuities
Pensions under a social security system were taxable only in the state that paid the pension. All other pensions were taxed in the state where they arose (the source state).

Article 22: Non-discrimination
This article provided that the DRC’s branch profits tax and the South African tax on branches would not be considered discriminatory.

Ms Fubbs (ANC) asked for clarification of the basis for the determination of the taxation rates of dividends under article 10.

Mr Van der Merwe replied that under South African domestic law, there was no withholding tax on dividends paid to foreign nationals. He added that, in the conclusion of DTAs with other countries, this was an area where South Africa sought to limit the amount of withholding tax as far as possible. He explained that above and beyond the OECD guidelines (5% for a shareholding of 25% and more, and 15% for all other dividends) it was arrived at by negotiation with treaty partners.

Mr Gabela (ANC) asked how professional sports people were affected, with specific reference to Vodacom Football Club players from the DRC playing in South Africa.

Mr van der Merwe replied that these treaties stated that if entertainers or sports people were to earn income from exercising their abilities in South Africa, they would be subject to immediate taxation.

Dr Davies asked whether SARS was lending any support to the DRC to improve their national revenue service.

Mr Van der Merwe replied that since 1998, a number of workshops had been conducted by the government (in conjunction with the OECD and SARS) with southern African countries on the various aspects of tax treaties, transfer pricing and a number of other issues. The DRC had been included in all of these efforts. There were occasions where language difficulties played a part. However, where enough donor funding was available, translation services were provided. A revenue authority to revenue authority agreement between the DRC and SARS to see what kind of direct assistance could be provided was now also under consideration.

The Committee agreed on a recommendation that the House approve the agreement.

Agreement between South Africa and Morocco

Article 5: Permanent Establishment
Construction sites would only be taxable in the state that the construction was taking place in after a period of six months. Where services were rendered through the physical presence of the employees of a company from the treaty partner for longer than three months over period of twelve months, it would presuppose a fixed base and the income from those services would be taxable in the source country. The test for income from services related to the exploitation of mineral oils was thirty days. This was in line with other oil-producing countries. Independent personal services were dealt with under article 14.

Article 7: Business Profits
In paragraph three the wording of the United Nations model was used at the request of Morocco, but the interpretation was the same as for the OECD model.

Article 9: Associated Enterprises
This article constituted an anti-abuse provision. It would be used to combat the action of transfer-pricing: the movement of profits from one state to another. Article 9 stated that where the relationship between associated enterprises (such as between a holding company and its subsidiary, or between two subsidiary companies within a group) created for financial or commercial purposes, were not at arms length, then the tax authorities of the two states might demand a rewrite of the accounts of how it would have been if the transactions between them had been at arms length. Should transfer pricing then be discovered upon the completion of an audit, the profits may be moved back to the source state. At this point, these profits might well have been taxed already in the destination state, thus having had the effect of double taxation. Paragraph two of this article catered for such instances in that where the two states agreed that the approach of determining what should be at arms length was justified, then the second state would have to adjust its accounts to eliminate the double taxation. There was also a third paragraph that stated that this adjustment did not need to be made if it could be shown that the actions of the taxpayers constituted fraud, gross negligence or wilful default.

Article 10: Dividends
The rates were 5% for shareholdings of 25% or more and 10% on everything else. In this treaty paragraph six of this article took care of the non-discriminatory application of branch profits tax by both parties.

Article 12: Royalties
Royalties and technical services would be taxable in the state of residence and to a degree of 10% in the source state. Here, management-, consultancy- and administrative services were included under technical services.

Article 18: Pensions and Annuities
Pensions under a social security system were taxable only in the state that paid the pension.

Article 21: Professors and Students
The salaries of visiting teachers and professors would be exempt from taxation in the host state for a period of up to two years, provided that the remuneration came from outside the host state.

Article 23: Elimination of Double Taxation
Morocco wanted tax sparing (or matching credit) included in the agreement. This would have provided for the practise of guaranteed tax breaks (or tax holidays) for investors that met certain pre-determined targets. These included, but were not limited to, the number of jobs created etc. In view of South Africa’s participation exemption, the question of tax sparing was not included. Should South Africa’s policy change in this regard, this aspect would have to be renegotiated and a clause was inserted to that effect.

Mr Bhamjee (ANC) questioned the effect of Islamic taxation on the negotiation of this DTA. Mr Van der Merwe replied that it had had no impact.

Agreement between South Africa and Sri Lanka

Article 5: Permanent Establishment
Construction sites would only be taxable in the state that the construction was taking place in after a period of six months. Where services were rendered through the physical presence of the employees of a company from the treaty partner for longer than ninety days over a twelve month period, it would presuppose a fixed base and the income from those services would be taxable in the source country. The test for independent personal services (e.g. doctors and lawyers) and for services related to the exploitation of minerals and oil would be the same.

Article 5: Resident
Delivery was excluded from the auxiliary activities envisaged in both paragraphs four and five as it was deemed too close to the profit-making function. Delivery could therefore constitute a permanent establishment.

Article 7: Business Profits
Paragraph one referred to a force of attraction rule, which provided that the business profits of an enterprise which was the resident of a country would be taxable only in that country unless it had a permanent establishment in the other party state. In such a case, the other state could tax the profits attributable to that permanent establishment. The United Nations (UN) went further in saying that if one had permanent establishment in a state and engaged there in other profit making, but not through the permanent establishment, one could be expected to — as a force of attraction — attribute those profits to the permanent establishment for the purposes of taxation. This was included as a provision in paragraph three, on the condition that its application would be hinged on proof of fraudulent or avoidance activities.

Article 8: Shipping and Air Transport
Taxation rights on international shipping would be retained by the source state, but such taxes would be applied at 50% only of the rate for taxes levied on shipping operators based in the source state.

Article 9: Associated Enterprises
Fraud, wilful default or neglect would result in no corresponding adjustment being made.

Article 10: Dividends
Here the rates were 10% in all cases.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Article 17: Pensions and Annuities
Pensions under a social security system were taxable only in the state that paid the pension.

Article 19: Professors and Students
The salaries of visiting teachers and professors would be exempt from taxation in the host state for a period of up to two years, provided that the remuneration came from outside the host state.

Article 21: Other Income
This article provided for any other forms of income that were not specifically dealt with in other areas of the treaty, in that they could be dealt with in the state that they arose.

Article 22: Protocol
This articled clarified that independent personal service providers’ income fell under article 7. It also stated that tax sparing was not dealt with and that if participation exemption changed then this aspect would need to be renegotiated.

Ms Fubbs (ANC) required greater clarity on the force of attraction rule and the meaning of "protocol" in the context of these treaties.

Mr Van der Merwe explained that the normal rule of taxing business profits in the source state provided that the source state could only tax profits attributable to the permanent establishment of a foreign company, and nothing more. If the foreign company entered into other profit generating activities in the source state independent of its permanent establishment, the normal rule would have been that those profits would not be attributed to the said permanent establishment for the purposes of taxation. The force of attraction rule provided that all profits generated by the foreign company in the source state could be lumped together with those of its permanent establishment for the purposes of taxation. Mr Van der Merwe emphasised that the draft included the proviso that the force of attraction rule could only be applied if it could be proven that the foreign company generated these other profits independent of its permanent establishment as a means of tax avoidance.

Mr Van der Merwe further explained that the protocol was an integral part of the treaty and therefore had equal force of law. The protocol was used in the main to provide for clarifications on issues set out in the treaty, or to take care of issues that would have to be dealt with in the future. It was often the area in which non-standard paragraphs would be placed.

Mr Durr expressed his concern over the practicalities involved in executing article eight.

Mr Van der Merwe explained that South African domestic law already allowed for the taxation of foreign ships coming into local ports. Ten percent of the gross income that these ships earned from the South African source would be regarded as their profit from their shipping transactions here, and it was according to this calculation that they would be taxed. This was done with the co-operation of local shipping agents.

Agreement between South Africa and Serbia and Montenegro

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state. Here payments for the use of industrial, commercial and scientific equipment were included under royalties.

Article 14: Independent Personal Services
The threshold for taxation in the source state was a fixed base for six months.

Article 18: Pensions and Annuities
Pensions were only taxable in the state that paid the pension. Paragraph two stated that the pension might be taxed in the source state if not taxed in the resident state.

Article 21: Professors and Students
The salaries of visiting teachers and professors would be exempt from taxation in the host state for up to two years, provided that the remuneration came from outside the host state.

Article 23: Capital
This article dealt with capital tax as Serbia and Montenegro imposed such a tax.

Ms Fubbs required clarity on how DTAs affected peacekeepers and the income they earned from their peacekeeping activities.

Mr Van der Merwe explained that peacekeepers were not mentioned in the DTAs specifically. He explained that they were dealt with in the same manner as South African diplomats and other South African government officials abroad. They were taxable only by the state that paid them.

Mr M Johnson (ANC) required further clarity on the taxation of pensions and how it would be decided where the pension would be taxed.

Mr Van der Merwe replied that the various tests of residence and permanent establishment would be utilised, with the 183-day physical presence test being the most common the world over.

Agreement between South Africa and Namibia

Article 2: Taxes Covered
This article specifically included capital gains tax. This was not really necessary as it was a tax on income.

Article 4: Residents
Here there was a different rule for Namibia as they still used the source system of taxation, and did not take residence into account. Therefore, under this treaty, anyone who was ordinarily resident would be regarded as a resident for tax purposes.

Article 5: Permanent Establishment
Construction sites were only taxable in the state that the construction was taking place in after a period of six months. Where services were rendered through the physical presence of the employees of a company from the treaty partner for longer than six months over a twelve month period, it would presuppose a fixed base and the income from those services would be taxable in the source country. The test for independent personal services (e.g. doctors and lawyers) was also six months. This article made specific provision for guest farms and warehouses at the request of Namibia.

Article 5: Resident
Delivery was excluded from the auxiliary activities envisaged in both paragraphs three and four as it was deemed too close to the profit-making function. Delivery could therefore have constituted a permanent establishment.

Article 7: Business Profits
In paragraph three the wording of the United Nations model was used at the request of Namibia, but the interpretation was the same as for the OECD model.

Article 8: Transport
Road transport was included here.

Article 11: Interest
Here the resident state had the sole right to tax.

Article 12: Royalties
Royalties were taxable in the state of residence and to a degree of 10% in the source state.

Article 18: Pensions and Annuities
Pensions were only taxable in the state that paid the pension. Paragraph two stated that the pension might be taxed in the source state if not taxed in the resident state.

Article 21: Professors and Students
The salaries of visiting teachers and professors would be exempt from taxation in the host state for up to two years, provided that the remuneration came from outside the host state.

Article 22: Limitation of Benefits
If one of the states had no — or a limited right — to tax and the other state could not tax under its domestic legislation, then the treaty would not apply to that income. Double non-taxation would thus be avoided.

Article 22: Protocol
This article explained the taxation of foreign branches in South Africa. It deemed this not to be discriminatory. However if provisions in this regard changed, then the non-discriminatory status of branch taxation would have to be reconsidered.

The Committee adopted the Clerk’s minutes of their various previous meetings.

The meeting was adjourned.