It is the practice in most countries for income tax to be imposed both on the world-wide income derived by residents of the country and on income derived by non-residents which arises in the country. The effect of such a system is that income derived by a resident Of one country from a source n another country is subjected to tax in both countries. As this position clearly discourages foreign investment, it is normal for countries which have trade relations to conclude double taxation agreements. Such agreements commonly provide that income of a particular nature will either be taxable in only one of the countries, or may be taxed in both countries with one of them allowing a credit for the tax imposed by the other.

The Convention concluded with Brazil closely follows the OECD explanation, which follows, the general principles of each Convention are set out.

The entire text has been made gender neutral.

The Preamble records that the object of the Convention is not only to avoid double taxation but also to extend the relationship between the two countries.

The Convention is made applicable to persons who are residents of one or both

of the Contracting States. This means, inter alia, that a citizen of one of the

States who is resident in a third State will not enjoy the benefits of the

Convention, apart from the non-discrimination provisions.

Paragraphs 1 and 2 of this Article provide that the Convention will apply to all taxes on income imposed by the two States.

Paragraph 3 lists the existing taxes imposed by each State and paragraph 4 provides that the Convention will also apply to identical or substantially similar taxes which are subsequently imposed by either State.

This Article defines various expressions which are used in the body OT the Convention. Several of these definitions are self-evident and are not further explained.

The definition of "South Africa" includes not only the sovereign territory but also those areas outside its territorial sea over which it may exercise jurisdiction in accordance with international law, for example, in relation to the exploitation of natural resources.

"Person" is defined to include individuals, companies and other bodies of persons that are treated as entities for tax purposes. The underlined words are of particular relevance to partnerships. Partnerships are not regarded as taxable entities in South Africa; rather, the income of a partnership is taxed in the hands of the partners. Accordingly, should a partnership consisting of a Brazilian resident and a resident of a third State derive income in South Africa, only the Brazilian resident will be entitled to the benefits of the Convention on his/her share of the partnership income.

"International traffic" is defined as any transport by ship or aircraft operated by a resident of a Contracting State, except when such transport is solely between places in the other State. Special provisions are contained in Article 8 for the taxation of international traffic. The effect of the exclusion mentioned above is that should a Brazilian company operate a purely domestic airline operation within South Africa, that operation will not fall to be dealt with under Article 8, but rather under Article 7 which deals with business profits in general. This provision is intended to place that operation on the same footing as South African domestic airlines.

Paragraph 2 follows the OECD Model in providing that expressions not defined in the Convention bear the meaning which they have under the domestic taxation laws of the States at the time of application of the provisions of the Convention. Any meaning under the taxation laws will take precedence over a meaning under other laws of the State.

The concept of "resident of a Contracting State" is used throughout the Convention and is of importance in three cases:

(a) in determining the Convention's personal scope of application as set out in Article 1;

(b) in solving cases where double taxation arises because of dual residence;

(c) in solving cases where double taxation arises as a consequence of taxation in the State of residence and in the State in which the income arose, the Slate of source.

This Article defines the meaning of the term and further solves cases of dual residence.

In paragraph 1 the term "resident of a Contracting State" is defined. The definition refers to the concept of residence adopted in the domestic law of each of the Contracting States. As criteria for the taxation as a resident, domicile, residence, place of management or any other criterion of a similar nature is used in the definition.

The term "resident" also includes specific reference to the State itself.

Paragraph 2 provides solutions to the cases where individuals are residents of both Contracting States and sets out a step by step method of finally deciding which State has a preferent right in claiming the individual as its resident.

Paragraph 3 deals with companies and other bodies of persons who are not individuals but who are residents of both States and specifies that in these cases the State in which the place of effective management is situated will have the preferent right to claim the company or body of persons as its resident.

One of the main goals of the Convention is to determine the right of a Contracting State to tax the profits of an enterprise of the other Contracting State which arise through a permanent establishment situated in the first-mentioned State. The Article defines what is to be regarded as a permanent establishment.

Paragraph 1 gives a general definition of a "permanent establishment" as being a fixed place of business through which the business of an enterprise is carried on.

Paragraph 2 contains a list, which is not exhaustive, of what is regarded to be a permanent establishment.

Paragraph 3 provides expressly that a building site, construction, assembly or installation project will not constitute a permanent establishment unless it lasts more than six months.

A number of preparatory or auxiliary activities which are treated as exceptions to the general definition laid down in paragraph 1 are set out in paragraph 4. The paragraph specifies that the term "permanent establishment" will not include the various activities set out therein and the Contracting State in which these activities take place will consequently not be able to tax any profits which might arise if these are the only activities which occur.

Paragraph 5 sets out the generally accepted principle that an enterprise will be treated as having a permanent establishment in a Contracting State if it carries on business in that State through an agent situated in that State, provided that the agent is not of an independent status and provided that such agent has the power to conclude contracts in the name of the enterprise.

Paragraph 6 deals with the situation where an enterprise carries on business through an independent agent in the other Contracting State and provides that no permanent establishment will be deemed to exist if the activities are carried on through such an agent who is acting in the normal course of business.

Paragraph 7 sets out the principle that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follows from the principle that for tax purposes a subsidiary company constitutes an independent legal entity and will be taxed in its State of residence on its own profits.

Paragraph 1 provides that income derived from immovable property may be taxed in the State in which the property is situated. Income from agriculture and forestry is specifically included in this rule.

Paragraph 2 establishes the general rule that what constitutes fixed property will be decided under the law of the State in which the property is situated. Nevertheless, property accessory to fixed prope4y and livestock and equipment used in agriculture and forestry are specifically included. So too are usufructs and payments for the right to extract minerals and other natural deposits.

Paragraph 3 makes it clear that the rule established in paragraph 1 applies irrespective of the manner in which the property is exploited.

Paragraph 4 provides that the provisions of paragraphs 1 and 3 also apply to income derived from fixed property owned by an enterprise or which is used for the performance of independent personal services. In the absence of this provision, it might be argued that this income should be dealt with in terms Of the provisions of Article 7 or 14, which establish somewhat different rules for the treatment of businesses and independent personal services.

This Article deals with the taxation of business profits and is to be read together with Article 5 as it uses the test of "permanent establishment" in determining where such profits are to be taxed.

Paragraph 1 specifies that the profits of an enterprise which is a resident of a Contracting State are taxable in that State unless it carries on business In the other Contracting State through a permanent establishment situated in that other State in which case that other State may tax the profits which are attributable to that permanent establishment.

Paragraph 2 deals with the allocation of profits to a permanent establishment and specifies that the profits which are to be attributed to the permanent establishment are those which it would have made if it had been dealing with entirely separate enterprises under arms-length conditions and not with its head office.

Paragraph 3 recognizes the fact that in calculating the profits of a permanent

establishment, allowance must be made for certain expenses which were incurred for the purposes of the permanent establishment. For example, if the head office incurs general administrative expenses it is most likely that a portion of those expenses was in fact incurred on behalf of the permanent establishment and it will therefore be necessary to allocate that portion of the expenses to the permanent establishment in determining its profits. The emphasis here is on the fact that the expenses must have been actually incurred - notional charges are excluded, for example, management fees.

Paragraph 4 deals with the situation where a permanent establishment which, although carrying on other business, also carries on purchasing for its head office. The paragraph provides that the profits which are attributed to the permanent establishment cannot be increased by the addition of a notional figure for profits from such purchases which are actually earned by the head office.

It is possible that the term "profits" could include other items of income which are dealt with in other Articles of the Convention. Paragraph 5 stipulates that the preceding provisions of Article 7 shall not affect the provisions of such other Articles. An example of this is where profits include interest which is dealt with separately under Article 11.

Paragraph 1 provides that profits derived by a resident of a Contracting State from the operation of ships or aircraft in international traffic are taxable only in that State. Thus, for example, profits derived by South African Airways from its flights into and out of airports in Brazil are taxable only in South Africa.

Paragraph 2 specifies that profits derived from the rental on a bare boat basis of ships or aircraft as well as profits from the use, maintenance or rental of containers (including trailers and related equipment for the transport of such containers) which are incidental to the profits mentioned in paragraph 1, are also taxable in accordance with Article 8. It should be noted that where such income is not incidental to international traffic operations, but rather constitutes an independent business in its own right, it will fall to be dealt with under either Article 7 as business income.

Paragraph 3 makes the above rules also applicable where the business is conducted through a pool, joint business venture or an international operating agency, but only to so much of the profits as is attributable to the participation held in that joint operation.

This Article deals with associated enterprises and in paragraph 1 provides that a Contracting State may recalculate the profits of the enterprises if they have created conditions between themselves which would not be created by enterprises dealing at arms-length with each other. This paragraph is effective in dealing with the effects of transfer pricing between associated enterprises. The concept of what is regarded as being an associated enterprise is also set out in this paragraph.

The recalculation of profits envisaged in paragraph 1 may of course result in double taxation if, for example, one of the Contracting States increases the profits of its enterprise, and subjects the increased amount to tax, although such increased amount may already have been subjected to tax in the hands of its associated enterprise in the other Contracting State.

Paragraphs 1 and 2 of this Article provide for the common international tax treatment of cross-border dividends, in terms of which the State in which the dividends are declared may impose a limited withholding tax and the State in which the dividends are received may impose full tax. The limitation on withholding tax rates in the source State imposed by paragraph 2 is as follows:

(a) where the shareholder is a company which holds at least 25 per cent of the capital of the company paying the dividend, the tax is limited to 1 0 per cent of the gross dividend. This limitation is intended to encourage substantial (i.e. at least 25 per cent) investment by companies in one State in subsidiaries in the other State;

(b) where the minimum holding of 25 per cent is not met (i.e. portfolio share investments) the rate of tax is limited to 15 per cent of the gross amount of the dividends.

Both the above limitations apply only if the registered shareholder is also the beneficial holder, i.e. the limitation does not apply to nominee shareholders.

Paragraph 3 contains the standard definition of what constitutes a dividend.

Paragraph 4 provides that this Article will not apply in cases where a resident of

one State carries on business in the other State through a permanent establishment or fixed base and derives dividends from shares the holding of which is effectively connected with the permanent establishment or fixed base. For example, if a South African company carrying on a manufacturing business through a permanent establishment in Brazil were to purchase the shares of a Brazilian company which supplies it with raw materials, the dividends derived by the South African company on those shares could be taxed in Brazil as part of the business profits of the permanent establishment.

Paragraph 5 provides for taxation at source ~f the profits of a permanent establishment which a resident of a Contracting State has in the other Contracting State. The withholding tax rate is limited to 10 per cent of the gross amount of the profits of such permanent establishment and is determined after the payment of the corporate tax related to such profits. This provision caters for the branch profits tax imposed by Brazil.

Paragraph 6 deals with the limitation of the right of one of the States to impose tax on dividends declared by, or the undistributed profits of, a company which is a resident of the other State. One situation in which tax may be imposed, is where the shareholding is effectively connected with a permanent establishment, as mentioned in relation to paragraph 4 above.

The second situation can best be explained through an example of a Brazilian company which carries on business through a branch in South Africa. The paragraph provides that South Africa may not impose tax on the dividends declared by the Brazilian company even though its profits are partly derived in South Africa, except in so far as the dividends are received by South African resident shareholders.

Paragraph 7 provides that the provisions of Article 10 will not apply if the right giving rise to the dividend was created or assigned mainly for the purpose of taking advantage of the Article by means of that creation or assignment. This is an anti-avoidance provision and is in line with the provisions in Article 11(9) and Article 12(7).

This Article deals with the taxation of income in the form of interest.

Paragraph 1 specifies that interest which arises in a Contracting State arid is paid to a resident of the other Contracting State may be taxed in the State of residence.

Paragraph 2 gives a right of taxation to the source State but limits the amount of

tax to 15 per cent of the gross amount of the interest, provided that the beneficial owner of the interest is a resident of the other State.

Paragraph 3 contains the standard definition of what is to be regarded as interest.

Paragraph 4(a) provides that interest which is paid to the Government of the other Contracting State, a political subdivision thereof, the Central Bank or any agency (including a financial institution) which is wholly owned by that Government or a political subdivision thereof shall be taxable only in the State of residence of the creditor.

Paragraph 4(b) however, provides that interest from securities, bonds or debentures issued by the Government of a Contracting State, a political subdivision thereof, or any agency (including a financial institution) which is wholly owned by that Government or a political subdivision thereof then such interest shall be taxable only in that State.

Paragraph 5 specifies that if the beneficial owner of interest carries on business in the Contracting State in which the interest arises through a permanent establishment or a fixed base situated in that State, the interest may be taxed in that State if the debt in respect of which the interest is paid is connected to that permanent establishment or fixed base. The provisions of Article 11 will not apply to such interest but rather the provisions in Article 7 in the case of a permanent establishment or Article 14 in the case of a fixed base. This paragraph is similar to paragraph 4 of Article 10 dealing with dividends.

Paragraph 6 provides that where interest is paid to a permanent establishment of a resident of the other Contracting State which is situated in a third State, the limitation on the rate of taxation of interest provided for in paragraph 2 shall not apply.

Paragraph 7 lays down the principle that the State of source of the interest is the State of which the payer of the interest is a resident. It also provides for an exception to this rule in the case of interest-bearing loans which have an economic link with a permanent establishment or a fixed base operated in the other Contracting State by the payer of the interest. If the loan was contracted for the requirements of the permanent establishment or fixed base and the interest is borne by such permanent establishment or fixed base, the paragraph specifies that the source of the interest is the Contracting State in which the permanent establishment or fixed base is situated.

The purpose of paragraph 8 is to restrict the operation of the provisions of this Article with regard to the taxation of interest in cases where there is a special relationship between the beneficial owner of the interest and the payer or between both of them and a third party. If, in the presence of this relationship, the interest paid exceeds the interest which would have been paid in the absence of such a relationship, the provisions of this Article will not apply to the amount of the interest which is considered to be excessive and such excessive amount will remain taxable in accordance with the laws of both Contracting States. The limitation placed on the source State under paragraph 2 will in such circumstances be negated. This is an anti-avoidance provision.

Paragraph 9 provides that the provisions of Article 11 will not apply if the debt-claim giving rise to the interest was created or assigned mainly for the purpose of taking advantage of the Article by means of that creation or assignment. This is an anti-avoidance provision and is in line with the provisions in Article 10(7) and Article 12(7).

This Article deals with royalties and paragraph 1 provides that royalties which arise in a Contracting State and are paid to a resident of the other Contracting State may be taxed in the State of residence.

Paragraph 2 gives a right of taxation to the source State but limits the amount of tax to 15 per cent in the case of royalties arising from the use of or the right to use trade marks and 10 per cent in all other cases, provided that the beneficial owner of the royalties is a resident of the other Contracting State.

Paragraph 3 defines which payments will constitute royalties for purposes of the Article. It includes amounts normally understood as royalties, such as patents, copyrights, trade marks, etc, and also includes payments for the use of, or right to use, industrial, commercial or scientific experience (know-how). Payments for the use of, or right to use, industrial, commercial or scientific equipment are also included. Payments of this nature are mostly dealt with under Article 7 which deals with business income.

Paragraph 4 provides that the provisions of paragraphs 1 and 2 will not apply if

the recipient of the royalties carries on business or performs independent personal services in the State in which the royalties arise through a permanent establishment or fixed base, and the royalties are effectively connected with that permanent establishment or fixed base. In this case, the royalties are in effect regarded as part of the business profits of the permanent establishment or fixed base, and may be taxed by the source State. This paragraph is similar to paragraph 4 of Article 10 dealing with dividends and paragraph 5 of Article 11 dealing with interest.

An example of where this paragraph would apply would be a Brazilian company with a permanent office in South Africa through which it sold franchise rights for the use of its product brand. South Africa would in this case be entitled to tax the franchise payments received by the Brazilian company.

Paragraph 5 lays down the principle that the State of source of the royalties is the State of which the payer of the royalties is a resident. It also provides for an exception to this rule in the case of royalties which have an economic link with a permanent establishment or a fixed base operated in the other Contracting State by the payer of the royalties. If the liability to pay the royalties was incurred by the permanent establishment or a fixed base and the royalties are borne by such establishment or fixed base, the paragraph specifies that the source of the royalties is the Contracting State in which the permanent establishment or fixed base is situated.

Paragraph 6 contains an anti-transfer pricing provision. Where the payer and recipient of a royalty are connected persons and the royalty is excessive, the source State may tax the portion which is excessive according to its laws - in other words the limitations set out in paragraph 2 would only apply to the portion of the royalty which meets the arms-length test.

Paragraph 7 provides that the provisions of Article 12 will not apply if the rights giving rise to the royalties were created or assigned mainly for the purpose of taking advantage of the Article by means of that creation or assignment. This is an anti-avoidance provision and is in line with the provisions in Article 10(7) and Article 11(9).

The Article deals with the taxation of capital gains and covers all kinds of taxes which are imposed on such gains.

Paragraph 1 specifies that the right to tax gains derived from the alienation of immovable property is also given to the Contracting State in which the property is situated although the alienator may be a resident of the other Contracting State.

Paragraph 2 deals with the alienation of movable property which forms part of a permanent establishment or a fixed base which a resident of a Contracting State has in the other Contracting State. It provides that gains from the alienation of such property may also be taxed in the State in which such permanent establishment or fixed base is situated and includes gains from the alienation of the permanent establishment or fixed base as such.

Paragraph 3 provides that gains from the alienation of ships or aircraft or movable property related to the operation of such ships or aircraft are taxable only in the State in which the enterprise is subject to tax in accordance with Article 8.

Paragraph 4 specifies that gains arising from the alienation of shares in a company, which consist directly or indirectly principally of immovable property located in the other Contracting State, may be taxed in that other State.

Paragraph 5 specifies that gains from the alienation of property not covered by the preceding paragraphs of this Article may be taxed in the State in which the gains arise, therefore, at source.

Paragraph 1 provides that income derived by a person that is a resident of a State in respect of professional services or other activities which are of an independent character may be taxed only in that State except in one of the following circumstances when such income may also be taxed in the other State where:

(a) the remuneration received in respect of those services or activities is paid by a resident of the other Contracting State or is borne by a permanent establishment or fixed base which is situated in that other State;

(b) that person, employees of that person or any other person on behalf of that person is present in that other State, or where the services or activities continue in that other State for more than an aggregate of 1 83 days in any twelve-month period commencing or ending in the fiscal year concerned. In such case only the income attributable to those services in that State may be taxed in that other State.

(c) the services or activities are performed in that other State through a fixed base which is regularly available to that person for the purpose of performing his/her services or activities in that other State. In such case only the income attributable to that fixed base may be taxed in that other State.

Paragraph 2 defines professional services but the definition is not exhaustive

Paragraph 1 lays down the principle that remuneration in respect of an employment is taxable in the State of residence of the employee unless the services in respect thereof are rendered in the other Contracting State, in which case the remuneration arising from the services rendered in the other State may also be taxed in that other State.

Paragraph 2 limits the right of taxation of the State in which the services are rendered (the source State) in that remuneration for services rendered in that State is taxable only in the State of residence if all three the following conditions are met:

(a) the employee is present in the source State for a period or periods not exceeding 183 days in any twelve-month period;

(b) the employer who pays the remuneration, or on whose behalf the remuneration is paid, is not a resident of the source State;

(c) the relevant remuneration is not borne by a permanent establishment or a fixed base which the employer has in the source State.

Paragraph 3 deals with remuneration derived by employees in respect of employment aboard a ship or aircraft operated in international traffic and specifies that such remuneration may be taxed in the State of residence of the operator of such ship or aircraft.

The Article provides that directors' fees may be taxed by the State in which the company concerned is resident. It does not, however, prevent the director from also being taxed on those fees in the director's State of residence.

In terms of paragraph 1 the income derived by entertainers and sportspersons may be taxed in the Contracting State in which their activities are exercised.

Paragraph 2 expands the principle laid down in paragraph 1 in that it specifies that in cases where income in respect of the activities of entertainers and sportspersons accrues to some other person rather than the entertainer or sportsperson, such income may still be taxed in the Contracting State in which such activities are exercised. This paragraph covers the frequent situation in which a professional sportsperson forms a company and competes in a sporting event in another country not in a personal capacity, but rather as an employee of that person's company. Because the sportsperson's activities in the country continue for a very short period and do not constitute a permanent establishment, neither the sportsperson nor the company would under the normal provisions of the Convention be taxable in that country.

In cases where the activities of entertainers or sportspersons in a Contracting State are supported wholly or mainly out of public funds of the other Contracting State, paragraph 3 specifies that any income derived from those activities in the first-mentioned State shall be taxable only in the State of which the entertainer or sportsperson is a resident.

Paragraph 1 provides that pensions and other similar remuneration paid in consideration of past employment, and annuities, may be taxed in the State in which they arise. The State of residence may also tax but must then give a credit for the source State tax.

Paragraph 2 gives the State of source of pension and other payments made under a public scheme that is part of its social security system the sole taxing right, notwithstanding the provisions of paragraph 1.

Subparagraph 1(a) provides that remuneration for services rendered which is paid by a Contracting State, a political subdivision or a local authority thereof, is taxable only in that State.

However, subparagraph 1(b) provides that such remuneration is taxable only in the other Contracting State if the services are rendered in that other State by a resident who is also a national of that other State or did not become resident of the other State with the express purpose of rendering the services.

Paragraph 2 provides that the same principle which applies to remuneration, as set out in paragraph 1, also applies to pensions paid by a Contracting State, a political subdivision or a local authority thereof. The pension would only be taxable in the other State if the recipient is both a resident and a national of that other State.

Paragraph 3 provides that the provisions of paragraphs 1 and 2 will not apply in respect of remuneration or pensions paid by a Contracting State, a political subdivision or a local authority thereof in respect of services rendered in relation to any business carried on by that Contracting State, political subdivision, local authority thereof. In such circumstances, the provisions of Articles 15, 16 17 and 18 dealing with remuneration and pensions other than of a public nature will apply.

This Article specifies that teachers or researchers of a Contracting State who, at the invitation of the Government of the other Contracting State or a university, college, school, museum or other cultural institution or under an official program of cultural exchange, engage in teaching, giving lectures or carrying out research at such institutions in the other Contracting State, shall be exempt from tax on remuneration from those activities in that State for a period not exceeding two consecutive years, provided that the remuneration is derived from outside that State.

In terms of paragraph 1, students or apprentices who are residents of one State but who are undergoing education or training in the other State, will not be taxed in the last-mentioned State on payments received for the purposes of their maintenance, education or training, if those payments are received from outside that State.

Students or apprentices who, during their period of study or training, receive a grant, scholarship or income from employment, which is not covered by paragraph 1, shall in terms of the provisions of paragraph 2 be entitled to the same exemptions, reliefs or reductions in respect of taxes as is available to a resident of the State in which they are undergoing such education or training.

This Article deals with the treatment of income which is not dealt with in other Articles of the Convention and specifies in paragraph 1 that such items of income will be taxable only in the State of residence of the recipient thereof.

Paragraph 2 reintroduces the principle established in paragraph 4 of Article 10 dealing with dividends and paragraph 5 of Article 11 dealing with interest that if such income is connected to a permanent establishment or a fixed base which a resident of a Contracting State has in the other Contracting State, then such income may be included in the profits which are attributable to the permanent establishment or fixed base as envisaged in Articles 7 and 14 and taxed in that other Contracting State.

Paragraph 3 states that notwithstanding paragraphs 1 and 2, the source Slate also retains a taxing right in respect of other income.

The provisions of this Article are designed to allow for the actual mechanisms required for the elimination of double taxation.

In paragraph 1(a) the position with regard to the manner in which Brazil will provide relief in cases of double taxation of its residents is set out while the South African position with regard to its residents is set out in paragraph 1(b). Both States use the credit method of relief.

Paragraph 2 enables the State of residence to retain the right to take into consideration the amount of income exempted in that State, when determining the rate of tax to be imposed on the remainder of the income.

Paragraph 1 provides that a State may not impose upon nationals of the other State any tax or requirement connected therewith which is other or more burdensome than that which it imposes on its own nationals in the same circumstances. The underlined words above are crucial to understanding the effect of this paragraph. By way of example, if Brazil imposed a withholding tax (NRST) on dividends paid to non-residents, but did not impose a similar tax on residents, NRST would be paid by South African shareholders but not by Brazilian shareholders. Nevertheless, this tax does not contravene the provisions of this paragraph, because the shareholders are not in the same circumstances, as they are resident in different States. A national Of Brazil taking up residence in South Africa would also become liable for NRST and the discrimination is thus on the basis of residence and not nationality. This is permitted.

Paragraph 2 provides that where an enterprise of one State has a permanent establishment in the other State, that permanent establishment shall not be less favorably taxed than enterprises of the home State which carry on similar activities. An exception is made, however, in the case of personal allowances, reliefs and reductions on account of civil status or family responsibilities. An example of such an allowance or relief would be the child rebates previously granted by South Africa. These reliefs may be withheld from non-residents.

Paragraph 3 provides that interest, royalties and other disbursements paid by

non-residents deriving income in a State are to be allowed as a deduction by that State in the same manner as that State grants those deductions to residents. It is provided, however, that this paragraph does not override Articles 9,11(8) and 12(6), which allow a State to make adjustments in cases where excessive payments are made because of a special relationship between payer and recipient.

Paragraph 4 prevents a State from giving less favorable taxation treatment to foreign-held enterprises than it gives to locally-held enterprises. The paragraph deals only with the taxation of the enterprise - it is still permissible, as discussed in relation to paragraph 1 above, to impose a different tax regime on the owners of the enterprise.

The Convention generally applies only to the taxes listed in Article 2 and paragraph 5 provides that the non-discrimination provisions of this Article will apply only to such taxes.

This Article institutes a mutual agreement procedure for difficulties arising out of the application of the Convention. In paragraphs 1 and 2 it provides that the competent authorities of the Contracting States shall endeavor by mutual agreement to solve the situation of taxpayers subjected to taxation not in accordance with the provisions of the Convention.

In paragraph 3, it authorizes the competent authorities of the two States to resolve by mutual agreement any problems relating to the interpretation or application of the Convention.

Finally, for practical purposes, paragraph 4 authorizes the competent authorities to communicate directly with each other for the purpose of reaching mutual agreement in respect of any of these matters.

Paragraph 1 provides that the States shall exchange such information as may be required both for carrying out the provisions of the Convention and for applying the domestic taxation laws concerning any tax imposed on behalf of the Contracting States. In other words, the competent authorities can exchange information on, for example, value-added tax or sales tax, as the case may be. The exchange of information is not restricted by Articles 1 and 2. Thus, should South Africa obtain tax information relating to a resident of a third State who is liable for Brazilian tax, it may make that information available to Brazil.

Paragraph 1 further provides that information obtained by a State under this provision must be treated with the same degree of secrecy as applies to information obtained under the domestic laws of that State. In addition to this general stipulation on secrecy, it is specifically provided that information obtained under this Article may be disclosed only to persons or authorities involved in the administration of the taxes imposed on behalf of a Contracting State, and that those persons and authorities shall use the information only for the purposes of such administration.

In terms of paragraph 2, the preceding provisions will not impose on a State the obligation:

(a) to do anything which is contrary to the laws and the administrative practice of either State;

(b) to supply information which is not obtainable under the laws of either State or in the normal course of the administration of either State;

(c) to supply information which discloses any business secret, or information the disclosure of which is contrary to public policy.

The Article ensures that members of diplomatic missions and consular posts are not deprived of any right which is accorded to them under international law or special agreements between Contracting States. In effect this normally means that the remuneration which they receive from their State of residence while they are stationed in the other Contracting State is not subjected to tax in that other State.

The object of paragraph 1 is to combat possible treaty shopping and provides that any limitations imposed on the taxing rights of a State will not apply in respect of offshore income from the activities set out in subparagraphs (a), (b) and (c) if such income is either not subjected to tax in the other State or is subjected to tax at a rate which is significantly lower than that applied to similar onshore activities.

Paragraph 2 provides that a legal entity that is resident in a Contracting State and derives income from sources in the other Contracting State shall not be entitled to the benefits provided for by the Convention if such persons or any combination of one or more of such persons who are not residents of that State own, directly or indirectly, more than fifty per cent of the beneficial interest in such legal entity or in the case of a company, more than fifty per cent of the aggregate vote and value of the shares in the company. This provision shall not apply where the said entity is engaged in substantive business operations, other than the mere holding of securities or any other assets, or the mere performance of auxiliary, preparatory or any other similar activities in respect of other related entities in the Contracting State of which it is a resident.

Paragraph 3 provides that with regard to the tax issues provided for in this Convention, the provisions of the Convention shall prevail over the General Agreement on Trade and Services or any other international agreements

The Article provides that the Contracting States shall notify each other once the legal procedures required in each country for the bringing into force of the Convention have been completed. The Convention will then enter into force on the date of receipt of the later of these notifications.

Paragraph 2 provides that the date on which the provisions of the Convention will begin to operate in both States, will be the first day of January next following the date of entry into force of the Convention with regard to taxes withheld at source, and, with regard to other taxes, for taxable years beginning after such date.

Paragraph 3 provides for the termination of the previous sea and air transport treaty between South Africa and Brazil.

The Article provides that the Convention shall operate for a minimum period of five years after which it may be terminated by either Contracting State by giving notice prior to 30 June of any calendar year. It will then cease to operate from 1 January in the calendar year following such notice on the basis set out in the Article.

Protocol

Paragraph 1 of the Protocol merely confirms that the provisions of paragraph 3 of Article 7 shall apply in respect of expenses incurred in the Contracting State in which the permanent establishment is situated or elsewhere. This is a confirmation of the normal interpretation placed on the Article.

Paragraph 2 of the Protocol provides that any interest which is paid as remuneration on the company's equity" shall also be regarded as interest for the purposes of paragraph 3 of Article 11 in so far as that interest is deductible when determining the income of the legal person. This provision is consistent with the domestic legislation in Brazil with regard to the definition of interest.

Paragraph 3 of the Protocol provides that payments for the rendering of technical services and technical assistance fall under the definition of royalties in paragraph 3 of Article 12. This provision is consistent with all Brazilian tax treaties.

Paragraph 4 of the Protocol specifies that should Brazil subsequently conclude a convention for the avoidance of double taxation with a third State which is not located in Latin America, whereby gains from the alienation of any property referred to in paragraph 5 of Article 13 are taxable only in the Contracting State of which the alienator is a resident, then similar treatment shall automatically apply in respect of this Convention.

Paragraph 5 of the Protocol merely clarifies that the term 'council" in Article 1 6 of the Convention refers to the administrative and financial councils established under Brazilian Corporate Law.

Paragraph 6(a) of the Protocol provides that reasonable additional requirements, for example, additional record keeping requirements for foreign owned companies, shall not constitute discrimination as envisaged in paragraphs 1 and 4 of Article 24. This situation could arise in the case of a transfer pricing investigation.

Paragraph 6(b) of the Protocol confirms that the imposition of a branch profits tax will also not constitute discrimination.

Paragraph 6(c) of the Protocol confirms the principle that an enterprise may not charge royalties to its own permanent establishment.

Paragraph 6(d) specifies that South Africa may impose tax on a permanent establishment in South Africa of a company resident in Brazil at a rate which does not exceed the normal tax on companies by more than five percentage points.

Paragraph 6(e) of the Protocol specifies that should South Africa abolish the secondary tax on companies without replacing it with a similar tax then the provisions of paragraph 6(d) shall cease to be effective from the date on which the relevant tax is abolished.

Paragraph 6(t) of the Protocol specifies that the provisions of Article 24 shall not prevent the application by a Contracting State of its domestic law concerning controlled foreign corporations and thin capitalization.

Attached are opinions from the State Law Advisers of the Departments of Foreign Affairs and Justice.

The entire Convention becomes part of the law of South Africa and is entered into in terms of section 108 of the Income Tax Act, 1962 (Act No 58 of 1962), read in conjunction with section 231(4) of the Constitution of the Republic of South Africa, 1996 (Act No 108 of 1996).

There are no direct financial costs under the Convention for the State.