International Agreements and Protocols: briefing by National Treasury and the South African Revenue Services

Meeting report

Presentation of Formal Ratification: South Africa-Seychelles Tax Treaty Protocol
Mr Lutando Mvovo, Director: International Tax, National Treasury, presented the process involved in the South-Africa Tax Treaty Protocol to the Committee stating that tax information exchange agreements were agreements between tax administrations. The National Treasury’s involvement in tax administration agreements was limited to managing the political impact assessment and instances where such agreement formed part of the broader Double Taxation Agreement (DTA) negotiation.

The SA– Seychelles tax treaty was one of the nine tax treaties that had a zero rate withholding tax on dividends. The Treaty had had to be renegotiated before the proposed dividends tax could be implemented. The renegotiation had however also addressed certain aspects that were not present in the old treaties. The Minister of Finance announced during his 2011 budget speech that the new dividends tax would come into operation on 1 April 2012. This protocol was signed on 4 April 2011 and would be formally ratified on 16 November 2011. The administrative machinery for its implementation would be put in place as part of the way forward. Tax dividend protocols with Australia, Netherlands, Ireland, Sweden and the United Kingdom were in force while protocols with Malta, Kuwait and Cyprus were still awaiting the Minister’s signature.

Discussion
Mr D Lees (KwaZulu-Natal, DA) asked if the Committee would be ratifying the protocol today.

The Chairperson replied that the protocol first had to go before the National Assembly. At some date between today and 6 December 2011 this matter would appear on the order paper.

Presentation of Double Taxation Conventions/Agreements Formal Ratification
South Africa- Seychelles
Mr Ron van der Merwe, Senior Manager at SARS, presented the Protocol amending the DTA between South Africa and the Seychelles. In broad terms, the amendments closely followed the Organisation for Economic Co-operation and Development (OECD) Model Convention, which formed the foundation for the vast majority of DTA’s worldwide. Amendments to the Agreement became necessary in view of the proposed phasing out of the secondary tax on companies and its replacement with a dividends tax. Articles of interest in the South Africa – Seychelles Protocol amending the Double Tax Agreement were as follows:

Article 4: Resident

This definition has been updated to follow current practice.

Article 5: Permanent Establishment

South Africa – Seychelles Protocol now includes “Performance of professional services for periods or periods exceeding 183 days in any 12 month period.”

Article 10: Dividends

Dividend rate in South Africa – Seychelles Protocol would be:
5% for shareholding of at least 10%; and
10% on all others.

Article 13: Capital Gains

Article 13 was amended by deleting paragraph 2 and substituted with a new paragraph 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State may be taxed in the other State. 

Article 13 was also amended by adding after paragraph 3 a new paragraph 4. Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.

Article 14: Independent Personal Services

Article 14 of the Agreement was deleted and the term “fixed base” was no longer used due to this deletion. Therefore, there were consequential changes to various other related Articles in the Agreement e.g. the changes in Articles I,III, IV and VI.

Article 26: Exchange of Information

Article 26 of the Agreement was deleted and replaced by the new Article on Exchange of Information. This new Article was in line with the OECD Model and 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.

South Africa-Malaysia and South Africa-Austria
The amendments to these agreements were simply an update of Article 26 on the Exchange of Information in line with the OECD Model. The amendments to the Agreements had become necessary in view of the global initiative to incorporate a comprehensive exchange of information Article in existing Double Taxation Agreements. 

Discussion
Mr Lees asked if 183 days mentioned under Article 5 were “working days” or calendar days. For example, if someone was on holiday in a country for three months of the 183 working days might they be classified as a “resident” despite that they were not professionally active for the whole 183 days.

Mr van der Merwe replied that the definition of state resident was based on domestic law. The Treaty did not create any new form of residency. The reason that an issue had arisen was because South Africa did not tax people because they were residents but rather if they received income from a source in South Africa. People from all over the world got income from sources in South Africa, but this should not make them a resident of South Africa. Article 4 had been amended to define resident as per our domestic law. The purpose of Article 5 was to define “permanent establishment”. Article 7, which dealt with the taxation of business profits, stated that business profits were taxable only in the state of residence unless there was a permanent establishment in the other state. This agreement was bi-lateral and so it cut both ways. For example, if a resident of South Africa went to do business in the Seychelles – which probably the most likely scenario – then the Seychelles can not tax that person until he has crossed the threshold of permanent establishment.

Mr B Mashile (Mpumalanga, ANC) also referred to the 183 days and commented that any legislative provision needed to administrable. What did “period or periods exceeding 183 days in any 12 month period” practically mean? Was South Africa not creating a situation whereby people could avoid taxes by staying in a country for 182 days for example? Did “any 12 month period” refer to twelve successive months? Did the advantages of this provision exceed the disadvantages?

Mr van der Merwe replied that a word was possibly missing from the quoted sentence which was creating confusion – it should read “period or periods in the aggregate exceeding 183 days in any 12 month period. Therefore it would not matter if someone went to a country for three months, left for a month and then came back for another two months. In terms of the Agreement, the authorities would keep counting the days. “Any 12 month period” meant that the twelve month period was not a fixed twelve month calendar period but that the start and end of twelve months was movable. SARS could also count the twelve months backwards or forwards. The interpretation of these rules was set out in the commentary. It was important for the interpretation of rules to be consistent across all states.

Mr Mashile said he had taken note that Mr van der Merwe had struggled to explain the implementation of the “183 days in any twelve month period”. There was no real clarity on it and practically it seemed as if the provision was open to manipulation.

Mr Mashile stated that the countries being discussed were small countries, especially Seychelles and Mauritius, and it was more than likely that it was South Africa that was supplying professional services to these countries rather than the other way around. Without being unpatriotic, were the treaties fair to these countries. How had the figure of 183 days been arrived at? Why was it 183 days and not 90 days for example?

Mr van der Merwe replied that 183 days was the standard set by the United Nations and the OECD. It was a standard used in the large majority of tax agreements. No one forced the other country to accept the 183 days. If a country was unhappy with that benchmark then they were more than welcome to propose other terms. It was important for the small countries to consider, that if they did not have technical knowledge and had to get it from somewhere else, it was sometimes not the best solution to tax those people who came in with the technical knowledge as this would just make the service more expensive the country’s people. The treaties were after all a negotiation. The 183 days was a difficult thing to talk through, but if Mr van der Merwe had the time he would be able to explain it quite easily.

Mr Mashile asked if South Africa was prohibited from using any other standards other than those set by the UN.

Mr van der Merwe replied that South Africa was not prohibited from using other terms.

Mr Charles Makola, Director: International Tax, National Treasury added that DTAs with developing countries could be tricky. Reaching consensus on a higher or lower threshold than six months could be tricky and would be the subject of negotiations – particularly with the island countries.

Mr Lees asked if the Agreement provided for the mechanism for 50% value calculation referred to under Article 13. The mechanism for calculating the total value was defined in our domestic legislation but was it defined in terms of these agreements? If not, could this not lead to a dispute over whose tax jurisdiction taxable income fell into?

Mr van der Merwe replied that it was desirable to always have consensus on the interpretation of treaties which followed from the OECD and United Nations commentary and backed up by domestic law. There was a paragraph in all of South Africa’s treaties that said that if there was an undefined term, such as the 50% value referred to by Mr Lees, then it should be interpreted in accordance with the domestic law of the country applying the treaty.

Mr Lees stated that the bank secrecy agreement eliminated the ability of the partner country to escape giving South Africa information even if they did not have a domestic tax interest. Mr van der Merwe had stated that getting access to information from domestic banks was not a problem for SARS under South Africa’s legislation but was that also the case in these countries? For example, did domestic law in the Seychelles allow the equivalent of SARS to access information from banks in the same way as South African domestic law did?

Mr van der Merwe replied that there was an organisation called “Global Forum” on exchange of information and transparency which had a 105 member countries, including South Africa. South Africa was in fact on the steering committee of the organisation which was formed to increase the flow of information from “financial jurisdictions”. The Global Forum had a very thorough Peer Review System which researched access to information in states and their ability to exchange that information. It could be said with confidence that if SARS asked Seychelles, Malaysia and/or Austria for information they would hand over the information. These countries had made a commitment to ensure that their domestic law allowed them to exchange information in accordance with international standards as adopted by the G20 through the Global Forum.

Mr Lees asked about the withholding tax on dividends that would be withheld by the company and passed on to the tax authority in the relevant country. Consider a professional man who was in the Seychelles for 100 days and was technically taxable in South Africa and not in the Seychelles. Considering the money was earned in the Seychelles, how did the money get repatriated to South Africa?

Mr van der Merwe replied that this was not a dividend coming back but simply the income that had been earned from business conducted. Normally there was not an issue with this – if a professional, such as a lawyer or a surgeon for example, went into another country and earned an income, it would usually not be a problem for him to repatriate that money.

Mr Charles Makola, Director: International Tax, National Treasury, added that South Africa taxed individuals on an accrual basis, irrespective of whether they had the cash or not the tax would be imposed and the individual would have to find a way of getting the fund out of the other country.
 
Mr Mashile asked how South Africa dealt with instances in which the state administration of a partner state was not credible so that it could not comply with the agreement. One might consider the example of Zimbabwe.

Mr van der Merwe replied that if that country was a member of the Global Forum then they would be “named and shamed”. If they were not, then South Africa could only do as much as it could. At the end of the day, South Africa would have to decide that, if it had a DTA with a country which had an Exchange of Information Article, and that country did not comply with the DTA, then South Africa could consider terminating the Agreement. South Africa would have to consider if the need for information was so important that it would justify terminating the Agreement and losing out on the other benefits that flowed from that Agreement. This was a decision that would need to be made at a ministerial level.

The Chairperson asked if the Global Forum also played an oversight role.

Mr van der Merwe replied that thirty of the member states formed a Peer Review Group and assessors from those countries conducted peer reviews. South Africa was a member of this group and had been assigned countries to do peer reviews on. His colleague was currently involved in a peer review of Mexico. The peer review group asked serious questions of countries being reviewed.

Presentation of Tax Information Exchange Agreements Formal Ratification
Mr van der Merwe presented the Tax Information Exchange Agreements (TIEA) formal ratification saying that the purpose of the agreements was to allow for effective exchange of information between the tax authorities. Mr van der Merwe presented the TIEA between South Africa and Guernsey. The agreement closely followed the OECD Model for TIEAs 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. Mr van der Merwe presented the TIEA between Guernsey and South Africa stating that the content of the TIEAs with Bermuda, Bahamas, San Marino, Jersey and Cayman was exactly the same, except that the South Africa – Guernsey Agreement contained one extra article which Article 10. Articles of interest in the South Africa – Guernsey Tax Information Exchange Agreement were as follows:

Article 1: Scope of the Agreement

•Exchange of Information that is foreseeably relevant to the enforcement of the domestic laws of the Parties concerning taxes covered by the Agreement.
 
•Including information that is foreseeably relevant to the determination, assessment, enforcement or collection of tax with respect to persons subject to such taxes, or to investigation of tax matters or the prosecution of criminal tax matters in relation to such persons.

•The requested Party shall ensure that effective exchange of information is not unduly prevented or delayed.

Article 2: Taxes Covered

This Article is in line with the OECD Model and extended exchanges to taxes of every kind and description.

Article 4: Exchange of Information upon Request

Information shall be exchanged without regard to:
a) whether the requested Party needs such information for its own tax purposes – domestic tax interest.
b) whether conduct being investigated would constitute a crime under the laws of the requested Party – dual criminality.

Domestic law should allow for exchange of:
a) information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity;
b)(i) information regarding the legal and beneficial ownership of companies, partnerships, foundations and other persons, including in the case of collective investment schemes, information on shares, units and other interests;
(b)(ii) in the case of trusts, information on settlors, trustees and beneficiaries.

Article 4 does not create an obligation for a Party to obtain or provide ownership information with respect to publicly traded companies or public collective investment schemes, unless such information can be obtained without giving rise to disproportionate difficulties.

Article 5: Tax Examinations Abroad

This article allowed for representatives of the competent authority of the requesting Party to enter the territory of the requested Party, to the extent permitted under its domestic laws. It also allowed for presence at interviews conducted by the requested Party. These were subject to approval of the requested Party.

Article 6: Possibility of Declining a Request

The Competent Authority may decline to assist where the disclosure of the information requested would be contrary to public policy of the requested Party. The Agreement did not impose any obligation to provide items subject to legal privilege, or any trade, business, industrial, commercial or professional secret or trade process. There was also no obligation to supply information which the requesting Party would not itself be able to supply to that Party.

Article 7: Confidentiality

All information provided and received by the competent authorities of the Parties shall be kept confidential. Furthermore, Information received shall be disclosed only to persons or authorities including courts and administrative bodies concerned with the purposes specified in Article 1. Article 7 also states that information received may not be used for any purpose other than for the purposes stated in Article 1 without the express written consent of the competent authority of the requested Party.

Article 8: Costs

Unless the competent authorities of the parties otherwise agree, indirect costs incurred in providing assistance shall be borne by the requested party, and direct costs incurred in providing assistance shall be borne by the requesting Party. The requesting party should be notified if the costs are expected to be significant.

Article 9: Mutual Agreement Procedure

Where difficulties or doubts arise between the Parties regarding the implementation or interpretation of this Agreement, the respective competent authorities shall use their best efforts to resolve the matter by mutual agreement.

Article 10: Mutual Assistance Procedure

If the competent authorities of the Parties consider it appropriate to do so they may agree to exchange technical know-how, develop new audit techniques, identify new areas of non-compliance, and jointly study non-compliance areas.

Discussion
The Committee asked for the presenters to supply it with written commentary on the technical differences between the six agreements, even if they did not change the interpretation or the content of the agreements.

Mr van der Merwe replied that this could be done.

Mr M Makhubela (Limpopo, COPE) said he had heard the presenter saying that if it was necessary sanctions would be applied to countries not complying with the Agreement. Why was this?

Mr van der Merwe replied that because sanctions would probably be the only thing that would enable SARS to get information about tax evaders. If it took the threat of sanctions by the G20 to get information from a country then that was what it would take. No amount of “nice talk” had ever convinced financial jurisdictions to open up and hand over information. All countries that were not tax havens had the same approach to this matter.

Mr Lees referred to Article 4 saying the shareholders names did not appear on the internet and so where would SARS get that information. One of the biggest challenges in his profession as an accountant had been getting through to the company secretary and getting hold of this information.

Mr van der Merwe conceded that SARS probably would not be able to get the names of shareholders on the internet but that it had access to the company secretaries who would give them full records. This was not a problem for SARS.

Mr Mashile asked if there had been any assessment of the domestic laws of the countries with which Agreements were to be signed. This was especially relevant to Articles 4 and 5. There was no point in ratifying an agreement with a country if there domestic law did not allow them to comply. If a county’s domestic law did not allow South Africa to enter it and seek out information then how would South Africa get around this?

Mr van der Merwe replied that all six of the countries with which agreements were being signed had undergone phase one of the peer review system and passed which meant that their domestic laws allowed for their compliance with the agreements. The agreements did not allow South Africa to go into other countries and “ride rough shod” over them. But there were consequences for countries that did not comply with the agreements. There were remedies for when member states of the Global Forum reneged on their commitments in treaties.

Mr Mashile thought that Article 6 was a dangerous one because it opened up temptation.

Mr van der Merwe replied that this article was based on the principle of reciprocity

Mr Mashile referred to Article 9 and asked what would happen if parties failed to resolve a matter by mutual agreement.

Mr van der Merwe replied that the interpretation of this article was laid out in the commentary. This was the international approach.

The Committee formally adopted the reports on the all treaties.

The meeting was adjourned.