Mozam­bi­can tax treaty spells trou­ble

Por­tuguese in­ter­pre­ta­tion puts dif­fer­ent spin on ‘per­ma­nent es­tab­lish­ment’, re­sult­ing in dou­ble tax­a­tion

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ELAN­DRE BRANDT

WORLD­WIDE, coun­tries en­ter into treaties with each other to avoid dou­ble tax­a­tion. Dou­ble tax­a­tion arises when the same amount of in­come is taxed in the hands of the same per­son in more than one coun­try and nei­ther coun­try pro­vides re­lief from tax in­curred in the other coun­try.

A prob­lem has been iden­ti­fied in re­spect of the treaty be­tween SA and Mozam­bique that re­sults in dou­ble tax­a­tion. The guid­ing prin­ci­ple is that the in­come of a South African res­i­dent is tax­able only in SA, ex­cept to the ex­tent that the in­come is at­trib­ut­able to a per­ma­nent es­tab­lish­ment of that per­son in Mozam­bique. If a per­ma­nent es­tab­lish­ment is cre­ated in Mozam­bique, then the South African per­son must reg­is­ter for tax in Mozam­bique and pay tax in that coun­try on the in­come that is at­trib­ut­able to the per­ma­nent es­tab­lish­ment.

A per­ma­nent es­tab­lish­ment is a fixed place through which the busi­ness of an en­ter­prise is car­ried on. In the case of con­struc­tion con­tracts, a spe­cial rule ap­plies, and a per­ma­nent es­tab­lish­ment arises in re­spect of “a build­ing site, a con­struc­tion, assem­bly or in­stal­la­tion project or any su­per­vi­sory ac­tiv­ity in con­nec­tion with such site or project, but only where such site, project or ac­tiv­ity con­tin­ues for a pe­riod of more than six months ...”

Ap­par­ently, the prob­lem with the dou­ble tax treaty be­tween SA and Mozam­bique is that the English and Por­tuguese ver­sions are in­ter­preted dif­fer­ently as to when a per­ma­nent es­tab­lish­ment arises.

The in­ter­pre­ta­tion of the English ver­sion, which is ap­plied by the South African Rev­enue Ser­vice (SARS), is that a per­ma­nent es­tab­lish­ment is only cre­ated in Mozam­bique when a South African per­son has been in the coun­try, car­ry­ing on busi­ness ac­tiv­i­ties, for more than six months.

On the other hand, the Por­tuguese ver­sion, which is used by the Mozam­bi­can tax au­thor­i­ties, is in­ter­preted to mean that a per­ma­nent es­tab­lish­ment will be cre­ated in that coun­try if the con­tract with the Mozam­bi­can cus­tomer pro­vides for ser­vices to be ren­dered for more than six months, even if the South African is only present for one day dur­ing the con­tract pe­riod.

In these cir­cum­stances, Mozam­bique will seek to tax the South African per­son on his busi­ness prof­its at the rate of 32% and SA will seek to tax the per­son (as­sum­ing it is a com­pany) on the same prof­its at the rate of 28%.

SA may not pro­vide any tax cred­its for the Mozam­bique tax suf­fered be­cause the au­thor­i­ties be­lieve a per­ma­nent es­tab­lish­ment was not cre­ated in Mozam­bique and there­fore it has in­cor­rectly taxed the prof­its.

SA has in­tro­duced a new limited tax credit pro­vi­sion into the In­come Tax Act that may pro­vide some limited re­lief

The prin­ci­ples gen­er­ally ap­plied in de­ter­min­ing when a site is first es­tab­lished are found in para­graph 19 of the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) Com­men­tary on the Model Tax Con­ven­tion re­lat­ing to Ar­ti­cle 5: Africa Desk: “A site ex­ists from the date on which the contractor be­gins his work, in­clud­ing any prepara­tory work, in the coun­try where the con­struc­tion is to be es­tab­lished ...” On this ba­sis, prepara­tory work car­ried out in SA does not con­sti­tute a per­ma­nent es­tab­lish­ment in Mozam­bique, but, once the contractor moves on site, the pe­riod for de­ter- min­ing the six-month re­quire­ment com­mences and will ter­mi­nate on the date that the contractor’s ac­tiv­i­ties on the site fi­nally ter­mi­nate. The tax­able in­come at­trib­ut­able to the site will be de­ter­mined by ref­er­ence to the ser­vices ac­tu­ally per­formed on site and not to the en­tire ser­vices per­formed both out­side and within Mozam­bique.

The in­ter­pre­ta­tion ap­plied by the Mozam­bi­can tax au­thor­i­ties is clearly in con­flict with in­ter­na­tional opin­ion that the crit­i­cal de­ter­mi­nant is the du­ra­tion of ser­vices ac­tu­ally per­formed within the host coun­try.

This is a mat­ter that can only be re­solved by the tax au­thor­i­ties. A stated ob­jec­tive of the treaty is to pro­mote and strengthen eco­nomic re­la­tions be­tween the two coun­tries.

How­ever, in these cir­cum­stances, South Africans were ac­tu­ally bet­ter off in the ab­sence of the treaty.

SA has in­tro­duced a new limited tax credit pro­vi­sion in the In­come Tax Act that may pro­vide limited re­lief to the South African tax­payer in cer­tain cir­cum­stances, but the risk of dou­ble tax­a­tion re­mains. South Africans in­tend­ing to do busi­ness with Mozam­bi­can clients or cus­tomers should plan to try to avoid ad­verse tax im­pli­ca­tions.

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