SA agrees new taxation treaty with Mauritius
THE Treasury published a media release on June 17 2015 advising that a new double taxation agreement entered into force on May 28 2015 between SA and Mauritius. The new treaty replaces the 1996 SA/Mauritius tax treaty.
The Treasury indicated that the primary reason for renegotiating the old tax treaty was to curtail abuse of the old treaty that existed between SA and Mauritius. The new treaty contains a revised test for establishing where a person, other than an individual, is resident and also deals with the question of withholding taxes on interest and royalties, as well as the liability of companies which are regarded as property rich.
The new tax treaty has complied with all requirements under the constitution and was gazetted on June 17 2015 such that the new tax treaty took effect on May 28 2015.
At the same time that the Treasury published its media release, a memorandum of understanding concluded between the Mauritius Revenue Authority (MRA) and the South African Revenue Service (SARS) regarding the application of Article 4(3) which deals with the question of residence of persons other than individuals was published. This document should assist taxpayers in understanding what criteria will be relied on in establishing where, for example, a company is to be regarded as resident under the provisions of the tax treaty, that is either in Mauritius or SA.
It is questioned how many other memorandums of understanding SARS has concluded with other revenue authorities, particularly in light of the case of Ben Nevis Holdings Ltd & Another v Commissioner for HM Revenue & Customs  EWCA CIV 578, where the court indicated that memoranda of understanding concluded by contracting states may have an important bearing on the position of taxpayers and that it is in the interests of fairness to taxpayers that such memoranda of understanding should be readily available to the public.
Thus, the release of the memorandum of understanding concluded by SARS and its Mauritian counterpart must be welcomed, as it should assist taxpayers in interpreting the provisions of the tax treaty.
Article 4 of the treaty deals with the meaning of the term “resident” for the purposes of the tax treaty which provides that a resident of a contracting state means any person who under the laws of that state is liable to tax therein by reason of that person’s domicile, residence, place of management or any other criterion of a similar nature. Article 4(3) provides that in the case of persons other than an individual which is resident in both SA and Mauritius, the authorities of the contracting states shall decide where such person is resident.
In the memorandum of understanding concluded by SARS and the MRA an understanding was reached in relation to the factors to be taken into account when attempting to settle the question of dual residence in the case of persons other than individuals.
A person other than an individual will be deemed to be a resident for the purposes of the tax treaty taking account of its place of effective management, the place in which it is incorporated or otherwise constituted and any other relevant factors.
The authorities of SA and Mauritius have indicated in the memorandum of understanding that the following factors will be considered in determining where a company is resident for purposes of the tax treaty:
Where the meetings of the person’s board of directors or equivalent body are usually held;
Where the CEO and other senior executives usually carry on their activities;
Where the senior day-to-day management of the person is carried on;
Where the person’s headquarters are located;
Which country’s laws govern the legal status of the person;
Where its accounting records are kept;
Any other factors listed in paragraph 24.1 of the 2014 OECD Commentary (Article 4, paragraph 3), as may be amended by the OECD/BEPS Action 6 final report; and
Any other factors that may be identified and agreed on by the authorities in determining the residency of the person.
Those companies that have been incorporated in SA and are wholly owned by South African companies need to ensure therefore that their primary activities are indeed conducted in Mauritius and not SA, thereby ensuring that the benefits available under the tax treaty will be available to such companies in Mauritius. Where a company has been incorporated in Mauritius but for all practical purposes is controlled in SA, such company will be regarded as resident in SA for purposes of the treaty. Thus, South African groups with companies in Mauritius should evaluate the manner in which the Mauritian company’s affairs are conducted so as to ensure that they cannot be said to be tax resident in SA under the provisions of the treaty concluded with Mauritius.
The old tax treaty provided for a zero withholding tax rate on interest and royalties on the basis that such amounts were only taxable in the state where the taxpayer receiving the interest or royalties resided.
The new tax treaty provides for a 10% withholding tax in the source country paying the interest. Furthermore, the new treaty allows for a 5% rate of withholding tax on royalties paid in the source country.
This means interest or royalties paid by a South African entity to a Mauritius person will be liable to a maximum withholding of either 10% or 5% as the case may be.
Under the old treaty, Mauritian companies were used to hold shares in South African companies which owned fixed property located in SA. Where the shares in the Mauritian company were disposed of, SA could not, under the old treaty, subject that disposal to capital gains tax as is the case with other countries. Thus, the new treaty now provides that a contracting state may tax capital gains realised on the disposal of shares deriving more than 50% of their value directly or indirectly from immovable property situated in that contracting state. Thus, with effect from taxable years commencing on or after January 1 2016, any Mauritian company disposing of shares in a company owning fixed property in SA will attract capital gains tax in SA.
When reference is made to article 28, which deals with the date on which the treaty enters into force, it would appear that the new tax treaty will generally apply with effect from January 1 2016 in respect of taxes withheld at source relating to amounts paid or credited after January 1 2016. Insofar as other taxes are concerned, the new treaty applies in respect of taxable years commencing on or after January 1 2016.
Memorandum of understanding should assist taxpayers in interpreting the provisions of new accord
Dr Beric Croome is a tax executive at ENSafrica.