SA agrees new tax­a­tion treaty with Mau­ri­tius

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

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 [2013] 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.

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