SARS Commissioner response to Business Day – South Africa’s tax treaty with Mauritius
Civil society organisations have estimated that billions of dollars of tax goes uncollected in Africa as a result of BEPS. The OECD has highlighted a number of action points to address BEPS, including measures to address treaty abuse.
Yesterday’s article “Uncertainty arises over new double tax treaty” places a great deal of emphasis on the supposed uncertainty and potential for double taxation created by one development in the new treaty between South Africa and Mauritius. It is alarmist and simply incorrect.
The first point is that few companies will be affected by the change in the “tie-breaker” rule to decide a company’s country of residence if it is a resident of both countries under their domestic laws. SARS’s experience is that dual residence for companies is uncommon, since most companies have their place of effective management in the country in which they are incorporated. This experience is echoed in the commentaries to the OECD and the UN Model Conventions which both note that: “It may be rare in practice for a company, etc. to be subject to tax as a resident in more than one State, but it is, of course, possible…”
The second point is that the use of a mutual agreement between two countries to resolve the question of dual residence is by no means unique to this treaty or even rare internationally. The approach is explicitly recognised in the commentaries, which go so far as to provide draft wording should countries prefer to take a case by case approach to dual residence in their treaties. South Africa and its partners have adopted this approach in several treaties.
A mutual agreement is not the exercise of an administrative discretion by SARS. It is an agreement between the competent authorities of the two countries, which is specifically provided for in the treaty. Also, the commentaries provide a list of factors for the competent authorities to consider when reaching an agreement on where a company is resident. Some factors are “where the meeting of its board of directors or equivalent body are usually held”, “where the chief executive officer and other senior executives usually carry on their activities” and “whether determining that the legal person is a resident of one of the Contracting States but not of the other would carry the risk of the improper use of the provisions of the Convention”.
Even in the unlikely event that agreement cannot be reached, South African law permits tax relief for tax paid by a resident company in another country. Double taxation will, thus, not arise.
Far from resulting in double taxation, the mutual agreement approach is intended to help counter abuses of treaties that may result in double non-taxation. The new treaty with Mauritius takes an internationally recognised step in this regard and brings exchange of information up to current international best practice.