DOUBLE TAX TREATIES: COMPANIES ICAZ TAX SEMINAR Presented by M. NGORIMA 22 February 2018
DISCUSSION POINTS 1. What are double tax treaties? 2. Model Treaties 3. OECD Model Treaty Basic template 4. Model Treaty Chapters 5. Double Tax Articles 6. Double Taxation Agreements Page 2
WHAT ARE DOUBLE TAX TREATIES? International agreements between two or more countries Relieve double taxation -allocate taxing rights between the treaty partners Remove the problem of dual residence by assigning to one country Prevent fiscal evasion provides for exchange of information etc Page 3
MODEL TREATIES The OECD Model Treaty is often used as a basis for discussion This is a template, used as an aid to negotiation The specific treaty will take into account the tax systems in the respective states Other Models UN, US We will concentrate on the OECD Model for our analysis of treaty principles and common issues Every real treaty is different, even though they may look the same at first glance in a client situation, it is essential to examine the treaty in front of you Ensure that you are using the current treaty Page 4
THE OECD MODEL TREATY BASIC TEMPLATE Split into chapters Each Chapter has one or more Articles Taxation of income articles usually give you your answer But the rest is important too the devil can be in the detail Page 5
THE MODEL TREATY - CHAPTERS Scope of the treaty Persons and Taxes covered Definitions General, Resident, Permanent Establishment Taxation of Income (allocation of taxing rights) Taxation of Capital Methods for elimination of double taxation (exemption, credit) Special provisions Mutual Agreement, Exchange of Information Procedures for entry into force and termination Page 6
DOUBLE TAX ARTICLES Article 1: Article 2: Article 3: Article 4: Article 5: Article 6: Article 7: Article 8: Article 9: Article 10: Article 11: Article 12: Article 13: Article 14: Article 15: Article 16: Persons covered Taxes covered General definition Resident Permanent Establishment Income from immovable property Business Profits International transport Associated Enterprises Dividends Interest Royalties Technical fees Capital Gains Income from employment Directors fees Page 7
DOUBLE TAX ARTICLES Article 17: Article 18: Article 19: Article 20: Article 21: Article 22: Article 23: Article 24: Article 25: Article 26: Article 27: Article 28: Entertainers\ Sports persons Pension\Annuity Government Services Students Other Income Elimination of double taxation Non-Discrimination Mutual Agreement Procedure Exchange of information Collection of Tax Diplomats Entry in force Page 8
TREATY SCOPE: ARTICLE 1 Treaty only applies to persons who are residents of both states PE cannot claim treaty benefits Person defined in Zimbabwe/South Africa agreements Includes an individual, an estate, a trust, a company and any other body of persons treated as an entity for tax purposes. Page 9
TAXES COVERED: ARTICLE 2 Treaties apply to taxes on income (including gains and capital appreciation), and on capital HC and FC taxes defined Includes similar taxes subsequently imposed - Income Tax - NRST - NRTF - NRTR - RTI - CGT Page 10
GENERAL DEFINITIONS: ARTICLE 3 This article defines treaty terms such as: ART - Person 3.1 (a) - Company 3.1 (b) - Enterprise 3.1 (c ) Terms not defined 3.2 Definition of respective territories Page 11
DOUBLE TAX TREATIES: RESIDENCE ARTICLE 4 Resident for treaty purposes if liable to tax in a Contracting State because of domicile, residence, place of management or other criterion of a similar nature Excludes cases where liability is restricted to income sources in that State A company can be resident in both Contracting States under the above rule, in which case there is a tie-breaker clause Page 12
DOUBLE TAX TREATIES: RESIDENCE TIE-BREAKERS Traditionally, the tie-breaker gives residence status to (only) the State in which the place of effective management (POEM) is situated In some treaties (including US, Canada), residence is determined by Mutual Agreement Procedure (MAP) between the two Contracting States Trend towards MAP tie-breakers in other new treaties OECD Commentary suggests criteria to be considered in MAP very similar to the existing POEM considerations, but adds that the use of the tie-breaker for tax avoidance can be a valid consideration If no agreement is reached, or if the Competent Authorities so decide, the company will be dual-resident Page 13
RESIDENCE ARTICLE 4 [Cont d] What happens where there is no single location for board meetings/poem? New communication technologies video conferences, virtual meetings online OECD discussion draft (2003) looked at possible alternative tie-breaker clauses Commentary suggests mutual agreement procedure as an alternative to effective management Page 14
PERMANENT ESTABLISHMENT : ARTICLE 5 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a warehouse, in relation to a person providing storage facilities for others; (g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; and (h) an installation or structure used for the exploration of natural resources. 3. The term "permanent establishment" shall be deemed to include: (a) a building site, a construction, assembly or installation project or any supervisory activity in Page 15
PERMANENT ESTABLISHMENT : ARTICLE 5. The term "permanent establishment" shall be deemed to include: (a) a building site, a construction, assembly or installation project or any supervisory activity in connection with such site or project, but only if such site, project or activity continues for a period of more than six months; (b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period commencing or ending in the year of assessment concerned; and Page 16
PERMANENT ESTABLISHMENT : ARTICLE 5. c) the performance of professional services or other activities of an independent character by an individual, but only where those services or activities continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period commencing or ending in the year of assessment concerned Page 17
INCOME FROM IMMOVABLE PROPERTY: ARTICLE 6 1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 2. (i) Immovable property" as defined in the Contracting State in which the property in question is situated. (ii) include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, (iii) usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. (iv) Ships and aircraft shall not be considered as immovable property. Page 18
BUSINESS PROFITS : ARTICLE 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on or has carried on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. Page 19
BUSINESS PROFITS : ARTICLE 7 [Cont d] 3. In determining the profits of a permanent establishment, there shall he allowed as deductions those deductible expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. 4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 of this Article shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary. The method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. Page 20
INTERNATIONAL TRANSPORT : ARTICLE 8 1. Profits of an enterprise of a Contracting State from the operation of ships, aircraft, or road or rail transport vehicles in international traffic shall be taxable only in that State. Page 21
ASSOCIATED ENTERPRISES : ARTICLE 9 1. Where: (a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State; and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. Page 22
DIVIDENDS, INTEREST & ROYALTIES: ARTICLE 10 to 12 [Cont d] Many countries impose WHT or income tax on payments made to non-residents Some times only taxation at source thus only WHT Purpose of treaty articles is to limit the rate of WHT A treaty rate between 0% and 15% is most common Can sometimes remove WHT altogether may only be taxed in the residence state (i.e. the country where the recipient is located) Domestic WHT may be lower than treaty rate, but the treaty is still useful as it protects from future changes, providing certainty Page 23
DIVIDENDS, INTEREST & ROYALTIES: ARTICLE 10 to 12 [Cont d] Definitions can be found in the treaty Articles may be subject to anti-avoidance provisions Within the treaty article itself; and/or Overrides in domestic law Enterprise clause like NL-HK treaty Beneficial ownership requirement Agents Nominees Subject to tax requirement in some treaties If effectively connected to a PE, these articles do not apply Instead, the income is fully taxed under Article 7 Page 24
DIVIDENDS : ARTICLE 10 [Cont d] Definition based on FC s domestic rules Doesn t apply to: - additional corporate tax on distributions - prepayment of tax on profits Hybrid entities WHT on branch remittances Page 25
DIVIDENDS : ARTICLE 10 [DTA ZIM/S. AFRICA] 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State. the tax so charged shall not exceed: (a) 5% of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 % of the capital of the company paying the dividends; (b) 10% of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. Page 26
INTEREST : ARTICLE 11 Defined as income from debt claims Art.11.3 Specific treaties can be wider Interest in excess of Arms length interest rate = dividend Sourcing rules Thin Cap Interest received by partner could be classified interest, not partnership profits Interest on hybrid loan Page 27
INTEREST : ARTICLE 11 [DTA ZIM/S. AFRICA] 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 5 % of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application. of this limitation. Page 28
ROYALTIES : ARTICLE 12 Is it a royalty within scope of domestic law? Is it a royalty within treaty definition? If not, only taxable if PE exists Treaty definition -very wide Relates to right to use Know-how Franchising Technical etc fees see later Film etc rents often excluded and taxed under Art 7 Services or royalty? Example A Zimbabwean Company pays a royalty of $10,000 to a South African based company. NRTF 10% Page 29
TECHNICAL SERVICES AND MANAGEMENT FEES: ARTICLE 13 Some countries impose withholding taxes on management or technical fees Could apply to services used in FC, even if performed outside There is no article in the OECD Model to cover these Sometimes included in the Royalties article and taxed at the same WHT rate Sometimes the parties add a separate Technical Services article If treaty is silent, they will fall within the Business Profits article See earlier regarding Services PE Page 30
DTA: ZIM\SOUTH AFRICA: - ARTICLE 13 Taxable in payee country Payer to withhold up to 5% Not applicable if Permanent Establishment exists Page 31
CAPITAL GAINS: ARTICLE 14 Gains derived from alienation immovable property referred to in Article 6 and situated in the other Contracting State, or from the alienation of shares in a company the assets of which consist directly or indirectly principally of such property, may be taxed in that other State. 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, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State. Page 32
INCOME FROM EMPLOYMENT: ARTICLE 15 Employment tax where services are rendered, however contracting state may tax if; (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the year of assessment concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not borne by a permanent establishment which the employer has in the other State. Page 33
DIRECTORS FEES: ARTICLE 16 Directors' fees and other similar payments derived by a resident of a Contracting State in that person's capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State. Page 34
ENTERTAINERS AND SPORTSPERSONS: ARTICLE 17 Notwithstanding the provisions of Articles 7 and 15, income derived by a resident of a Contracting State as an entertainer such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that person's personal activities as such exercised in the other Contracting State, may be taxed in that other State. Page 35
PENSIONS AND ANNUITIES: ARTICLE 18 Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration for past employment, and annuities, arising in a Contracting State and paid to a resident of the other Contracting State, may be taxed in the firstmentioned State. The term "annuity" means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth. Notwithstanding the provisions of paragraph 1 of this Article, pensions paid and other payments made under a public scheme which is part of the social security system of a Contracting State, a political subdivision or a local authority thereof shall be taxable only in that State. Page 36
GOVERNMENT SERVICE: ARTICLE 19 1(a) (b) Salaries, wages and other similar remuneration paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State. However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who: (i) is a national of that State; or (ii) did not become a resident of that State solely for the purpose of rendering the services. Page 37
STUDENTS, APPRENTICES AND BUSINESS TRAINEES: ARTICLE 20 A student, apprentice or business trainee who is present in a Contracting State solely for the purpose of the student, apprentice or business trainee's education or training and who is, or immediately before being so present was, a resident of the other Contracting State, shall be exempt from tax in the first-mentioned State on payments received from outside that first-mentioned State for the purposes of the student, apprentice or business trainee's maintenance, education or training. Page 38
OTHER INCOME: ARTICLE 21 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the Agreement and arising in the other Contracting State may also be taxed in that other State. Page 39
ELIMINATION OF DOUBLE TAXATION: ARTICLE 22 Double taxation shall be eliminated as follows: (a) In South Africa, subject to the provisions of the law of South Africa regarding the deduction from tax payable in South Africa of tax payable in any country other than South Africa (which shall not affect the general principle hereof), Zimbabwean tax paid by residents of South Africa in respect of income taxable in Zimbabwe, in accordance with the provisions of this Agreement, shall be deducted from the taxes due according to South African fiscal law. Such deduction shall not, however, exceed an amount which bears to the total South African tax payable the same ratio as the income concerned bears to the total income; and (b) In Zimbabwe, subject to the provisions of the law of Zimbabwe regarding the allowance as a credit against Zimbabwean tax of the tax payable in a territory outside Zimbabwe (which shall not affect the general principle hereof) South African tax payable, whether directly or by deduction, in respect of taxable income or chargeable gains from sources within South Africa shall be allowed as a credit against any Zimbabwean tax computed by reference to the same taxable income or chargeable gains by reference to which the South African tax is computed. Page 40
NON-DISCRIMINATION: ARTICLE 23 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. Page 41
MUTUAL AGREEMENT PROCEDURE: ARTICLE 24 1. Where a person considers that the actions of one or both of the Contracting States result or will result for that person in taxation not in accordance with this Agreement, that person may, irrespective of the remedies provided by the domestic law of those States, present a case to the competent authority of the Contracting State of which the person is a resident or, if the case comes under paragraph 1 of Article 23, to that of the Contracting State of which the person is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Agreement. Page 42
EXCHANGE OF INFORMATION: ARTICLE 25 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Agreement. The exchange of information is not restricted by Articles 1 and 2. Page 43
EXCHANGE OF INFORMATION: ARTICLE 25 [Cont d] 3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws or administrative practice of that or of the other Contracting State; (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; and (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public). Page 44
MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS: ARTICLE 27 Nothing in this Agreement shall affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements. Page 45
ENTRY INTO FORCE: ARTICLE 28 Each of the Contracting States shall notify the other in writing. through the diplomatic channel, of the completion of the procedures required by its law for the bringing into force of this Agreement. The Agreement shall *enter into force on the date of the later of these notifications. It is assumed this DTA, gazetted on the 8th April, 2016, has been brought *into force by the above notifications none of which has appeared on the Gazette Editor. Page 46
DOUBLE TAXATION AGREEMENTS The following agreements are in force and the applicable withholding taxes are as follows: Page 47
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