COMMENTARY ON THE ARTICLES OF THE ATAF MODEL TAX AGREEMENT FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO

COMMENTARY ON THE ARTICLES OF THE ATAF MODEL TAX AGREEMENT FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

2 OVERVIEW The ATAF Model Tax Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ( the Agreement ) generally follows the United Nations Model Double Taxation Convention between Developed and Developing Countries and the OECD Model Tax Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital ( the UN MDTC or OECD MTC ). It should be noted that the Commentary to the UN MDTC quotes extensively from the Commentary to the OECD MTC. In view of this fact, the Commentary to this Agreement will refer mainly to the condensed OECD MTC Commentary ( OECD Commentary ) as it read on 15 July 2014, when the Articles are, in the main, identical. With regard to Articles which are mainly identical to the UN MDTC published in 2011, reference to that Commentary ( UN Commentary ) will be used. It is important to note that references to taxes on capital have been omitted from this Model as no Member State currently imposes taxes of this nature. This issue would need to be addressed in bilateral negotiations if one of the parties does impose a tax on capital. The entire text has been made gender neutral which results in some differences in language but not in principal. The term Agreement has been used in the Agreement but Members are at liberty to use the term Convention if they so wish. Both the OECD and UN Models and Commentaries use the term Convention. Where reference is made to the OECD Commentary, the reference is to the 2014 edition thereof. Reference to the UN Commentary, refers to the 2011 edition. These references in this Commentary indicate agreement with the interpretation set out therein. This is of considerable importance in ensuring that interpretation of the provisions of the Agreement are consistent with the international approach and result in general consensus in this regard. Finally, it is not the aim of this document to provide a comprehensive commentary on the provisions of the ATAF Model. This would result in mostly repeating the text of the OECD and UN Commentaries in order to ensure consistent interpretation. Consequently this document intends only to give a brief overview of the various Articles and to provide a crossreference to the relevant paragraphs in either the OECD or UN Commentary which provide extensive guidance and will ensure consensus in application. GENERAL Firstly, in cases where the treaty is in conflict with domestic law, it is the general principle and intention that the treaty should override domestic law. This is in accordance with international law. Secondly, with regard to the allocation of taxing rights, where the taxing right of the State of source is unlimited or limited, it has the prior right of taxation. Consequently it is the State of residence which is obliged to eliminate any double taxation. The Agreement is a Model which is intended to provide an African approach to tax treaties for Members. It will be revised from time to time and is not a legal instrument as such.

3 COMMENTARY ON ARTICLE 1 PERSONS COVERED BY THE AGREEMENT Paragraph 1 Paragraph 1 of this Article follows the OECD MTC, and specifies that the provisions of the Agreement will apply to persons who are residents of one or both of the Contracting States. The term resident, is defined in Article 4. Paragraph 2 Paragraph 2 of this Article is derived from the Base Erosion and Profit Shifting Project (BEPS Project) and deals with income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent. It is considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State. The OECD Commentary should, therefore, be followed and also provides extensive guidance which covers the following important aspects in particular issues related to the improper use of treaties: Application of the Agreement to partnerships; Cross-Border issues relating to Collective Investment Vehicles (CIVs); Complications frequently arise when the investors, the CIV and the investment are all located in different countries. In order to address these issues, a section pertaining thereto was introduced into the OECD Commentary in the July 2010 edition. For purposes of the Commentary, the term CIV is limited to funds that are widely-held, hold a diversified portfolio of securities and are subject to investorprotection regulation in the country in which they are established: o Application of the Convention to CIVs: In order to qualify for the benefits of a treaty, a CIV would have to qualify as a person that is a resident of a Contracting State and, as regards the application of Articles 10 and 11, that it is the beneficial owner of the income that it receives. Paragraphs 6.10 to 6.16 provide a full discussion on these factors. o Policy issues raised by current treatment of collective investment vehicles: In the negotiation of treaties, a specific provision for treaty entitlement of CIVs is suggested at paragraph 6.17. At paragraph 6.18 measures of reaching an equitable solution are discussed. Mention is also made of the fact that the goal is to achieve neutrality between a direct investment and an investment through

4 a CIV in the international context. paragraphs 6.19 and 6.20; Potential treaty abuse is discussed at o Possible provisions modifying the treatment of CIVs: In order to address the specific concerns described in paragraphs 6.18 through 6.20, paragraph 6.21 provides the text of a suggested provision. Mention is also made of the fact that the suggested provisions are intended to deal with source taxation of the CIVs income and not the taxation in the State of residence of its investors. Furthermore, it is pointed out that all aspects of beneficial ownership which relate to a CIV are identical to those relating to an individual; Application of the Convention to States, their subdivisions and their wholly owned entities; Paragraphs 6.35 to 6.39 discuss the application of the OECD MTC to States, their subdivisions and their wholly-owned entities. In view of the fact that in terms of Article 4 paragraph 1, they are residents of a Contracting State and entitled to the benefits of the Convention, it is pointed out, inter alia, that issues may arise in the case of entities set up and wholly-owned by a State or one of its political subdivisions or local authorities as some of these entities may derive substantial income from other countries while being totally exempt from tax. It may therefore be important to determine whether tax treaties apply to them. Mention is, however, made that the international law principle of sovereign immunity should not be overlooked. Most States would not apply this principle to business activities. Improper use of the Convention; o o o o o Conduit company cases; Provisions which are aimed at entities benefiting from preferential tax regimes; Provisions which are aimed at particular types of income; Anti-abuse rules dealing with source taxation of specific types of income; Provisions which are aimed at preferential regimes introduced after signature of the Agreement; Remittance based taxation; and Limitations of source taxation: procedural aspects.

5 COMMENTARY ON ARTICLE 2 TAXES COVERED BY THE AGREEMENT The text of Article 2 of the UN MDTC and the OECD MTC is included in the Agreement with the exception of the omission of any reference to taxes on capital and, in paragraph 2 where the phrase as well as taxes on capital appreciation. is omitted. These omissions result from the fact that currently no Member State imposes taxes on capital or capital appreciation. The full OECD Commentary in regard to Article 2 is therefore relevant, except for the sections of Paragraph 2 point 3, which deal with these omissions. It should be noted that omission of paragraphs 1 and 2 of this Article may result in some new taxes imposed, as envisaged in paragraph 4, not qualifying to be regarded as covered taxes. This is because the test of identical or similar taxes required by paragraph 4 will be limited to the taxes which exist at the time of signature as listed in paragraph 3 of the Article. In such cases it would result in the negotiation of a Protocol to the Agreement in order to include such new taxes as taxes covered by the Agreement. Paragraph 1 In general, the Article ensures that taxes on income imposed by all levels of Government are covered irrespective of the manner in which they are levied, e.g.by way of assessment or by way of withholding. Paragraphs 2 and 3 Paragraph 2 of the Agreement provides a definition of taxes on income while paragraph 3 lists the taxes which exist in each Contracting State at the time of signature of the Agreement. Paragraph 4 This paragraph ensures that the Agreement shall apply equally to any identical or similar taxes on income, as defined in paragraph 2, which are imposed after the date of signature of the Agreement. Clearly the relevant State should advise its treaty partners of the imposition of such new taxes. In addition, the paragraph requires the Contracting States to notify each other of any significant changes to their taxation laws. Normally these notifications will concentrate on changes which affect the application or interpretation of the treaty. General Articles 1 and 2 together provide the basis for eligibility for the benefits of the treaty and are of great importance. Persons need to be resident of one or both of the Contracting States under Article 1 and the tax involved should be a covered tax under Article 2. If these requirements are not met, the treaty will not apply.

6 COMMENTARY ON ARTICLE 3 GENERAL DEFINITIONS Paragraph 1 Subparagraphs (a) and (b) provide for each country to define its territory in geographical terms as well as in terms of international law. This definition will normally be provided by the law advisers of the Department of Foreign Affairs. It is important that the relevant country definitions are drafted in accordance with international law; Subparagraph (c) provides for the States which are party to the treaty concerned to either be referred to as a Contracting State or the other Contracting State depending on the context in which the Agreement is being interpreted; Subparagraph (d) defines the term person and is discussed in paragraph 2 of the OECD Commentary. The reference in the Agreement to the treatment of an entity for tax purposes addresses the issue of partnerships in cases where they are not taxable entities under domestic law of the State and so are excluded from the treaty. In respect of those States which do treat partnerships as taxable entities, the text will ensure that they are included; Subparagraph (e) defines the term company and follows the guidance set out in paragraph 3 of the OECD Commentary; Subparagraph (f) defines the term enterprise and is interpreted in accordance with paragraph 4 of the OECD Commentary; Subparagraph (g) defines the terms enterprise of a Contracting State and enterprise of the other Contracting State and is self explanatory; Subparagraph (h) defines the term international traffic and is fully discussed in the OECD Commentary under paragraphs 5 to 6.3; Subparagraph (i) defines the term competent authority and is fully discussed in the OECD Commentary at paragraph 7; Subparagraph (j) defines the term national and has a similar definition to the OECD MTC but does not make reference to partnership in (j)(ii), such reference being made in the OECD MTC. The OECD Commentary is relevant with regard to a full explanation of the terms referred to in this subparagraph under paragraphs 8 to 10.1, but as mentioned, cognisance must be taken of the fact that a partnership is not included in this definition in the Agreement. Negotiating parties which treat partnerships as taxable entities are, however, entitled to include the term in line with the treatment of partnerships in their domestic tax legislation; Subparagraph (k) defines the term business and is interpreted in accordance with the OECD Commentary at paragraph 10.2. Paragraphs 2 to 10.2 of the OECD Commentary provide guidance with regard to these definitions.

7 Paragraph 2 Paragraph 2 of Article 3 provides a general rule of interpretation for terms used in the Agreement but not defined. A full discussion thereon is provided under paragraphs 11 to 13.1 of the OECD Commentary. It is important to note that the context in which these undefined terms are used in applying this rule must be determined. In addition these terms will have the meaning which they have in the laws of the State which is applying the Agreement and at the time of that application. Any meaning under tax laws will have precedence over the meaning in any other law of that State. Paragraphs 11 to 13.1 of the OECD Commentary provide guidance on this paragraph. COMMENTARY ON ARTICLE 4 THE DEFINITION OF RESIDENT The Article defines the term resident of a Contracting State and is vital in applying the provisions of the Agreement, in particular Article 1. Paragraph 1 The general rule in paragraph 1 is based on the concept of residence as adopted in domestic tax laws of the States and is focussed on the taxpayer s personal attachment to the State concerned. It is identical to paragraph 1 of the OECD MTC. A full discussion thereon may be obtained under Article 4 of the OECD Commentary at paragraphs 8 to 8.8. At paragraph 8.5 the issue of whether a sovereign wealth fund qualifies as a resident of a Contracting State is discussed. Mention is also made of the fact that in certain cases the issue may require clarification during bilateral negotiations, particularly in relation as to whether a sovereign wealth fund qualifies as a person and is liable to tax for purposes of the relevant treaty. Paragraphs 6.35.to.6.39 of the OECD Commentary on Article 1 are also relevant in relation to States and their wholly owned entities. Paragraph 2 This paragraph relates to cases of dual residence where, under the provisions of paragraph 1 of the Article, an individual is a resident of both Contracting States. Special rules have been established to give the attachment to one State preference over the attachment to the other State which will result in one of the State obtaining the right to claim the individual as its sole resident for purposes of the treaty. These rules are referred to as the tie-breaker test. The OECD Commentary, at paragraphs 9 to 20 under this Article, clearly illustrates these special rules. Paragraph 3 This paragraph relates to cases of dual residence where, under the provisions of paragraph 1 of the Agreement, a person other than an individual is a resident of both Contracting States. This paragraph is given as an alternative in both the OECD Commentary and UN Commentary but in future is intended to become part of the OECD Model MTC itself as a result of the BEPS Project (see paragraph 24.1 of the OECD commentary on Article 4). As cases of dual residence of persons who are not individuals can be complex in nature, they

8 should be dealt with on a case-by-case basis by the competent authorities of the Contracting States. Furthermore, should it be ascertained by the competent authorities that the issue of dual residence arises as a result of tax avoidance and evasion schemes, that person will not be entitled to any relief or exemption as provided for in the Agreement. This provision is envisioned to assist in limiting these schemes and treaty shopping. COMMENTARY ON ARTICLE 5 DEFINITION OF PERMANENT ESTABLISHMENT The main aim of the concept of a permanent establishment is to determine the right of a Contracting State to tax the profits of an enterprise of the other Contracting State in terms of Article 7 of the Agreement. It is important to establish what constitutes a permanent establishment as, under Article 7, a Contracting State cannot tax the profits of an enterprise of the other Contracting State unless it carries on its business through a permanent establishment situated in the first-mentioned State. This Article in the ATAF Model contains elements of both the OECD MTC and the UN MTC and but leaves the time factors open for negotiation. In addition certain of its provisions have been drafted in accordance with the revisions proposed under the BEPS Project and are considered to be more favourable to developing countries. Paragraph 1 This paragraph gives the general definition of a permanent establishment and is identical to the OECD MTC and therefore paragraphs 2 to 11 of the OECD Commentary are relevant. These paragraphs also contain a number of helpful examples which assist in deciding on the existence or not of a permanent establishment. Paragraph 2 Paragraph 2 lists examples, by no means exhaustive, which can be regarded, prima facie, as constituting a permanent establishment. The examples given in paragraph 2 are to be interpreted in line with the general principle of paragraph 1. The assumption is therefore clearly made and is reinforced in the OECD Commentary that the examples listed will only constitute a permanent establishment if the requirements of paragraph 1 are met. Some countries seek to extend this list by the addition of further examples. As stated above, these inclusions will not automatically mean that the additions are permanent establishments as the principles of paragraph 1 of the Article will still need to be met. The list is identical to that of the OECD MTC and paragraphs 12 to 14 of the OECD Commentary are therefore relevant Paragraph 3 The text of subparagraph (a) of paragraph 3 of the Agreement covers a broader range of activities than paragraph 3 in the OECD MTC in that the latter stipulates that a building site or construction or installation project constitutes a permanent establishment, whereas the Agreement, being identical to the UN MDTC, also includes an assembly project, as well as supervisory activities in connection with such site or project. It is important to note that although there is this difference in texts, the OECD Commentary at paragraph 17 notes that

9 any on-site planning and supervision of the erection of a building are considered to be covered under subparagraph 3 of the OECD MTC. The OECD and UN Commentaries on paragraph 3 of this Article should be referred to in conjunction to cover all aspects of this paragraph. The OECD Commentary on Article 5 covers this paragraph under paragraphs 16 to 20. Cognisance must also be taken of the fact that the time period stipulated to deem a permanent establishment to exist in terms of the ATAF Agreement differs in that it allows for the Contracting States to decide, through negotiation, on the number of months required to deem such permanent establishment to exist. In contrast, the OECD MTC stipulates a period in excess of twelve months and the UN MDTC stipulates a period in excess of 6 months. Subparagraph (b) deals with the furnishing of services by an enterprise through employees or other personnel engaged by the enterprise and is identical to the UN MDTC except for the time period which, in terms of the Agreement, is to be decided through negotiation for a period or periods exceeding in the aggregate days in any twelve-month period commencing or ending in the fiscal year concerned. The UN MDTC stipulates an aggregation of periods in excess of 183 days within any twelve month period. The reasons for the inclusion of the furnishing of services are fully explained in the UN Commentary to this Article under paragraphs 9 to 12 and 14. The provision with regard to services by an individual in subparagraph (c) is unique to Article 5 of the ATAF Agreement. An Article on Independent Personal Services, Article 14 in the UN MDTC, has not been included in the ATAF Agreement. The text of the ATAF Agreement rather follows the general principles of the alternate approach for countries wishing to delete Article 14 proposed in the UN Commentary on Article 5 under paragraphs 15.1 to 15.26. Under this approach, it was considered important to ensure that the taxing rights of the source State contained in Article 14 were retained in line with the general principles of that Article of the UN MDTC, which also allows the country of source to tax services performed by an individual based on physical presence in the source State. In terms of this subparagraph in the ATAF Agreement, the source State may impose tax by deeming there to be a permanent establishment based on physical presence of the individual performing the services. There is no restriction imposed by the criteria required by paragraph 1 of Article 5 as a permanent establishment is deemed to exist subject only to the length of stay of the individual for purposes of performing the services, hence it is the physical presence test that is incorporated in this provision. The required number of days to be exceeded in any twelve month period to constitute the existence of a permanent establishment in the source State is to be decided upon during negotiation between the Contracting States. It should also be noted that this addition to Article 5 and the non-inclusion of an Article pertaining to Independent Personal Services has the effect of ensuring that taxation of the income derived from professional services or other activities of an independent character previously dealt with under that Article (Article 14 of the UN MDTC) is now dealt with under Article 7 of the Agreement. Subparagraph (d) includes a provision which deems a permanent establishment to be created for activities related to the exploration for natural resources in view of the importance of such activities in Africa. The nature and importance of this income should be taken into account when the source State is considering the number of days required to create a permanent establishment. Clearly this will need to be decided during the negotiation between the two

10 States. Paragraph 15 of the OECD Commentary to Article 5 provides some guidance in this regard. Paragraph 4 This paragraph lists a number of activities which, if they are the only activities carried on through a permanent establishment will result in that permanent establishment being deemed not to exist. The activities listed are identical to those which will be listed in the OECD MTC as a consequence of the BEPS Project and therefore the proposed new OECD Commentary, paragraphs 21 to 30, is relevant. The significance of the new text is that all the activities, or overall activities in case of a combination thereof, mentioned in this paragraph now need to be of a preparatory or auxiliary character before the exclusion granted by paragraph 4 will apply. Paragraph 4.1 This paragraph deals with the issue of fragmentation of activities in order to take advantage of the exclusion provided by paragraph 4. It specifies that in cases where such fragmentation of activities by the enterprise or by a closely related enterprise results in the test of preparatory or auxiliary nature not being met, paragraph 4 will not apply. This paragraph is also a consequence of the BEPS Project. As noted, the changes to paragraph 4 and the addition of paragraph 4.1 are products of the BEPS Project and the proposed new OECD Commentary will deal with them under paragraphs 21 to 30 thereof. Paragraph 5 This paragraph has been revised by the OECD in consequence of the BEPS Project in order to give more clarification to the concept of a dependent agent. Its provisions provide the tests which will decide when the activities of a dependent agent will result in a permanent establishment for the principal of the dependent agent being deemed to exist. In this case as well it is a deemed permanent establishment and the provisions of paragraphs 1 and 2 of Article 5 will not apply. In other words there is no need to find a fixed place of business. The proposed new OECD Commentary at paragraphs 31 to 35 will provide guidance. Paragraph 6 This paragraph has also been revised by the OECD in consequence of the BEPS Project in order to give more clarification to the concept of an independent agent. In cases where the activities in the other State on behalf of the principal are carried on by an independent agent, a permanent establishment for the principal will not be deemed to exist. The proposed new OECD Commentary at paragraphs 36 to 39 will provide guidance.

11 Paragraph 7 This paragraph, not included in the OECD MTC, is identical to paragraph 6 of Article 5 in the UN MTC and deals with certain aspects of the insurance business in particular the case where an insurance enterprise of a State collects premiums or insures risks in the other State. Where the business is carried on other than through an independent agent a permanent establishment is deemed to exist. Paragraphs 27, 28 and 29 of the UN Commentary to Article 5 are relevant. Paragraph 8 This paragraph specifies that affiliated companies will not make either one a permanent establishment of the other merely by reason of that relationship. The paragraph is identical to paragraph 7 of the OECD MTC and therefore the Commentary thereon at paragraphs 40 to 42 is relevant. COMMENTARY ON ARTICLE 6 INCOME FROM IMMOVABLE PROPERTY This Article deals only with the income which a resident of a Contracting State derives from the use of immovable property, as defined in paragraph 2, situated in the other Contracting State. The Article gives an unlimited taxing right to the last mentioned State, being the State of source. Income covered will include income from the direct use, letting or use in any other form of immovable property. It is important to note that the definition of immovable property in paragraph 2 includes payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. This Article deals specifically with these payments and will take precedence over other more general Articles and will give the source State an unlimited right of taxation under paragraph 1. All the paragraphs are identical to Article 6 of the OECD MTC and therefore the full OECD Commentary on this Article is relevant for definitions, explanations and discussion in terms of the various paragraphs. COMMENTARY ON ARTICLE 7 BUSINESS PROFITS Article 7 and the Commentary thereto have been completely replaced in the 2010 edition of the OECD MTC. However, as both the UN MDTC and ATAF Members have indicated that they do not wish to adhere to this revision of Article 7, the previous version of this Article and the Commentary thereto, are applicable and are reflected after the revised OECD Commentary to Article 7 in the 2014 edition on the shaded pages, 158 to 175. Hence all references to OECD MTC Article 7, in this Commentary, refer to the 2008 version thereof. The ATAF Agreement follows closely the UN version of Article 7 but does not include the force of attraction principles

12 which the UN MDTC proposes in paragraph 1 of the Article. The definition of permanent establishment in Article 5 is necessitated by the provisions of Article 7. Article 5 does not accord any taxing rights, but rather defines the concept of a permanent establishment in order to facilitate a taxing right, given in terms of paragraph 1 of Article 7, to the State of source. The operation of Article 7 must therefore of necessity be supported by a clear definition of the concept permanent establishment. This is in view of the fact that Article 7 allocates the sole right to tax business profits to the State of residence unless a permanent establishment has been established in the other State, the State of source. Should a permanent establishment have been established, the State of source is granted a right to tax the profits of the enterprise but only so much of them as are attributable to the activities carried on in the permanent establishment, as stipulated in the provisions of Article 7. Article 7 encompasses the arm s length principle, embodied in the OECD MTC and UN MDTC, under which the profits attributable to a permanent establishment are those which would be earned by the permanent establishment if it were a wholly independent entity dealing at arm s length with its head office. Under the OECD MTC only profits attributable to the permanent establishment may be taxed in the source State. The UN MDTC and the ATAF Agreement follow this general principle. It is important to remember that we are dealing here with only one legal entity, the head office and its branch. Paragraphs 1 and 2 While paragraph 1 provides that a Contracting State may only tax the profits of an enterprise of the other Contracting State to the extent that they are attributable to a permanent establishment situated in the first State, it is paragraph 2 that determines the method of attribution of profits to a permanent establishment. Paragraph 2 stipulates that the arms-length principle will apply. As paragraphs 1 and 2 are identical to paragraphs 1 and 2 of the OECD MTC, the OECD Commentary, at paragraphs 9 to 26, is relevant. Further guidance is contained in paragraphs 6 to 15.4 of the UN Commentary. Paragraph 3 This paragraph is identical to paragraph 3 of Article 7 of the UN MTC. It not only incorporates Article 7 paragraph 3 of OECD MTC in its entirety but also incorporates clarifications in the text to fully describe the situations in which certain expenses may or may not be allowed as a deduction. This clarification is taken from the UN MDTC and consequently the UN Commentary on this paragraph, at paragraphs 16 and 17, is relevant but as paragraph 3 of the OECD MTC is also incorporated in the full text of the paragraph, the OECD Commentary thereon, at paragraphs 27 to 51, is also relevant. Paragraphs 4, 5, 6, and 7 As these paragraphs are identical to the same numbered paragraphs in Article 7 of the OECD MTC, the OECD Commentary thereto is relevant at paragraphs 52 to 64. Paragraph 4 deals with attribution of profits on using the basis of apportionment while paragraph 5 specifies that no profit should be attributed to the permanent establishment by

13 reason of the mere purchase by the permanent establishment of goods and merchandise for the enterprise. Paragraph 6 provides that the same method of attribution of profits should be used year by year unless there is good reason to deviate. Paragraph 7 provides a rule of precedence of Articles and states that the provisions of Articles which deal separately, in other words specifically, with items of income will take precedence over this Article which deals with business profits generally. COMMENTARY ON ARTICLE 8 INTERNATIONAL TRANSPORT This Article to the Agreement, with the exception of paragraph 4 which is identical to paragraph 4 of the OECD MTC, although using different wording, is identical in principle to the OECD MTC. The OECD MTC uses the place of effective management of the enterprise operating in ships or aircraft in international traffic as the deciding factor in granting the right of taxation to a Contracting State. This Agreement differs in that it provides for the State of residence to be the determining factor and grants the State of residence the sole right to tax. The Model thus uses the alternate approach proposed by both the OECD and the UN Models and this is confirmed in the definition of international traffic which is contained in paragraph 1 of Article 3 of the Agreement. Paragraph 1 This paragraph provides for profits of an enterprise of a Contracting State from the operation of ships and aircraft in international traffic to be taxable only in the State of residence of the enterprise. Paragraph 2 This paragraph provides that the same taxing rights should also apply in respect of boats used in inland waterways transport. Therefore the sole taxing right is given to the State of residence of the enterprise. Paragraph 3 This paragraph specifies certain types of profits that may accrue to enterprises undertaking international transport activities and stipulates that these profits shall also be subject to the provisions of this Article but only if they are incidental to the profits to which the provisions of paragraph 1 apply. In other words, the principle that the State of residence will have sole taxing rights will also apply to the profits listed in subparagraphs (a) and (b) of the paragraph. This principle is in line with the comments in paragraph 5 of the OECD Commentary on Article 8 but extends this principle also to the use or rental of containers. Paragraph 4 This paragraph applies to the various forms of international cooperation that enterprises engaged in international traffic may enter into and provides that profits arising from such

14 cooperation shall be subjected to the provisions of paragraph 1. It is identical to paragraph 4 of the OECD MTC. The entire OECD Commentary on Article 8 is, for the reasons set out above, of application to the provisions of the Article in the Agreement and the Article should be interpreted on a similar basis except where reference is made to the revised Article 7 and would result in different treatment as opposed to the version of Article 7 in this Agreement. COMMENTARY ON ARTICLE 9 ASSOCIATED ENTERPRISES This Article deals with adjustments to profits that should be made for tax purposes where transactions have been entered into between associated enterprises on terms other than at arm s length. In particular, it combats abuses resulting from transfer pricing in relation to these cross-border transactions. Paragraphs 1and 2 of this Article are identical to these paragraphs in the corresponding Article of the OECD MTC and therefore the OECD Commentary on this Article is relevant. Briefly, under paragraph 1, the State in which the profits have been understated may demand a rewrite of the accounts showing the profits which should have been realised if the dealings between the associated enterprises had been at arm s length. In accordance with paragraph 2, the other State is then required to make a corresponding adjustment in order to deal with economic double taxation. Paragraph 3 is included from the UN Model MDTC and provides that where it has been determined that the adjustment of profits between the associated enterprises has been the result of fraud, gross negligence or wilful default, the corresponding adjustment required by paragraph 2 of the Article shall not apply. Paragraph 8 of the UN Commentary is relevant to this paragraph. COMMENTARY ON ARTICLE 10 DIVIDENDS This Article deals with the taxing rights of Contracting States with regard to dividends, a term generally defined as the distribution of profit to shareholders by companies. As a general rule in all Models, the right of taxation of dividends is shared between the State of residence and the State of source. Paragraph 1 This paragraph is identical to paragraph 1 of Article 10 of the OECD MTC in that it accords an unlimited taxing right to the State of residence of the shareholder when the dividend is paid by a company which is a resident of the other State. The OECD Commentary, at paragraphs 4 to 8, is relevant.

15 Paragraph 2 The paragraph deals with the limited taxing right which may be exercised by the State of source in respect of dividends paid to the beneficial owner thereof who is a resident of the other State. The State of source will be the State in which the company which pays the dividend is a resident. The paragraph is identical to the corresponding paragraph of the OECD MTC as it is drafted after the BEPS Project except for the limitation on the rates of tax which may be levied by the State of source. Beneficial ownership is a common law concept and is used to ensure that the benefit of the Article is conferred on the correct owner of the dividends. The concept of beneficial ownership is discussed with regard to dividends in paragraphs 12 to 12.2 of the OECD Commentary on Article 10. The OECD MTC is prescriptive in that it has fixed percentages, limiting the rates of withholding in the source State, whereas in terms of the ATAF Agreement, the Contracting States must bilaterally decide, through negotiation, on these limitations including the percentage shareholding stipulated in the payee company under paragraph 2(a). The important inclusion in paragraph 2(a) as a result of the BEPS project, is the requirement that in order to qualify for the lower rate of tax in the source State, the shareholding of at least 25% of the capital of the company paying the dividends must have been held directly throughout a 365 day period that includes the day of the payment of the dividend. It also specifies that, for the purpose of computing that period, no account shall be taken of changes of ownership that would directly result from a corporate reorganisation, such as a merger or divisive reorganisation, of the company that holds the shares or that pays the dividend. At paragraph 13.2 the exemption from tax on dividends derived from activities of a governmental nature is discussed. This discussion covers the sovereign immunity principle as well as the application of domestic law. To ensure such an exemption of tax on dividends paid to the Government of the other Contracting State, or some of its wholly owned entities, in cases where such exemption would not otherwise be available, an additional paragraph is suggested, the draft of which is included in this paragraph. The OECD Commentary, at paragraphs 9 to 22, is relevant and these paragraphs will also be updated in consequence of the BEPS change. Paragraph 3 Paragraph 3 contains the definition of a dividend and follows the general principle of both the OECD MTC and the UN MDTC with the exception of the exclusion of certain types of shares which do not exist in Member States. It includes income from other corporate rights which is accorded the same tax treatment as income from shares under the domestic laws of the source State. The OECD Commentary from paragraphs 23 to 30 provides guidance.

16 Paragraph 4 This paragraph is identical to the corresponding paragraph in the OECD MTC and provides that dividends from a shareholding which is effectively connected to a permanent establishment of the beneficial owner which is situated in the other State in which the company paying the dividends is a resident, may be taxed in that other State without any limitation. The OECD Commentary at paragraphs 31 to 32 is relevant. It is important to note that at paragraph 32 it is emphasised that a shareholding must be effectively connected to a permanent establishment and requires more than merely recording the shareholding in the books of the permanent establishment for accounting purposes. In effect it means that the shareholding should form part of the business assets of the branch as opposed to the head office of the enterprise. This is also in order to avoid abuse through the transfer of shares to a permanent establishment situated in a country that offers preferential treatment to dividend income. Subparagraphs 32.1 and 32.2 of the OECD Commentary relate to the revised OECD Article 7 and may be disregarded. Paragraph 5 Paragraph 5 of this Article is identical to the corresponding OECD MTC paragraph hence the OECD Commentary at paragraphs 33 to 39 is relevant. The paragraph rules out the extraterritorial taxation of dividends by which some States tax dividends paid by a non-resident company solely because some or all of the profits from which the dividend is paid originated in their territory. However, the State will retain its taxing right over dividends paid by the nonresident company to shareholders who are its own residents.. COMMENTARY ON ARTICLE 11 INTEREST Interest is generally taken to mean remuneration on money lent, being remuneration falling within the category of "income from movable capital." Unlike dividends, interest does not suffer economic double taxation as in most cases it is allowed as a deduction in determining the taxable income of the debtor. However, as a result of the common practice of giving a taxing right on such interest to the source State, juridical double taxation is likely to result. Paragraph 1 Paragraph 1 lays down the principle that where interest arises in a Contracting State and is paid to a resident of the other Contracting State, the State of residence has an unlimited right to tax. Paragraph 1 of the Agreement is identical to that of the OECD MTC and paragraphs 5 and 6 of the OECD Commentary on Article 11 are relevant.

17 Paragraph 2 Paragraph 2 is identical to that of the OECD MTC and gives a limited right to tax interest to the State in which the interest arises, the source State. However, it limits the exercise of that right by imposing a limitation on the rate of tax charged. In the ATAF Agreement, the rate limitation is not specified but is to be achieved through bilateral negotiations. This is different to the OECD MTC which stipulates a rate not exceeding 10 per cent. This paragraph incorporates the same principles set out in paragraph 2 of the OECD MTC. Beneficial ownership is a common law concept and is used to ensure that the benefit of the lower rate envisaged in this paragraph of the Article is conferred on the correct owner of the interest. The concept of beneficial ownership is discussed with regard to interest in paragraphs 9 to 11 of the OECD Commentary on Article 11. The OECD Commentary at paragraphs 7 to 14 is relevant. At paragraph 7.4 the exemption of tax on income derived from activities of a governmental nature, is discussed. This discussion covers the sovereign immunity principle as well as the application of domestic law. The aim is to ensure an exemption from tax on such interest income paid to the Government of the other Contracting State, or some of its wholly owned entities. A typical example cited would be the central bank. Further possible instances in which exemption from tax on interest in the source State are discussed is contained in paragraphs 7.5 to 7.12. An additional paragraph is suggested in cases where such exemption would otherwise not be available. Paragraph 3 Paragraph 3 defines the term "interest" for the purposes of this Article and is identical to paragraph 3 of the OECD MTC and therefore paragraphs 18 to 23 of the OECD Commentary are relevant. It should be noted that penalty charges for late payment are specifically excluded from the definition. Paragraph 4, Paragraph 4 is identical to the corresponding paragraph in the OECD MTC and provides that interest from a debt-claim which is effectively connected to a permanent establishment of the beneficial owner situated in the other State in which the interest arises, may be taxed in that other State without any limitation. Therefore paragraphs 24 to 25 of the OECD Commentary are relevant. However, it should be noted that paragraph 25 emphasises that a debt-claim must be effectively connected to a permanent establishment and requires more than merely recording the debt-claims in the books of the permanent establishment for accounting purposes. In effect it means that the debt-claim should form part of the business assets of the branch as opposed to the head office of the enterprise. This is in order to avoid abuse

18 through the transfer of loans to a permanent establishment situated in a country that offers preferential treatment to interest income; Again subparagraphs 25.1 and 25.2 relate to the revised OECD Article 7 and may be disregarded. Paragraph 5 This paragraph provides the rule for determining the source of interest and is identical to paragraph 5 of the OECD MTC. The general rule is that interest will arise in the State of residence of the person paying the interest. This may change if that interest is borne by a permanent establishment of the payer situated in the other State. Paragraphs 26 to 31 of the OECD Commentary provide the necessary guidance. Paragraph 6 This paragraph contains an anti-abuse provision in order to deal with instances where excessive interest is paid between the debtor and creditor in cases where there is a special relationship between them or between both of them and some other person. In such cases the excessive interest may be taxed in both States in accordance with domestic law and without any limitation imposed by this Article. The limitation under paragraph 2 will therefore apply only to the amount of interest which would have been paid at an arms-length rate. Paragraphs 32 to 36 of the OECD Commentary are relevant. COMMENTARY ON ARTICLE 12 ROYALTIES In principle, royalties in respect of licences to use patents and similar property and other similar payments are income to the recipient from a letting. This letting may be granted in connection with an enterprise or quite independently of any activity of the grantor. This Article mainly follows the UN MDTC Article 12 on Royalties as the OECD MTC proposes that royalties be taxed exclusively in the State of residence of the beneficial owner thereof. Paragraph 1 Paragraph 1 is identical to the UN MTC and provides that the State of residence of the beneficial owner of the royalty has an unlimited taxing right. Paragraph 2 Paragraph 2 affords the State of source of the royalty a limited right of taxation if the beneficial owner of the royalties is a resident of the other Contracting State. The rate of this limitation is to be decided through bilateral negotiations. The text of the paragraph is slightly

19 amended from the UN version to follow the updated wording as contained in paragraph 2 of Article 11 of the ATAF Agreement. The UN Commentary deals with paragraphs 1 and 2 simultaneously in paragraphs 4 to 11 thereof, which are therefore relevant. Beneficial ownership is a common law concept and is used to ensure that the benefit of the Article is conferred on the correct owner of the royalty. The concept of beneficial ownership is discussed with regard to royalties in paragraphs 4 to 5 of the OECD Commentary on Article 12. Paragraph 3 This paragraph defines what comprises a royalty for purposes of this Agreement and encompasses all forms of copyright. It is similar to the UN MTC and the UN Commentary at paragraphs 12 to 16 provides extensive guidance. It is important to note that the scope is extended in the ATAF Agreement by ensuring that payments for the use of, or the right to use all copyright is included in the definition and is not limited (as in the Models) to copyright of literary, artistic or scientific work. The definition also includes payments for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience (know-how). Paragraph 4 Paragraph 4 is identical to paragraph 3 of Article 12 of the OECD MTC and provides that a royalty from a right or property which is effectively connected to a permanent establishment of the beneficial owner situated in the other State in which the royalty arises, may be taxed in that other State without any limitation. Paragraphs 20 and 21 of the OECD Commentary are therefore relevant. It should be noted that paragraph 21 specifies that for a right or property to be effectively connected to a permanent establishment that it requires more than merely recording the right or property in the books of the permanent establishment for accounting purposes. In effect it means that the right or property should form part of the business assets of the branch as opposed to the head office of the enterprise. This is in order to avoid abuse through the transfer of rights or property to a permanent establishment situated in a country that offers preferential treatment to royalty income; Again subparagraphs 21.1 and 21.2 relate to the revised OECD Article 7 and may be disregarded. Paragraph 5 Apart from the reference to fixed base, referred to due to the inclusion of an Article on Independent Personal Services in the UN MTC, paragraph 5 is identical to the corresponding paragraph in the UN MTC. It provides a source rule in view of the shared right of taxation between the residence and source States and paragraphs 19 and 20 of the UN Commentary are relevant. The general rule specified in this paragraph is that the royalty will arise in the State of residence of the person paying the royalty. This may however change if that royalty is in effect borne by a permanent establishment of the payer thereof which is situated in the other

20 State. Paragraph 6 This paragraph contains an anti-abuse provision in order to deal with instances where an excessive royalty is paid in cases where there is a special relationship between the payer and the beneficial owner or between both of them and some other person. In such cases the excessive amount of the royalty may be taxed in both States in accordance with their domestic law and without any limitation which may be imposed by this Article. The limitation under paragraph 2 will therefore apply only to the amount of the royalty which would have been paid at an arms-length rate. The provisions are identical to paragraph 4 of the OECD MTC and paragraphs 22 to 26 of the OECD Commentary are relevant. COMMENTARY ON ARTICLE 13 TECHNICAL FEES This Article gives a limited taxing right to the State of source by making provision for that State to impose tax in a similar manner to Articles 10, 11 and 12. The OECD MTC does not include an Article on technical fees. This Article confers an unlimited taxation right to the State of residence, with a limited taxing right being extended to the State of source. This limitation is subject to certain conditions being fulfilled. The Article adopted for the ATAF Agreement is similar to the new Article adopted by the UN Committee of Experts on International Tax Matters in 2015. The Article and its Commentary have not as yet been included in the UN Commentary. However, the Committee proposed a commentary to the Article which contains full discussion and also includes a number of valuable examples. For those reasons and to ensure consistent interpretation, the proposed UN Commentary is printed in full in the following section. Once the relevant commentary has been approved and included in the UN Commentary, this section will be revised to provide the necessary cross-references. It is important to note that this proposed commentary includes numerous references to Article 14 of the UN Model dealing with independent personal services. This Article has not been included in the ATAF Agreement and this type of income falls to be dealt with under Article 7 of the Agreement. Paragraph 1 [28.] This paragraph establishes that fees for technical services arising in one Contracting State and paid to a resident of the other Contracting State may be taxed in the other Contracting State. It does not, however, provide that such fees are taxable exclusively by the State of residence. [29.] In most cases, the person who performs the technical services will be the recipient of the fees for those services. If the person who receives the fees for technical services is not the person who performs those services, it is a matter of domestic law as to who is the proper taxpayer. If