FORMAL RATIFICATION: TAX TREATY WITH CAMEROON, LESOTHO, HONG KONG, QATAR AND CYPRUS Select Committee On Finance Presenter: Lutando Mvovo Director, Tax Policy, National Treasury 28 April 2015
Purpose of tax Treaties Prevent double taxation of the same income limit the right to tax passive income in the source country by reducing tax to a lower rate and residence country must provide credit or exemption or giving the residence country exclusive right to tax the passive income Create Fiscal Stability termination made by giving 6 months notice to the other treaty partner provides for dispute resolution mechanism (MAP) Prevent tax avoidance and evasion exchange of information and assistance in tax collection 2
Interaction between tax treaties and domestic law The Constitution S 231(1)-Signing and negotiation of all international agreements responsibility of the National Executive S 231 (2)- Binds the Republic once approved by Parliament (NA and NCOP) S 231 (4)-Becomes law in the Republic when it is enacted into law by national legislation 3
Interaction between tax treaties domestic law Income Tax Act Section 108 (2): Agreement approved by Parliament Published in the government gazette Have effect as if enacted in the Income Tax Act 4
CONSIDERATIONS FOR TAX TREATY Treaty country identification (New Treaties): Investment flows (inbound and outbound); Main corporate players making cross border investments in either country; Political relations, in some cases; Trade flows (mere indication of economic activity) Gateway to Africa s strategy; Potential economic and political advantages against risk of compromising the domestic tax base; 5
TAX TREATY BENCHMARK Country tax profile: Tax system [basis of tax, domestic tax rates, domestic and treaty withholding tax rates] Special tax vehicles and instruments [effective tax rates, tax on interest, dividends, royalties, capital gains etc.] Treaty network and variations [common trends + common treaty partners] Interrelationship between the tax systems of two countries [whether distort economic activity]. Potential tax avoidance [e.g. transfer pricing] and treaty shopping 6
SOUTH AFRICA-LESOTHO DTA ricalesotho 7
Reasons for the Lesotho Treaty Renegotiation of the old tax treaty First tax treaty between South Africa and Lesotho came into force in 1997 During that time, South Africa was still on source based system of taxation and did not have capital gains tax system Hence, the current tax treaty between South Africa and Lesotho does not cover certain aspects 8
Reasons for the Lesotho Treaty Growing presence of South African presence in the construction, retail, transport, tourism, communication and financial sectors; Lesotho is also important from a Regional perspective (Lesotho is a member of SADC; The renegotiation of the old treaty became necessary due to changes in South African domestic law (e.g. change from source system to residence system, introduction of capital gains tax etc) and in international trends; The renegotiations were concluded in 2013; The renegotiated tax treaty was signed on 18 September 2014. 9
SOUTH AFRICA-CAMEROON DTA 10
The South Africa Cameroon Tax Treaty This is a new tax treaty; Our first tax treaty with a country in the Central African region Aim is to enhance economic relations between South Africa and Cameroon; Growing presence of the South African companies in Cameroon especially in the mining, aviation, telecommunications and financial sectors; Expand South Africa s tax treaty network in Africa; To promote South Africa as a gateway to Africa; 11
The South Africa Cameroon Tax Treaty In terms of bilateral relationship between the two countries, this is the third bilateral agreements; The other two bilateral agreements are: The General Co-operation Agreement (which opens the way for cooperation in all government sectors); A Bilateral Trade Agreement and a Memorandum of Understanding on Economic Co-operation 12
SOUTH AFRICA-QATAR DTA 13
The South Africa Qatar Tax Treaty This is a new tax treaty; The SA Qatar tax treaty was initiated by South Africa; To strengthen economic relations between South Africa and Qatar; Expand South Africa s tax treaty network in the Middle East; Growing South African community in Qatar, evidenced by the establishment of South Africa Social Committee (SASCOM) which assists new comers to Qatar; 14
The South Africa Qatar Tax Treaty Qatar is important to South Africa as it has oil reserves of 15,21 billion barrels and natural gas reserves measured at approximately 25.4 trillion cubic metres; Presence of South African companies in the Aviaition,construction and oil industries. The negotiations were concluded in 2013. The agreement was signed on 6 March 2015 15
SOUTH AFRICA-HONG KONG DTA 16
The South Africa Hong Kong This is a new tax treaty; Aim is to promote economic relations between South Africa and Hong Kong by providing certainty for cross border investments and trade; Initiated by Hong Kong, aimed at expanding its tax treaty network; Hong Kong is regarded as the world s gateway to Mainland China and other parts of Asia; Hong Kong s Stock Exchange is the sixth largest stock exchange in the world and Asia's third largest in terms of market capitalisation after Tokyo Stock Exchange and Shanghai Stock Exchange 17
The South Africa Hong Kong Major SA companies with presence in Hong Kong include companies in companies in the aviation, shipping, construction, oil, consumer products, engineering, banking and travel; A large number of Hong Kong companies have presence or offices in South Africa; This made it necessary that a tax treaty between the two countries be negotiated; Negotiations were concluded in 2013. The agreement was signed in 16 October 2014 18
SOUTH AFRICA-CYPRUS PROTOCOL TO THE DTA 19
Reasons for changes to tax treaty protocols Proposed changes to the current tax treaty became necessary as a result of the conversion of Secondary tax on Companies ( STC ) to a dividends tax at shareholder level; Implementation of the proposed STC conversion was subject to renegotiation of tax treaties, that had a zero rate withholding tax on dividends; The dividends tax came into operation on 1 April 2012; The renegotiation also addressed certain aspects that are not present in the current treaty such as updating the article on exchange of information; 20
SOUTH AFRICA-CYPRUS The South Africa-Cyprus tax treaty was signed on 26 th November 1997 At that time South Africa was still on source system of taxation Negotiations were concluded in 2012; The Protocol amending the tax treaty was signed on 1 April 2015 21
THANK YOU 22