Tuesday, 11 August 2015

New South Africa and Mauritius Double Taxation Agreement

National Treasury published a media release on 17 June 2015 advising that a new Double Taxation Agreement (“DTA”) entered into force on 28 May 2015 between South Africa and Mauritius. The new tax treaty replaces the 1996 South Africa / Mauritius tax treaty.

National Treasury indicated that the primary reason for renegotiating the old tax treaty was to curtail abuse of the old treaty that existed between South Africa 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. Each of these aspects will be dealt with below.

The new tax treaty has complied with all requirements under the Constitution of the Republic of South Africa and was gazetted on 17 June 2015 such that the new tax treaty took effect on 28 May 2015.

At the same time that the National 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 South Africa.

The memorandum of understanding should assist taxpayers
in interpreting the provisions of the new Double Tax Agreement
between South Africa and Mauritius
It is questioned how many other Memoranda 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 interest 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 South Africa and Mauritius, the competent authorities of the contracting states shall decide where such person is resident. 

In the Memorandum of Understanding concluded by SARS and the MRA the authorities reached an understanding 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 competent authorities of South Africa 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 Chief Executive Officer 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 such other factors that may be identified and agreed upon by the Competent Authorities in determining the residency of the person.

Those companies which have been incorporated in South Africa and are wholly owned by South African companies need to ensure therefore that their primary activities are indeed conducted in Mauritius and not South Africa, 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 South Africa, such company will be regarded as resident in South Africa 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 South Africa 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 therefore that 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 South Africa. Where the shares in the Mauritian company were disposed of, South Africa 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 1 January 2016, any Mauritian company disposing of shares in a company owning fixed property in South Africa will attract capital gains tax in South Africa.

The new tax treaty also contains a new provision at Article 26 which allows for SARS to assist the MRA in recovering taxes due to MRA and in turn allows for SARS to seek assistance from MRA in collecting taxes due to SARS. An ever increasing number of tax treaties are catering for reciprocal assistance in the collection of taxes.

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 1 January 2016 in respect of taxes withheld at source relating to amounts paid or credited after 1 January 2016. Insofar as other taxes are concerned, the new treaty applies in respect of taxable years commencing on or after 1 January 2016.

Those South African groups that have operations in Mauritius need to review their affairs to ensure that they adhere to the Memorandum of Understanding concluded by SARS and MRA which will be utilised in determining where a company is resident for purposes of the tax treaty.

Dr Beric Croome is a Tax Executive Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, August 2015.  

Monday, 13 July 2015

Constitutional Court decides that Exit Levy Paid by Mr Mark Shuttleworth is Lawful

The Constitutional Court handed down judgment on 18 June 2015 in the case of the South African Reserve Bank and Minister of Finance v Mark Shuttleworth regarding the nature of the exit levy paid by Mr Shuttleworth to export capital from South Africa. That court also dealt with the broad discretionary powers conferred on the Minister of Finance to regulate the exchange control system of the country.

During 2001 Mr Shuttleworth emigrated to the Isle of Man on the basis that he wished to free up his funds for investment outside of South Africa. At that stage the Exchange Control Regulations did not permit Mr Shuttleworth to transfer his assets from South Africa. He applied to the South African Reserve Bank (“the SARB”) to transfer an amount of approximately R2.5 billion out of South Africa and the SARB agreed thereto on the basis that he was required to pay a so-called exit charge of 10% of that amount. 

Mr Shuttleworth accordingly paid the exit levy of approximately R250 million and was later advised that the exit charge was a tax and had been imposed in a manner not permitted by the Constitution. Before the matter reached the Constitutional Court, the dispute was dealt with by the North Gauteng High Court and subsequently the Supreme Court of Appeal. 

The High Court held that the exit charge was lawfully imposed and also decided that a few exchange control legislative provisions were unconstitutional. Subsequently, the Supreme Court of Appeal held that the levy paid constituted a tax and was therefore unlawful and should be refunded.

As a result of the fact that both parties to the case were dissatisfied with the decision of the Supreme Court of Appeal, the case was heard by the Constitutional Court, which delivered its judgment on the matter on 18 June 2015.

After the first democratic election in South Africa in 1994, the process of relaxing of the exchange control rules started. During 2003 the Minister of Finance reached the conclusion that the economy had become more resilient and decided that it was appropriate to commence with the relaxation of exchange controls previously in force. 

The Minister confirmed that holders of blocked assets would be required to apply to the Exchange Control Department of the SARB to remit such funds and that approval would be subject to an exiting schedule and that an exit charge of 10% of the amount to be remitted would be payable. The Constitutional Court reached the conclusion that the decision to impose the 10% exit charge on persons wishing to export more than R750,000 was a decision made by the Minister and not the SARB.

The court stated that the Minister of Finance exercised the power to impose the levy in terms of regulation 10(1)(c) of the Exchange Control Regulations and imposed two conditions on persons wishing to remove funds from South Africa, namely, that they pay a 10% exit charge on the capital exceeding R750,000 and that the capital exported be subject to an existing schedule. Moseneke DCJ reached the view that the SARB was only responsible for implementing the policy decision made by the Minister of Finance and that it had no discretion when giving effect to his decision. The Supreme Court of Appeal had held that the exit levy constituted a tax and in light of the fact that it had not been introduced by way of a Money Bill in accordance with section 77 of the Constitution the levy was unlawful.

The court made the point that the government is not entitled to levy a tax or appropriate public money without due process and the express consent of public representatives and proceeded to analyse the provisions of section 77 of the Constitution and particularly the meaning of “national taxes, levies, duties [and] surcharges”. The court made the point that the fact that a charge or levy may be referred to as a tax does not imply that it must be  introduced with compliance with the requirements of section 77 of the Constitution.

Moseneke DCJ reached the view that the exit charge was not aimed at raising revenue but that its purpose was to restrict the scale of capital exported from South Africa. Furthermore, the exit charge did not apply to the general population of the country but only to those persons who wish to externalise capital in excess of R750,000. The court recognised that the exit charge generated revenue of some R2.9 billion for the government but reached the view that the garnering of income by the Treasury was secondary to the primary purpose of regulating and discouraging the export of capital from South Africa.

Image purchased from www.iStock.com ©iStock.com/zimmytws
Ultimately the court therefore decided that the exit charge paid by Mr Shuttleworth was not one which fell within the constraints set out in the definition of a Money Bill in the Constitution. The court was also required to deal with the delegation of legislative power and whether plenary legislative powers had been assigned to the President. 

The court reached the conclusion that the President did not delegate legislative power but that the power he had was to regulate by way of imposing conditions for the export of capital. The court took account of the particular circumstances regarding the movements in foreign currency and the possibility of funds being moved from one location to another and the need for special regulation thereof. 

The court accepted that the nature of the power which the Currency and Exchanges Act, No. 9 of 1933, conferred on the President to make regulations relating to currency is unusually wide but that was justified taking account of the unusual circumstances of the subject matter. The court therefore held that the exit charge paid by Mr Shuttleworth did not constitute a tax and it had been lawfully imposed.

The court also had to deal with an application filed by Mr Shuttleworth seeking leave to cross-appeal the decision of the lower court refusing to impugn the constitutional validity of all or some of the provisions regulating exchange control in the country. 

The court decided that it was not in the interests of justice to grant Mr Shuttleworth leave to cross-appeal against the decision of the Supreme Court of Appeal on the broad constitutional attack against the exchange control regulations. 

Despite the court’s conclusion, Moseneke DCJ made the point that the specific provisions targeted by Mr Shuttleworth “are well and truly archaic and may very well be at odds with the tenets of our Constitution. The state parties are nudged to take appropriate steps to review the provisions in issue.”

Mr Shuttleworth also sought to impugn section 9(1) of the Currency and Exchanges Act and regulation 10(1)(c). The High Court had dismissed Mr Shuttleworth’s contention and Moseneke DCJ agreed with the view reached by that court that South Africa’s “exchange control system requires a flexible, speedy and expert approach to ensure that proper financial governance prevails”.

In the result the court held that regulation 10(1)(c) of the Exchange Control Regulations was valid. Thus, the Constitutional Court held that the exit levy paid by Mr Shuttleworth was lawfully imposed and this puts paid to the SARB having to make a refund to Mr Shuttleworth and indeed any other persons who paid the levy upon exporting capital from South Africa.

It is interesting to note that Froneman J did not agree with the conclusion reached by Moseneke DCJ and therefore handed down his own dissenting judgment. Froneman J reached the view that the exit charge raised revenue for the national government and reached the conclusion that it could therefore only be imposed by way of original legislation passed by Parliament. Froneman J therefore reached the conclusion that the imposition of the exit charge by announcement in Parliament was constitutionally invalid.

The decision of the Constitutional Court brings finality to the Shuttleworth saga which has been underway for a number of years and it is clear that the exit levy imposed on the export of capital was, in the view of the court, lawfully imposed. The Minister of Finance indicated in his 2015 Budget Speech that the SARB  is in the process of simplifying the Exchange Control Manual and plans to finalise that during 2015.  It is hoped that the SARB will take heed of the court’s views on the provisions contained in the Exchange Control Regulations and that those provisions will be reviewed to take account of the Constitution.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, July 2015. 

Wednesday, 17 June 2015

Keynote Address at CIMA Gauteng Branch Graduation Ceremony

As a Fellow of CIMA (Chartered Institute of Management Accountants), I was privileged to be able to address the graduands and their families at the graduation ceremony of the CIMA Gauteng Branch on 11 June 2015.

Here is my keynote address, in which I address how a personal sense of ethics and duty in the professional business person can play a vital role in keeping the South African democracy aligned with the values enshrined in our Constitution:

Good evening officers of The Chartered Institute of Management Accountants in South Africa, distinguished guests, graduands, ladies and gentlemen.

At the outset, I would like to express my sincere thanks to The Chartered Institute of Management Accountants for asking me to present this speech on the occasion of this graduation ceremony. 

This graduation, as is the case with all graduations, is an auspicious occasion. This ceremony marks the culmination of years of perseverance and devotion, excitement and a sense of relief on completing the requirements for your qualification. 

For that you, the graduates, deserve our heartiest congratulations. It is appropriate also to acknowledge the contributions made by your parents, relatives, friends and significant others and mentors, for ensuring that you reached this milestone. Without the support and encouragement of these people, it is unlikely that you would be at this ceremony today.

You are graduating at an important time in the life of South Africa. During 2014 we completed the fifth democratic election since 1994. This year marked the twenty first year since the first democratic elections were held under the fully democratic dispensation agreed to by the various political parties in 1994.

Once the Independent Electoral Commission had certified the results of the 2014 election, the 400 parliamentarians elected by the electorate were sworn in. All parliamentarians are required to swear an oath of allegiance to the Constitution of the Republic of South Africa, undertaking that they will serve in the best interests of the people of South Africa.

Likewise, the President and Ministers of Cabinet were administered their oath of office by the Chief Justice who were required to confirm that they would also uphold the Constitution and all other laws of the country.

No doubt, you are wondering why I am raising the question of oaths that were administered and sworn to by parliamentarians, the President and his Cabinet.

The dictionary defines an oath as “a solemn promise, often invoking a divine witness, regarding one’s future action or behaviour.”

It is appropriate also to draw your attention to the Hippocratic Oath  historically undertaken by medical doctors upon their graduation from an institution of learning. In essence, that oath required the doctor to take care of his or her patients, and preserve patient confidentiality whilst adhering to certain standards of ethical conduct. Certain medical schools, such as Wits and others in South Africa require their graduates to subscribe to a modern version of the Hippocratic Oath.

A similar oath, that may not be as well known, is the “Themis Oath”, which is a pledge undertaken by the graduates of the School of Law in current-day Greece, based on an oath that was taken hundreds of years ago.

Upon graduating, the graduands of the School of Law in Greece are required to affirm today as follows:

“Before the President and the Dean of the School of Law, I give my solemn pledge to faithfully abide by the ordinances of justice with all my heart and soul, and that on leaving this sacred institution, I will render my services to all those that need my education and training, always in peace and ethical conduct. I will pursue the path of righteousness in life, and dedicate myself to that which is true and just, and to the protection of virtue and wisdom. May this pledge be accompanied by the blessings of the professors and my beloved teachers, and may the gods be with me during all my life.”

The question that I ask is this: Just as we expect our parliamentarians and other public officials to take an oath of allegiance, should universities and professional bodies in South Africa not require their graduands to undertake an oath or pledge along the lines of either the Hippocratic Oath or the Themis Oath, adapted to the particular field of study concluded by the graduands?

An oath such as the Themis Oath, prescribes the standards of conduct expected of law graduands in Greece and the sentiments expressed therein can contribute to the enhancement of ethical conduct in the future careers of all graduands in South Africa, including you, who are the future of South Africa.

As graduands, you have an important role to play in society and you are privileged to have been able to further your education and receive a qualification from the Chartered Institute of Management Accountants. There is no doubt that the qualification obtained by you will stand you in good stead as you carve out your careers in this country.

The Institute has provided you with the tools required to conduct your chosen profession and has instilled certain values in you as to how you should conduct yourself in future.

I would like you to carefully consider the words contained in the various oaths I have referred to, because a truly democratic South Africa needs you to pursue your careers in both a peaceful and ethical manner in the dealings that you will have with all members of our community.

Remember, too, the framework of our Constitution and the Bill of Rights which has now turned twenty one years old, enshrines the values agreed on by the political parties as we moved from the previous dispensation to the democratic South Africa.
Our respect of the democratic values of the country should affect not only how we conclude transactions in business, but also should be applied to our daily lives as we travel on the roads from one destination to another and also in our interactions with people from all walks of life.

It is important, therefore, that in our daily lives we all uphold the values contained in the Bill of Rights set out in the Constitution. We need to respect the rule of law in our dealings with one another and in all aspects of our lives.

The Bill of Rights which forms the foundation of the Constitution of this country comprises 27 rights, which rights are required to be respected by the State in its dealings with the people of South Africa and indeed also in the interactions of people with one another. It is interesting to note that the carved wooden doors of the Constitutional Court, being the highest court in South Africa and the guardian of the Constitution, contains reference to each of the 27 rights protected in the Bill of Rights.

It is not possible to refer to all of the 27 rights set out in the Bill of Rights, and I would urge you to examine the Constitution and be familiar with the rights set out therein which form the cornerstone of democracy in South Africa. The Bill of Rights provides that everyone is equal before the law and has the right to equal protection and benefit of the law and this right is fundamental in addressing the inequalities which existed prior to 1994. 

Furthermore, human dignity is entrenched as a right whereby the law recognises that everyone has inherent dignity and the right to have their dignity respected and protected. The Constitution also protects a person’s right to privacy, which includes the right not to have their person or home searched and enshrines the right of all persons to freedom of conscience, religion, thought, belief and opinion. 

In addition, the Bill of Rights upholds the principles of freedom of expression and the right of people to assemble peacefully and to demonstrate and present petitions. Furthermore, the Bill of Rights contains procedural rights whereby persons are entitled to request information from the State regarding that person and also upholds the principle of fair administrative procedure where persons interact with the State and state organs. Additionally, everyone has the right to have any dispute that can be resolved by the application of law decided in an open court, which hearing is presided over by judicial officers who are independent.

The rule of law encompasses the provisions contained in the Constitution, as well as other laws of the country. It is essential that citizens respect the laws of the country, regardless of how much of a nuisance they may be. This can be a small thing such as a driver on the road not going through a red robot or talking on a cell phone, thereby jeopardising the lives of other innocent people on the roads.

It is also requires citizens to respect the property rights of others and this includes not purchasing stolen goods or acquiring, what appears to be, unbelievably cheap DVDs which are the result of illicit copies made in violation of copyright laws and other rights held by the original artists thereto.

Thus, we as citizens of this country, all have a responsibility to recognise and voluntarily choose to adhere to the dictates of ethical behaviour in our interaction with each other as citizens of the country and particularly in business dealings. If we each dedicate ourselves to pursuing that path of righteousness, we can only enhance and improve the lives of all citizens in this our beloved country.

By receiving your qualification today, you are bringing to an end a chapter in your life which will enable you to go forward with your chosen career. It must be remembered that now that you have received a qualification, does not bring your learning to an end but is in fact merely the beginning thereof as you move through the university of life and interact with people from all walks of life in your career.

In closing, I would like to refer to the words of American editor and speech writer, Jack C Yewell:

“Giving of yourself, learning to be tolerant, giving recognition and approval to others, remaining flexible enough to mature and learn - yields happiness, harmony, contentment and productivity. These are the qualities of a rich life, the bounteous harvest of getting along with people.”

If we all respect that which is both true and just, virtuous and wise and if we can recognise the value of others, regardless of their background, that can only yield a future South Africa that provides a bounteous harvest of harmony and peace for all her citizens.

Nkosi sikelel’ iAfrika and congratulations and best wishes to the graduands and their families.

Tuesday, 9 June 2015

Tax Consequences of Foreign Companies Rendering Services in South Africa

Where a foreign company renders professional services to a South African company, it is important that the foreign entity considers whether, as a result of rendering such services, the foreign company will create a permanent establishment in South Africa. 

The reason why this becomes important is that where a foreign company creates a permanent establishment in South Africa, South Africa will under the provisions of a Double Taxation Agreement (“DTA”) concluded with another country, be entitled to subject that foreign entity to tax on the profit attributable to that permanent establishment created in South Africa.

In the case of X LLC, case number 13276 heard in February 2015, as yet unreported, the Tax Court had to determine whether X had created a permanent establishment in South Africa, and as a result thereof, was liable to tax in South Africa. The case involved a corporation incorporated in the United States of America and the court therefore had to consider the provisions of the DTA concluded by South Africa and the United States of America.

Article 7(1) of the DTA concluded by SA and the USA provides that the profits of an enterprise of the USA shall  be taxable only in USA, unless that enterprise conducts business in South Africa through a permanent establishment located in South Africa. 

Furthermore, the DTA provides that where business is carried on through a permanent establishment, the profits of the enterprise may be taxed in South Africa, but only to the extent that they are attributable to that permanent establishment.

Article 5(1) of the DTA in turn provides as follows:

“for the purposes of this Convention, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

In addition thereto, Article 5(2) of the DTA provides that the term ‘permanent establishment’ includes especially-

“(k)          the furnishing of services, including consultancy services, within a contracting state by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or connected project) within that state for a period or periods aggregating more than 183 days in any 12 month period commencing or ending in the taxable year concerned.”

The court had to decide how the DTA should be interpreted and whether it was necessary for X to have met the requirements of both Articles 5(1) and 5(2)(k) of the DTA.

The taxpayer contended that it is necessary that a permanent establishment be created first and only once that has occurred, is it then necessary to take account of the provisions of Article 5(2)(k) of the DTA. 

SARS on the other hand, argued that if X fell within the provisions of Article 5(2)(k) a permanent establishment exists and it is not necessary that X met the requirements of Article 5(1) of the DTA.

Vally J in his judgment handed down on 15 May 2015 reached the conclusion that Articles 5(1) and 5(2)(k) cannot be read disjunctively. He expressed the view that as a result of the usage of the words ‘includes especially’ Article 5(2)(k) of the DTA should be read as specifying those specific activities which will be regarded as creating a permanent establishment in South Africa. 

The Tax Court reached the decision that taking account of the number of days spent by X’s staff in South Africa, it met the time requirement specified in Article 5(2)(k) of the DTA and for that reason a permanent establishment had been created in South Africa. 

The court also reached the conclusion that X had a fixed base in the boardroom of its client in South Africa, and had therefore established a fixed place of business in South Africa while rendering services to its client in South Africa. 

It must be remembered that Article 5(1) of the DTA, in defining a permanent establishment, refers to ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. 

The court expressed the view that it is not necessary that the non-resident carries out all of its business from the fixed place of business which is established in South Africa. 

The court reached the conclusion that a permanent establishment is created where X performs only some of its obligations in terms of a contract concluded with its client, and even if it conducted part of its business from its client’s boardroom.

In assessing X to tax in South Africa, SARS levied tax on the fees derived by X in South Africa, after deducting therefrom attributable expenditure and imposed additional tax of 100% and interest on the underpayment of provisional tax in accordance with section 89quat(2) of the Income Tax Act. 

The court reached the decision that the additional tax was not disproportionately punitive and therefore dismissed the appeal against the additional tax. Insofar as the imposition of interest is concerned, the court expressed the view that X should have familiarised itself with the taxation laws of the country within which it conducts its operations, and for that reason it was decided that X had been negligent in not seeking advice regarding the tax consequences of the contract concluded with its client. 

The court therefore came to the conclusion that SARS was correct in imposing interest on the underpayment of provisional tax.

Based on the above case, which admittedly deals with the interpretation of articles contained in the SA and USA DTA, it is important that non-residents rendering services to clients in South Africa must evaluate whether they will create a permanent establishment in South Africa, thereby triggering income tax on the profit attributable to the services rendered in South Africa.

Furthermore, if the non-resident creates an enterprise as envisaged under the provisions of the VAT Act, it would also be necessary to register for VAT purposes, and charge VAT on the fees received from the resident client and pay that to SARS. 

Furthermore, where persons from abroad are sent to South Africa to render the services that may, depending on the circumstances and the provisions of the DTA in question, give rise to the non-resident entity being required to register as an employer in South Africa with the obligation to withhold and deduct PAYE from amounts paid to persons sent to South Africa to render services here.

Clearly, any South African tax paid by the non-resident entity, would under the terms of the DTA be recognised as a credit claimable against tax paid in the home jurisdiction of the entity rendering the services in South Africa. Non-resident employees who become liable to tax in South Africa should also be entitled to claim such tax as a credit in their home jurisdiction under the DTA in question.

It is important therefore that non-resident entities rendering services into South Africa carefully consider how to plan and structure their affairs in South Africa, so that they do not fall foul of the provisions of the Income Tax Act read together with any applicable DTA.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, June 2015. Image purchased from www.iStock.com

Monday, 11 May 2015

Automatic Exchange of Information for Tax Purposes

South Africa is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. It has been confirmed that South Africa has undertaken to exchange information automatically in relation to new accounts and pre-existing individual high value accounts by the end of September 2017.

South Africa has concluded a large number of double taxation agreements with trading partners, which allows for the exchange of information in terms of those agreements.

Furthermore, South Africa has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“Multilateral Convention”), which Convention was gazetted during the course of last year, such that the Convention took effect in South Africa on 1 March 2014. That Convention envisaged the automatic exchange of  information by the various countries which had signed the Convention.

Subsequently during October 2014, South Africa together with 50 other jurisdictions translated their commitments under the Multilateral Convention into action by way of the signing of a Multilateral Competent Authority Agreement that activates the automatic exchange of information based on the Multilateral Convention.
The Competent Authority Agreement is a multilateral framework agreement, such that the subsequent bilateral exchanges will take effect between those countries which file the subsequent notifications under section 7 of the agreement. Furthermore, the agreement sets out the particulars of what information will be exchanged, as well as the timing thereof.

The agreement comprises eight sections:

·         section 1 contains definitions of terms used in the agreement
·         section 2 sets out the information which will be automatically exchanged
·         section 3 sets out the timing and method of the automatic exchange of information
·         section 4 describes how the parties to the agreement will co-operate to ensure compliance with the agreement
·         section 5 contains provisions to ensure confidentiality and the safeguarding of data
·         section 6 sets out the process to consult to ensure the smooth operation of the agreement and also to amend the agreement
·         section 7 sets out the subsequent notifications required under the agreement and how the agreement is then subsequently brought into effect
·         section 8 sets out the role of the secretariat

    As indicated above, section 2 of the agreement sets out in greater detail the information which countries are required to exchange automatically. 

    Under the agreement, South Africa will be required to exchange information regarding so-called “reportable accounts” of another jurisdiction which comprises financial accounts maintained by a reporting financial institution which has been identified as an account which is held by one or more persons that are reportable persons in relation to another country.

      Information which South Africa will be required to exchange with other countries under the agreement is as follows:

·      the name, address, tax identification number and date and place of birth in the case of an individual
·       the account number
·       the name and identifying number of the reporting financial institution
·      the account balance or value as of the end of the relevant calendar year or other appropriate reporting period
·      the total amount paid or credited to the account holder with respect to the account during    the calendar year or other period as the case may be

Under section 3 of the agreement, the information is required to be exchanged automatically within nine months after the end of the calendar year to which the information relates.

For South Africa to comply with its obligations under the Multilateral Convention and indeed the Multilateral Competent Authority Agreement, it will require substantial information from the financial institutions in the country regarding accounts linked to persons resident in other countries.

Under the provisions of section 26 of the Tax Administration Act No. 28 of 2011 (“TAA”) the Commissioner may issue public notices requiring financial institutions to submit returns to SARS reflecting detailed financial information.

South Africa has concluded an agreement with the United States of America whereby South African financial institutions are required to report significant financial information to SARS for onward transmission to the United States of America. 

A detailed public notice was issued under section 26 of the TAA describing the comprehensive financial information to be collated by financial institutions in South Africa for onward transmission to United States of America. No doubt further public notices will be issued by SARS setting out exactly what information financial institutions are required to supply to SARS so that that information may ultimately be made available to other countries in terms of the Multilateral Convention.

The OECD has indicated that the Global Forum will establish a peer review process whereby ensuring the effective implementation of the automatic exchange of information.

Furthermore, governments who are party to the Multilateral Convention have also undertaken to increase the level of information exchanged upon request by including a requirement that beneficial ownership of all legal entities be made available to tax authorities and capable of being exchanged with treaty partners. This will enable tax authorities to ascertain who owns assets held by companies and trusts located around the world.

The Global Forum has indicated that 89 of its member countries have committed to implement reciprocal exchange of information on financial accounts automatically.

At the seventh meeting of the Global Forum held in Berlin during October 2014, it was announced that an initiative will be launched in Africa to increase awareness of the benefits of the exchange of information across the African continent and also to increase the number of African countries who are members of the Global Forum. The Global Forum will also assist tax administrations in Africa regarding the exchange of information.

It is clear therefore that the automatic exchange of information will commence in many countries during 2017 or no later than 2018. Just as South Africa must provide financial information to other countries, SARS will receive information from other countries regarding South Africans who have bank accounts abroad.

Taxpayers who are in default and have not made full and proper disclosure of their affairs to the South African Revenue Service should utilise the Voluntary Disclosure Programme (“VDP”) enshrined in the TAA thereby ensuring that they can remedy their defaults without facing criminal prosecution and in many cases escaping penalties which would otherwise be payable. It must be remembered that the VDP contained in the TAA is a permanent feature of the law and does not have a date by which taxpayers must apply for relief. 

Furthermore, those persons who may have violated the exchange control regulations should consider regularising their affairs with the Financial Surveillance Department of the South African Reserve Bank, thereby ensuring that they regularise their affairs without facing criminal sanction for prior violations of exchange control regulations.

Dr Beric Croome is a Tax executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (May 2015).Image from IISD Please contact me if there are copyright issues relating to use of image.

Tuesday, 14 April 2015

Procedures Governing Objections and Appeals to SARS

A taxpayer who receives an assessment from the Commissioner: South African Revenue Service with which they do not agree, is entitled to lodge an objection against that assessment and Chapter 9 of the Tax Administration Act, No. 28 of 2011 (“TAA”) sets out the procedures that must be followed. 

Taxpayers also need to be mindful of the rules governing objections and appeals promulgated under section 103 of the TAA, which sets out in greater detail the steps to be followed in the objection and appeal process.
Under section 96(2) of the TAA, the Commissioner is obliged to supply the taxpayer with the grounds of the assessment so that the taxpayer can understand the basis on which the assessment has been issued. 

Unfortunately, far too many cases are seen where the Commissioner summarily disallows deductions claimed by taxpayers without supplying any information as to the legal basis on which the deduction was denied. 

In these cases the taxpayer is entitled to demand that the Commissioner complies with his statutory obligation to supply the grounds for the assessment in compliance with section 96(2) of the TAA. 

The taxpayer is required to submit the request for grounds of assessment where SARS has failed to fulfil its legal obligation to do so at the time of issuing of the assessment within 30 business days of the date of the assessment in question.

Once the taxpayer has received the grounds of assessment, they are entitled to submit an objection against that assessment within 30 days of receiving the grounds for the assessment. Where the Commissioner has supplied the grounds of the assessment as required at the outset, the taxpayer is required to lodge the objection within 30 business days of the date of the assessment.

According to the SARS’ website, taxpayers need to submit the correct documentation for the objection to be valid. In the case of personal income tax, a notice of objection or form NOO is required to be submitted via e-filing. Corporate income taxpayers are also required to file the objection electronically by using the form NOO. 

Where a trust disputes an assessment issued by SARS, it is necessary to complete form ADR1 and submit that either by hand or by email to an appropriate official at SARS. In the case of value-added tax, payroll related taxes and all other taxes , such as donations tax, dividends tax etc. a taxpayer can only file the objection using form ADR1 and is unable to lodge the objection electronically. 

Unfortunately, it does not appear that SARS officials are familiar with the procedure set out on the SARS website and officials have often rejected objections on the basis that they are invalid on the grounds that the taxpayer has not used an NOO form in respect of value-added tax or donations tax, secondary tax on companies. 

Once the legal position and SARS guidelines are pointed out to SARS officials, a letter of apology is issued and the objection is then acknowledged and confirmed as being properly filed. It is most unfortunate that SARS officials do not appear to be familiar with their own procedures.

It is critical that when the taxpayer decides to object to the assessment, that they also consider whether to pay the tax in dispute or whether they wish to apply for a suspension of payment of the tax in dispute in terms of section 164 of the TAA. 

The rules regulating the suspension of payment of tax in dispute is not discussed further here, except to point out that too often SARS does not respond timeously or at all to the letters requesting suspension of payment, as a result of the fact that the requests for suspension are not capable of being submitted to SARS electronically and are therefore not properly tracked within SARS’ systems. 

Too often taxpayers who have lawfully applied for suspension of payment receive demands for payment or in a worst case scenario, are informed that judgment has been taken against them even though SARS has sat on their request for suspension for many months.

When the taxpayer submits their objection, it is most important that the grounds of the objection are properly considered and fully set out in the letter of objection submitted to the Commissioner.

Where SARS has failed to supply the grounds of assessment or failed to supply proper reasons for the decision to issue the assessment, the taxpayer should insist that SARS complies with their statutory duty to inform the taxpayer for issuing the assessment in question. The taxpayer cannot properly object to an assessment without knowing the basis on which SARS has issued the assessment concerned.

It is also important that when the objection is prepared, that statements made in the letter of objection can be supported subsequently by documentary evidence should the case proceed on appeal to the Tax Court, or another court. The letter of objection needs to be carefully contemplated and drafted, so that the taxpayer sets out their case properly and knows that they can support the statements made in their letter of objection. There is nothing worse for a taxpayer to lodge an objection only to discover that documents which they believe to exist, which would support their case, in fact are no longer available or do not exist.

Under the rules governing objections and appeals, taxpayers also cannot unilaterally add to the grounds of objection without following proper procedures laid down in the rules governing objections and appeals and this applies equally to SARS insofar as its grounds of assessment are concerned.
On 8 December 2014 Rogers J delivered judgment in the case of ABC (Pty) Ltd v Commissioner for SARS,  as yet unreported.

In ABC’s case, the Commissioner submitted an application to the Tax Court for consent to amend its grounds of assessment under rule 10 of the rules which previously governed the objection and appeal process.

The case related to the application or otherwise of section 103(2) of the Income Tax Act, No. 58 of 1962 (“the Act”) and in his Rule 10 Statement, the Commissioner indicated that he was relying not only on the first change in shareholding but also on the subsequent change of shareholding which occurred during November 2003. 

These factors were important in determining whether section 103(2) of the Act could apply to the transaction in dispute or not. From a review of the decision of Rogers J, it would appear that the Commissioner informed the taxpayer of the grounds of assessment setting out the basis on which the assessment was issued, without reference to the second change of shareholding and now sought the court’s consent to supplement his grounds of assessment.

The new rules governing objections and appeals took effect on 11 July 2014 and the court indicated that the Commissioner’s Rule 10 Statement was filed at the time that the old rules applied. Rogers J indicated that he was required to establish what could lawfully be contained in a Rule 10 Statement and he reached the conclusion that the coming into force of the new Tax Court rules did not affect that evaluation.

The court referred to the fact that the question as to whether the Commissioner or the taxpayer could introduce new grounds into their Rule 10 and 11 Statements not covered by the earlier steps in the assessment process is not entirely settled in law. In ITC 1843 Claasen J held that the Commissioner and the taxpayer were entitled to depart from their previously stated positions in letters of assessment and letters of disallowance of objection.

Subsequently in HR Computek (Pty) Ltd v The Commissioner for the South African Revenue Service the Supreme Court of Appeal indicated that the taxpayer does not have the freedom of amendment which Claasen J accepted in ITC 1843.

Rogers J reached the conclusion that a distinction should be made between a tax appeal which relates to objective questions of fact and law and tax appeals which relate to the exercise by the Commissioner of discretionary powers. The court analysed section 103(2) of the Act extensively and reviewed the grounds of assessment set out in the Commissioner’s Rule 10 Statement. 

The court indicated that the Commissioner cannot support the existing assessment made by the him on the basis of matters on which he was not satisfied when he first issued the assessment in dispute. The court therefore came to the conclusion that the Commissioner’s application to amend its grounds of assessment set out in their Rule 10 Statement should be refused and that the taxpayer’s counter application to strike out those amendments should succeed. The taxpayer in the case of ABC (Pty) Ltd therefore succeeded in preventing SARS from amending its grounds of assessment and also received an order of costs in its favour.

The lesson to be learnt from the ABC case is that the taxpayer must formulate its grounds of objection properly and likewise SARS must formulate its grounds of assessment adequately and cannot supplement that at will and thereby prejudice the taxpayer.

Dr Beric Croome: Tax Executive, ENSafrica. This article first appeared in Business Day, Business Law & TAx Review, April 2015. Photograph by Judy Croome.