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.  

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