International Fiscal Association 69th Annual Congress 2015

 I was privileged to be invited to be the South African Branch Reporter and also a panelist for "Subject 2: The Practical Protection of Taxpayers' Rights" at the International Fiscal Association's 69th Annual Congress in Basel 2015

IFA BASEL2015 Registration Hall at the Exhibition Centre in the Messeplatz

 One of the many "goody bags" from various sponsors of the conference:

   Arriving at the opening function and chatting to Professor Jennifer Roeleveld

 of IFA-SouthAfrica,  hosts of the IFA Annual Congress in 2022.

  Chatting to Prof Dr Pasquale Pistone of the IBFD 

and member of the Permanent Scientific Committee of the IFA 

  Prof Craig West, Prof Jennifer Roeleveld, UCT Masters student Louise Möeller 

and Prof Johann Hattingh of University of Cape Town at Ms Möller research board.  

Both IFA-South Africa and Prof Johann Hattingh snapped photos as I was presenting

 on the panel for Subject 2: The Practical Protection of Taxpayers' Rights

 

Prof Jennifer Roeleveld chairs IFA Basel seminar on Taxpayers' Rights & International Exchange of Information. 
Prof Craig West as secretary.  Photo courtesy of Prof Johann Hattingh. 

   The Gala Dinner had a variety of talented performance artists to entertain us

 The IFA flag being handed from Switzerland (Congress Host 2015)

 to Madrid (Congress Host 2016)

   After the congress was over, my wife and I stayed in 
the remote mountain village of Pianazzola, Italy

  then onto Milan for an orchestral concert at Teatro de alla Scala 

and a visit to Castello Sforza

Homeward bound! Waiting in Zurich Airport for flight LX288 to Johannesburg, 

the last flight of the day to depart from Zurich.

New Release: "a stranger in a strange land" by Judy Croome

I've been asked when my wife's next book will be available. 
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Click here for a review of the book by Vine Leaves Literary Journal(UK)
and click here for a review by Readers' Favorites (USA)

The links to purchase it are below the book details.

Aztar Press is proud to announce the release of

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Purchase in South Africa from Loot or directly from Aztar Press.

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Tax Treatment of Awards Received from Foreign Trusts by South African Beneficiaries

Where a South African tax resident beneficiary receives an award from a foreign trust, it is important that they ascertain the nature of the distribution received from that trust, so that they may correctly disclose the nature of the amount received from the trust for tax purposes in South Africa.

The tax payable by the beneficiary on an award received from a foreign trust will depend upon the precise nature of the distribution received from the foreign trust.

It must be remembered that under section 102 of the Tax Administration Act, No. 28 of 2011 (“TAA”) the taxpayer must discharge the onus of proof as to whether an amount is exempt from tax or is taxable. 

Thus, where a taxpayer is unable to determine the underlying nature of the amount received from a foreign trust, SARS would be fully entitled to regard that amount as normal income fully liable to tax in South Africa.

It would be far preferable if the foreign trustees assisted the South African beneficiary by advising them as to the nature of the amounts comprising the distribution made to the beneficiary so that the tax exposure relating to that distribution can be properly managed.

Where the beneficiary receives a return of trust capital, that clearly will not be taxable on the basis that it is a return of capital which falls outside of the rules taxing capital gains in South Africa imposed under the Eighth Schedule to the Income Tax Act, No. 58 of 1962, as amended (“the Act”).

Where, however, a foreign trust disposes of assets and realises capital gains thereon and subsequently makes an award to a South African beneficiary, the beneficiary will then receive a capital gain and depending on the circumstances that may or may not be taxable in South Africa.

Image purchased from www.iStock.com ©iStock.com/Courtney Keating

Paragraph 80(3) of the Eighth Schedule to the Act deals with the position where a resident acquires a vested right to any amount representing the capital of any foreign trust and that capital arose from a capital gain of that trust or any amount which would have constituted a capital gain of that trust if that trust had been tax resident and determined in any previous year of assessment during which the resident beneficiary had a contingent right to that capital and that capital gain was not subject to tax under the provisions of the Act. 

In such circumstances the amount received must be taken into account for purposes of calculating the aggregate capital gain or aggregate capital loss of the resident beneficiary in that year of assessment.

Thus, where a foreign trust disposes of assets and realises a capital gain thereon in say the 2014 tax year and subsequently awards that gain to the resident beneficiary in the 2015 tax year, that gain will then be taxable as a capital gain in South Africa. 

However, where the trust disposes of assets and realises a capital gain and distributes that to a resident beneficiary in the same year of assessment, it is apparent that the capital gain will not be taxable in the hands of the resident beneficiary. 

This interpretation is supported by the comments made in the Davis Tax Committee’s Interim Report on Estate Duty, where at page 45 the following is stated:

“However, unlike paragraph 80(3) this provision suffers from deficiency, in that it refers to a capital gain and not to an amount that would have constituted a capital gain had the non-resident trust been a resident. It can thus only apply to the limited range of assets referred to in paragraph 2(1)(b). Consequently, SARS is powerless to subject most gains of a non-resident trust to CGT in the hands of resident beneficiaries when such gains are distributed in the same year of assessment in which they arise.”

Thus, where a foreign trust realises a capital gain, it is in the interests of the South African resident beneficiary that that capital gain is distributed in the same tax year, thereby ensuring that the amount escapes tax in the hands of the beneficiary based on current statutory provisions.

Where, the foreign trust derives income in the form of interest, dividends etc. it is important to know what part of the distribution relates to the different categories of income. 

This flows from the provisions of section 25B(2A) of the Act which regulates the tax consequences flowing from distributions received by a resident beneficiary from a foreign trust. 

In principle, where the foreign trust derives income and awards that to a resident beneficiary in the same tax year or in a subsequent tax year, the resident beneficiary will need to ascertain the composition of the distribution received so that they can analyse the award into its constituent parts. 

Where, for example, the foreign trust receives interest income that will retain its nature and will be taxed as interest in the hands of the beneficiary in South Africa upon receipt, regardless of the fact when that was received, unless it was derived prior to 2001 being the year in which South Africa moved to the worldwide basis of taxation. 

Insofar as dividends are concerned, where the foreign trust derives dividends and awards that to a beneficiary the income tax payable thereon will generally not exceed 15% based on the provisions of section 10B of the Act. It would be necessary to consider the particular facts and circumstances of the trust in question.

Where a South African resident beneficiary receives a distribution from a foreign trust and they are unable to identify the constituent parts of that distribution, the full amount would be treated as taxable by SARS.

Those persons who applied for amnesty under the 2003 amnesty legislation were required to accept that the assets owned by the foreign trust were regarded as theirs for income tax and capital gains tax purposes and as and when income is derived by the foreign trust, that will be taxed in the hands of the amnesty applicant.

The Davis Tax Committee has recommended that in future all distributions of foreign trusts be taxed as normal income. This proposal is justified by the Committee on the basis of seeking to discourage the creation of offshore trusts because of the deferral of the tax that a beneficiary obtains through the use of an offshore trust. 

However, this proposal does not take account of the fact that many persons applied for amnesty and are paying tax on income generated by foreign trusts as and when derived and should those trusts make distributions, it would be inequitable if those distributions are taxed again as a  result of the proposal contained in the Davis Tax Committee Report. This would constitute double taxation which cannot be justified and it is hoped that this proposal to summarily regard all amounts received from foreign trusts as income will not be accepted.

In conclusion therefore it is contended that trustees of foreign trusts should assist South African tax resident beneficiaries of those trusts by recording the distributions made to the resident beneficiary and the precise nature thereof so that the beneficiary can correctly disclose those amounts for tax purposes.

A further point to consider is that where distributions are received from a foreign trust, that should be disclosed to the exchange control authorities through the normal banking channels, particularly where the distribution is received in South Africa. 

Should the beneficiary wish to retain the distribution offshore, they should seek permission from their authorised dealer to do so for exchange control purposes.

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

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. 

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.

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