International Taxation in South Africa: Double Tax Agreements, & Legislation
By Basil Coutsoudis
Posted: 17th June 2014 08:49In an international trade context, international taxation refers to various treaty provisions relieving international double taxation. It incorporates domestic legislation covering foreign income of residents and domestic income of non-residents.
It incorporates domestic legislation,(1) treaty provisions containing domestic legislation, treaty provisions relieving international economic double taxation, rules relating to international tax avoidance and evasion, and, directives and domestic legislation concerning cross-border direct taxation.(2)
Therefore in the context of foreign trade with South Africa, an understanding is required of the interaction of the South African tax system with the systems of foreign countries. In this regard, there may or may not be double tax treaties in existence, and every instance has to be dealt with on its own merits.
One of the main problems in international tax is the question of source and residence. In South Africa we have a hybrid system of taxing worldwide income for tax resident persons and taxing non-residents on a source basis. There are two basic types of double taxation. There is economic double taxation, which is the imposition of comparable taxes by two or more tax jurisdictions on different taxpayers in respect of the same taxable income, for example, where profits are taxed at corporate level and again at the shareholder level, and there is juridical double taxation, which is the imposition of comparable taxes by two or more tax jurisdictions on the same taxpayer in respect of the same income or capital, for example, where one country withholds tax on dividends paid and the recipient shareholder is taxed in another country for dividends received.
In South Africa, residence is defined by a test of where a person is ordinarily resident,(3) physical presence, and for corporate entities, the place of incorporation, or the place of effective management.(4) In this regard, article 4 of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital (2010) is useful, and most of South Africa’s double tax agreements (DTA) are based on the OECD model.
In South Africa, domestic tax relief for double taxation comes in various forms. The exemption method provides that, income taxed in other jurisdiction is excluded from domestic income,(5) the credit method, where foreign income is included but foreign tax paid is allowed as a credit against domestic tax payable,(6) and the deduction method where foreign income is included in taxable income and a deduction is permitted for any foreign tax paid.(7)
A further method recently finding favour in the newer tax treaties and renegotiated treaties, is a reduced rate of tax. Translation of foreign taxes to local currency is also permitted, thereby allowing taxpayers to take advantage of favourable currency exchange rates.
Another favourable development in South African tax law which benefits foreign owned companies, or companies with foreign shareholders, is the switch in 2012 from a system of imposing secondary tax on companies (STC) on all dividends declared, to a pure dividends tax in line with such taxes in foreign jurisdictions. Previously DTAs did not cover STC. Generally STC was not regarded as a tax on dividends but fell under business profits and therefore no limit on the STC levied by South Africa could be imposed. Newer treaties do incorporate provisions to prevent double taxation of dividends tax, and protocols have been added to old treaties to incorporate additional taxes. Usually a treaty will apply to any identical or substantially similar taxes in the future, and it was therefore an important move in South Africa, to move from STC to dividends tax.
In essence, the provisions of South Africa’s DTAs will mirror the provisions of the OECD model law which are closely followed. So for example, in the case of immovable property, passive income such as rental ‘may’ be taxed in state where property is situated, and in the country where the tax payer is resident. However, the resident state must give relief for tax paid in the source state.(8)
As a further example, Article 10(9) makes provision for dividends tax. Generally taxing rights for dividends tax are given to country of residence of the recipient of the dividend, but dividends can also be taxed in the company’s state provided the recipient is the ‘beneficial owner’ and if a company, limited to 5% or if an individual, to 15%. Foreign dividends can be taxed in the resident state if residents hold at least 10% of total equity and voting rights, if the shareholder is a company which is in the same country as the foreign company paying the dividend to the extent the foreign dividend does not exceed income included per certain provisions of the ITA, or if the dividend is on a foreign share listed on the JSE(10) excluding dividends in specie.
There are further articles dealing with royalties, capital gains tax, employment, director’s fees, controlled foreign companies and many more provisions that are mirrored in South African DTAs.
A list of the states with whom South Africa has treaties can be found on the SARS website,(11) and South African tax authorities and courts will use the commentary that the OECD provides for its Model Tax Convention together with its own jurisprudence, in order to interpret and apply the provisions of South African DTAs.
Lastly, there are certain rebates applicable in terms of the ITA itself that are available, on the basic premise that if a taxpayer elects the relief offered by way of a treaty, then the provisions of the ITA cannot be used for the same income. A summary of such rebates against South Africa tax for foreign taxes payable are:
- Foreign source income (note the problem here was South Africa source income could not enjoy relief, for example management fees earned in South Africa and foreign withholding also paid elsewhere or true source royalties.)
- S9D proportional amount of net income.
- Foreign dividends.
- Capital gains from foreign source.
- Deemed income.(12)
- Deemed foreign capital gains.(13)
- Capital of trusts. (14)
- Proportional amount of tax paid by a partnership or trust as an ‘entity’ in another country.
- Other foreign income – a deduction of foreign tax paid is allowed.
On the whole, foreign investors will find that the tax, revenue, and banking systems South Africa are extremely evolved, and rank with the best of the world. South Africa cannot be deemed by any means to be a tax haven of any sort, and does not follow polices as a tax haven in order to promote foreign investment. However, the tax system is comparable in both efficiency and in terms of investment friendly tax policies, to stand up on its own against the best in the world, as an attractive market for foreign business.
(1)In South Africa, tax legislation is contained in the Income Tax Act 58 of 1962 (ITA) and the Tax Administration Act 28 of 2011 (TAA).
(2)IBFD International Tax Glossary 5th edition (2005).
(2)IBFD International Tax Glossary 5th edition (2005).
(3)CIR v Kuttel 54 SATC 298, Cohen v CIR 13 SATC 362
(4)See South African Revenue Service (SARS) Practise Note 6; De Beers Consolidated Mines Ltd v Howe (1905-06) 5 TC 198 (KB Dov.CA,HL)
(5)See S9(1)(g), 10(1)(l),10(1)lA, 10(1)(m),10(1)(o) of the Income Tax Act, and OECD Article 23A.
(6)ITA S 6 quat and OECD Article 23B.
(7)ITA s 6 quat.
(8)Article 6 OECD Model Tax Convention on Income and on Capital (2010)
(9)OECD Model Tax Convention on Income and on Capital (2010)
(10)Johannesburg Stock Exchange.
(12)In terms of section 7 of the ITA.
(13)In terms of the 8th schedule of the ITA.
(14)In terms of section 25B(2A) and paragraph 80(3) of the 8th schedule, of the ITA.