SA is closing investment tax loopholes
07 June 2013
Posted by: Author: Brendan Peacock
Author: Brendan Peacock (Business Day live)
South Africa signed a new double-taxation agreement with Mauritius on May 17, and is set to revise similar treaties with Cyprus, Luxembourg, the Netherlands and Singapore.
The rationale is an attempt to close loopholes that allow business structures for investments into South Africa to escape SARS’ tax net.
A potential fillip at a time when the country’s GDP growth is expected to remain in the doldrums and without any improvement in the current account deficit, the revised Mauritius agreement updated the treaty last signed in 1996.
Andrew Knight, partner at Maitland, said South Africa had become increasingly concerned with the erosion of its tax base through structures set up with inadequate underlying substance or commercial justification.
"The existing Mauritius-South Africa tax treaty was signed at a time when South Africa had a source-based system of taxation and no capital gains tax.
’’South Africa will introduce a withholding tax of 15% on interest and royalty payments from March 1 2014.
’’It has also scrapped secondary tax on companies in favour of a withholding tax on dividends,” he said.
Mr Knight said the indications were that the new treaty would take effect from January 2015.
This would give adequate time for existing structures to be reviewed and for alternatives to be put in place.
Expanding on what that meant for business, Mr Knight said that structures with an insufficient centre of gravity in Mauritius might find themselves without treaty protection.
’’Real estate investment structures would also be affected as South Africa would have the right to tax capital gains realised by a Mauritius entity on the sale of shares in a company that is ‘land rich’.”
In essence, Mr Knight said the net effect was not materially different from the position under the existing treaty — namely that care had to be taken to ensure that effective management of a Mauritius company was indeed in Mauritius.
"This issue does serve to emphasise the importance of determining whether a company might find itself with its place of effective management in South Africa under domestic rules.
’’The concept of effective management in a South African context has unfortunately been in a state of uncertainty since September 2011, when SARS raised the possibility of changing its own interpretation of the term.
A clear statement on this is now very much overdue,” he said.
"SARS will have the ability to tax pension and annuity payments arising from South Africa, and while currently other income — that is, income not covered by other articles of the treaty — earned by a Mauritius resident is taxable only in Mauritius, under the new treaty South Africa will have a right to tax if the income has its source in South Africa,” Mr Knight explained.
On the upside, the rate of withholding tax on dividends for holdings in South African companies of less than 10% had been reduced to 5%, according to Mr Knight.