International Tax Agreements: overview by National Treasury and SARS
01 September 2014
Posted by: Author: Parliamentary Monitoring Group
Author: Parliamentary Monitoring Group
Date of Meeting: 27 Aug 2014
Chairperson: Mr C De Beer (ANC; Northern Cape)
Documents handed out:
South African Revenue Service and National Treasury Overview of International Agreements
Audio recording of the meeting:
SC Finance: Induction Workshop by National Treasury and South African Revenue Service on International Agreements
The Select Committee on Finance were briefed on international tax agreements by South African Revenue Service and the National Treasury. The purpose was to give insight into the details of the different types of tax agreements such as Double Taxation Agreements (DTAs), Tax Information Exchange Agreements (TIEAs) and Multilateral Conventions on Mutual Administrative Assistance in Tax Matters. Double Taxation Agreements seek to address individuals being taxed twice on the same income and the latter deal with the exchange of information between states on request.
The bodies responsible for the negotiation of tax treaties are National Treasury and SARS and other role players include the Department of International Relations and Cooperation (DIRCO), Department of Trade and Industry (DTI) and private sector players (multinational companies). The tax treaty network of South Africa is the largest in Africa. Some treaties are renegotiated in order to modernise them such as treaties with Lesotho, Malawi, Zambia and Zimbabwe.
Some developments in international tax such as base erosion and profit shifting were explained. These include activities such as tax planning strategies that exploit loopholes to make profit disappear and mismatches in tax rules to make profits disappear for tax purposes as well as ensuring that income is not taxed anywhere (double non-taxation). One of the main causes of this is tax treaty abuse. Propositions were made to avoid this in future agreements. The ratification procedure for taxation agreements was explained.
This ratification procedure was questioned by some members. The role of the Committee was seen as mere ‘rubber stamping’ of agreements negotiated by the executive. The presenters clarified that the Committee had an active role in the process and if it had reservations, these would be taken into account and rectified.Other questions included what happens when proposed amendments to our legislation contradict the treaties, the what impact on Anglo American tax revenue due to it moving its headquarters out of the country, and what is being done about the R600 billion in taxes owed to the South African government.
Overview of International Tax Agreements
Mr Luthando Mvovo, Director: International Tax and Treaties, National Treasury, laid out the jurisdictional framework for international tax and the different systems used in taxation, which are the source and residence system. One reason for international tax treaties is the prevention of double taxation and he elaborated on what double taxation is and how it is addressed by the treaty. Section 231 of the Constitution provides for the adoption mechanism of international agreements and for the interaction between international treaties and domestic law. South Africa has the largest tax treaty network in Africa.
He explained base erosion and profit shifting, and the abuse of tax treaties. He provided suggestions for avoiding the abuse of tax treaties, with proposals to change the current text to deal with treaty shopping.
Ms Oshna Maharaj, Manager: International Development and Treaties, SARS, dealt with the procedure that is followed in the negotiation and adoption of Double Taxation Agreements/Conventions into South African law. She went through the articles of a typical Double Tax Agreement and the protocols amending the agreements. She also elaborated on Tax Information Exchange Agreements (TIEAs) which fall within the provisions of section 231(2) of the Constitution. The procedure followed for TIEAs is the same as that for DTAs. TIEAs may be favoured over DTAs by South Africa because of the ongoing exercise to eliminate harmful tax practices by ensuring transparency and information exchange between jurisdictions. She then looked at Multilateral Conventions on Mutual Administrative Assistance in Tax Matters (CMAA) and Value-Added Tax Mutual Administrative Assistance Agreements (VAT MAA) which both fall within the provisions of section 231(2) of the Constitution.
Mr E Von Brandis (DA; Western Cape) asked what was the impact on tax revenue by the moving of the headquarters of Anglo America to the United States.
Mr T Motlashuping (ANC; North West) asked what the role of the Committee was because the agreements are signed and the Committee ratified them. However, whether the Committee ratified it or not, the agreements stood. On the development of taxation agreements, he noted that there is a double submission to the Minister of Finance for approval, and he asked for clarity. On the point about making changes to agreements only after five years, he asked what happens when amendments to our legislation contradict the treaties. Is there recourse to change the agreements prior to that?
Mr V Mtileni (EFF; Limpopo) asked if South Africa is not being double taxed in the sense that it exports its raw resources to other countries with which South Africa might have agreements for processing – since the processed goods come back but with a new price. He did not understand why, for tax agreements, legal opinion is obtained from the State Law Advisers of the Department of Justice and Constitutional Development and of DIRCO. The Ministers of those two departments and their legal advisers scrutinise and approve the agreement. Only then is it taken to the National Assembly and National Council of Provinces and their Committees who "rubber stamp” the agreements. He wanted to understand the logic behind this and if it was not supposed to be vice versa. Was this not a problem that the parliamentary committees were being used as rubber stamps? The executive only needs the Committee’s stamp but when things go wrong, the Committees are faced with the responsibility. He asked the presenters who they work with on a day to day basis on the agreements. He referred to the financial ombudsman who was complaining about the R600 billion owed to the country and stated that the ‘powers that be’ mingle with the top five families that are doing business with the government and who are not paying tax. He wanted to know if SARS and the National Treasury are just rubber stamps or if they have any influence on the issue.
The Chairperson stated that the correct word to use is ‘ratification’ and not ‘rubber stamp’. He asked about the monitoring mechanism for the agreements, saying the presenters need to outline the whole process.
Mr Mvovo responded that Anglo America Plc is resident in the United Kingdom and its subsidiary in South Africa is incorporated into it and it has a tax residence in South Africa. It pays corporate tax on all its activities in South Africa and if it pays a dividend tax to its parent company it is subject to dividends tax.
On the submissions to the Minister, Mr Mvovo explained that the first submission is when there is a request for negotiations and a submission is made to the Minister for the approval to negotiate. Then they go and negotiate and come back to the Minister for approval of the negotiated agreement in the form of second submission. If the Minister is not happy with what has been negotiated, he will not approve it.
On making changes to agreements only after five years, and what to do then when proposed amendments to our legislation contradict the treaties, Mr Mvovo replied that this is always a difficult issue. He gave the example of dividends tax. An announcement was made in 2007 by the then Minister of Finance that South Africa was to repeal secondary tax on companies and replace it with dividends tax. The intention had been to introduce dividends tax in two years but there were about eight to twelve DTAs that gave exclusive rights to tax dividends to resident countries. All these treaties had to be renegotiated and the renegotiations took about five years or more. He cited the treaty of Botswana because it had a provision stating that they would not renegotiate within ten years. However, there is no treaty in our network that stated that, and other treaties do not stipulate a time period for renegotiation.
Ms Maharaj responded about the export of raw minerals and whether there was double taxation on the re-imported goods, saying there would not be a case of double taxation in that situation.
Ms Maharaj said that the process where a legal opinion from State Law Advisers is utilised is a legal and constitutional process that they have to follow for international agreements. It is quite useful because after the agreement is finalised, they take it to the Department of Justice for a review of any conflict. The State Law Advisers might propose some changes but normally only technical changes. They ensure that there is no conflict with legislation. Then when they go to the Department of International Relations and Cooperation, they also obtain an opinion there. DIRCO reviews the agreement to see if it is consistent with international law. This is good because the departments cannot suggest changes after they have issued these opinions. So when they come before the Committee, they are bringing the final agreement and it will be accurate. South Africa has model tax agreements for double taxation. They ensured when they did these models that there will be no problems when they bring these agreements to the parliamentary committees – that they have met all the requirements, and there is no conflict in law. To date, she did not think there has been a problem with their international agreements. When the parliamentary committees do a formal ratification, they scrutinise the presentations, so she does not think that there is rubber stamping.
On the ombudsman and the outstanding R600 billion, Ms Maharaj said that she works in the legal and policy section so it is difficult for her to tell the members operationally what is happening and how much is outstanding because that is information she does not have access to. The only people that are in a position to respond to this are the people working for SARS involved in recovery. SARS has many mechanisms to recover taxes. However, she felt that at times assets are moved out of the country and it then becomes difficult to recover the money because the assets will be lying outside of the country.
Mr Mvovo added that from the policy side, amendments are made to the tax legislation every year. They have pricing rules that place a cap on the money that can be taken out of the country. He could not answer from the operational side but in terms of policy, there are rules dealing with that.
Mr Twala said that he agreed with his colleague from SARS. On the concern about Parliament merely rubber stamping approval of international agreements, he said that this is not the case. The draft documents are sent to Parliament for preliminary consultation. Members have the chance to engage with the draft document and if they say no, there will be no procession to signature. They do that so that the draft document is taken for corrections before signature. Preliminary means before signature. Then they can go back and fix whatever problem is identified by the Committee.
The Chairperson thanked the presenters for the insight provided on International Tax Agreements which they will be dealing with over the next five years. The good news is that on 17 and 19 September the Committee will deal with over twenty tax agreements and the nitty-gritty details of specific agreements for each country.
Committee minutes: adoption
The Committee deliberated on the minutes of 22 August 2014 and they were adopted.
Mr T Motlashuping (ANC; North West) noted that a member of another Committee had sat in on the meeting.
The Chairperson responded that she was an invitee as they were doing an intervention in terms of Rule 105 of the NCOP rules, in consultation with other Committees. They were taking it a step further than just consultation and the member had been invited to the meeting as a representative of the Select Committee on Public Administration. He was glad that she had been at the meeting.
The meeting was adjourned.
This article first appeared on pmg.org.za.