South Africa and Mauritius agree on corporate residence rules under new tax treaty
04 June 2015
Posted by: Author: Webber Wentzel
Author: Webber Wentzel
The governments of South Africa and Mauritius have signed a Memorandum of Understanding (MoU) on 22 May 2015, setting out how the so-called corporate residence tie-breaker test will be applied when the revised tax treaty between the two countries comes into force.
The new tax treaty itself was signed in Maputo on 17 May 2013 and has been ratified by South Africa, but has not yet come into force, because it has not been ratified by Mauritius. It is believed that the new Mauritius government has sought to clarify how the new treaty will be applied, particularly the controversial residency test, before bringing the treaty into force. It would now seem likely that the new tax treaty will come into force as it stands and not be re-negotiated or cancelled, as seemed possible.
The new tax treaty contains an unusual tie-breaker test for corporate tax residency. In terms of the treaty, if a company is considered a tax resident of both Mauritius and South Africa under the domestic laws of each country, then the exclusive state of residence of the company, for the purposes of applying any tax relief available under the treaty, would be decided by mutual agreement between SARS and the Mauritius Revenue Authority (MRA). Almost every other tax treaty in force with South Africa uses the 'place of effective management' (PoEM) test as the so-called tie-breaker.
The existence of this 'mutual agreement procedure' as a tie-breaker has led to considerable uncertainty and concern among multi-nationals that have Mauritian companies in their group structures. Such a procedure has generally been considered unworkable and a barrier to trade and investment. Mauritius has an extensive network of tax treaties with African countries, as well as a low tax rate and no exchange controls, so has been a popular intermediary holding company jurisdiction.
For example, a company incorporated in Mauritius would generally be considered tax resident in Mauritius. However, if SARS believed that the company had a PoEM in South Africa, it would also be considered tax resident in South Africa under the domestic definition of 'resident'. In terms of the new treaty, SARS and the MRA would need to agree where the company was resident in that instance.
The MoU sets out various factors that SARS and the MRA will take into account to determine a company's (or trust's) state of residence, namely:
- 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.
With respect to item (7) above, this is a clear reference to changes to the OECD definition of corporate residence that may be agreed upon in future by member states as part of the ongoing initiative to counter cross-border tax avoidance. The items in (1) to (6) above are the factors currently listed in paragraph 24.1 of the OECD Commentary on Article 4(3), which contains the model residency definition for juristic persons.
Although the MoU does add some certainty to the application of the new treaty, it does not do away with the potentially administratively burdensome and potentially very slow process of mutual agreement that the treaty requires.
This article first appeared on webberwentzel.com.