Two new double tax agreements
25 January 2016
Posted by: Author: PwC South Africa
Author: PwC South Africa
Readers will note from SARS Watch that a new double taxation agreement between South Africa and Kenya was recently published in the Gazette. Subsequent to this, a further agreement, this time with Hong Kong, was published in the Gazette on 24 November 2015. Both of these agreements come into effect in South Africa as from 1 January 2016. In Kenya, the DTA also takes effect on 1 January 2016, whereas the agreement with Hong Kong will be effective in that jurisdiction from 1 April 2016.
The South African Revenue Service has been active in the treaty negotiation process over the past few years and the conclusion of agreements with these two countries is welcomed.
For South African residents doing business with Kenya, the agreement is particularly welcome. The 25% domestic withholding tax imposed by Kenya on fees payable to non-residents was a serious impediment to South Africa’s consultancy concerns doing business with Kenya. Under the new agreement, these fees will be taxable in Kenya only if they are derived through a permanent establishment of the South African resident in Kenya.
However, persons rendering consultancy services to either of these foreign jurisdictions should be aware that the agreements contain a ‘services permanent establishment’ provision, in terms of which a permanent establishment includes:
‘the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by an enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within the Contracting State for a period or periods exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned.’
The abolition of section 6quin of the Income Tax Act has imposed a duty on SARS to ensure that it aggressively protects its residents from taxation imposed by foreign jurisdictions in contravention of the terms of a double taxation agreement. Residents should be astute to ensure that they are familiar with the terms of the new agreements.
Corporate residence is subject to a tie-breaker provision in both agreements which states that where a person other than an individual is a resident of both contracting states, such person will be deemed a resident of the state in which its place of effective management is situated.
An element of debate is introduced in the Hong Kong agreement, which states that, in cases of doubt, the competent authorities must attempt to resolve the matter by way of mutual agreement, taking into account all relevant factors; in the absence of such agreement, the person will be denied benefit under the treaty (subject to limited exceptions).
Withholding tax rates are limited, as follows:
Dividends to company holding >10%
International agreements are a catalyst for trade, and these new agreements should not prove an exception to this rule.
This article first appeared on pwc.co.za.