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No tax on interest? Ruling pertaining to DTA between South Africa and Brazil

Monday, 12 November 2018   (0 Comments)
Posted by: Author: Louis Botha
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Author: Louis Botha (Cliffe Dekker Hofmeyr)

On 24 July 2006, the Convention between the Government of the Republic of South Africa and the Government of the Federative Republic of Brazil for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (DTA), came into force. The DTA, similar to other such double tax agreements, determines the taxing rights of each country where a resident of one contracting state earns income from a source in the other contracting state.

On 4 July 2018, the South African Revenue Service (SARS) issued Binding Private Ruling 307 (BPR 307), which deals with relief from double taxation of interest in terms of the DTA.

Facts and proposed transaction

The applicant, a South African resident company, proposes to enter into trades in respect of bonds issued by the Brazilian government (bonds). The applicant will:

  • enter into a purchase and resell agreement with international counterparties in terms of which it will acquire bonds from the counterparties and will agree to sell back the bonds to the counterparties on specified dates and for specified prices which will each include an interest component; and
  • acquire bonds in the market without any associated resell arrangements.

The applicant may in either case receive interest from the Brazilian government as issuer of the bonds during the term of the transaction. The interest that the applicant will receive is not subject to tax in Brazil.

In respect of the purchase and resell agreement, the applicant will pay the counterparties so-called manufactured payments calculated with reference to the interest it will receive while holding each bond. The applicant will recognise the purchase and resell agreements and the bonds at fair value in profit or loss in terms of International Financial Reporting Standard 9. BPR 307 further states that s24JB(2) of the Income Tax Act, No 58 of 1962 (Act) will apply to the instruments.

Please click here to read more.

This article first appeared on cliffedekkerhofmeyr.com.


 

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