SA renegotiates double tax agreement with Mauritius

Posted On Tuesday, 13 August 2013 08:51 Published by Commercial Property News
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SOUTH Africa has renegotiated its double tax agreement with Mauritius following earlier concerns by the South African Revenue Service (SARS) and the Treasury that South African multinational were abusing the current treaty negotiated in 1996.

Ernest MazanskyTax experts on Sunday said the new treaty, which is expected to come into effect in 2015, raises "significant constitutional concerns" as it puts tax authorities in a position where they may exercise powers that properly belong to Parliament.

According to Johan Hatting, PwC’s senior international tax manager, the most significant deviation in the new treaty concerns companies that are tax resident in both Mauritius and South Africa. Such dual residents are subject to double taxation, but with tax treaties such double taxation is resolved by determining that a company will only be tax resident in the treaty state in which its "place of effective management" is situated.

Mr Hatting says under the new Mauritius tax treaty, the effective management criterion is substituted with an administrative discretion which means SARS and the Mauritian authorities must agree on whether a dual resident company should be taxed only in Mauritius or only in South Africa. If SARS does not reach an agreement with its Mauritian counterpart, the company will pay tax in South Africa and in Mauritius.

"Such a dual resident will not have an effective legal remedy against any decision or lack of agreement by the revenue authorities. This is because there is no objective rule in the new tax treaty in respect of which a court of law may adjudicate a taxpayer compliant," Mr Hatting said.

There is also no automatic right of representation for such a taxpayer during the mutual agreement procedures when the two tax authorities decide where the taxpayer must pay tax.

This raises constitutional concerns, he added.

The South African authorities have been critical of the Mauritian headquarter company dispensation, that had been far more favourable than that of South Africa. Finance Minister Pravin Gordhan announced a new headquarter company regime for South Africa more than three years in an effort to attract foreign investments.

The regime was not met with great enthusiasm. Some amendments were made in an effort to make it more attractive, however it did not deliver the desired results. Ernest Mazansky, a tax director at Werksmans Tax, wrote in an earlier article that Mauritius has been able to persuade a growing number of foreign companies to use it as a base for investing into their African operations, mainly because of its "benign tax environment".

"This success has not gone unnoticed by South Africa, whose well-developed, reliable infrastructure far outweighs the non-tax investment advantages of any other African location, including Mauritius," Mr Mazansky said.

Mr Hatting said Parliament was briefed about the renegotiations of the tax treaty in February 2011. It was said that the mutual agreement dispensation under the new treaty was designed to convey a message to companies.

That message was that if they caused confusion as to their place of residence, then they could not expect to benefit from these treaties.

"This speaks to the heart of the reason why South Africa sought to renegotiate the 1996 tax treaty — the concern that South African corporate taxpayers were ‘abusing’ the treaty by investing through intermediate Mauritian holding companies into other countries. SARS is well known to have aggressively examined the tax residency in Mauritius of such investment holding companies," Mr Hatting said.

Source: TheTimes

Last modified on Tuesday, 13 August 2013 10:44

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