Germany, Eswatini & Switzerland Double Taxation Agreement

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Finance Standing Committee

01 September 2021
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

In a virtual meeting, the Standing Committee on Finance met with National Treasury and the South African Revenue Services to be briefed on the amendment of South Africas tax treaties with Germany, Eswatini and Switzerland, and the formal ratification of the Kuwait Double Taxation Agreement.

The Committee was informed that the signatures and internal process for the Kuwait tax treaty experienced delays, and therefore the formal ratification of the Kuwait Double Taxation Agreement could not yet proceed.

National Treasury explained the purpose and protocol of tax treaties: Tax treaties are mainly to eliminate double taxation for the partner countries. Secondly, they provide certainty on when and how tax is to be imposed in a country. Thirdly, they help with tax collection between the tax authorities of the two countries, and mitigate tax evasion.

The South African Revenue Services highlighted the proposed amendments to tax treaties with Germany, Eswatini and Switzerland.

South Africa’s tax treaty with Germany first came into force in 1975. The amendments now seek to address Base Erosion and Profit Shifting (BEPS), often employed by companies to lower their taxation by shifting profits from a higher tax jurisdiction to a lower tax jurisdiction.

South Africa's treaty with Eswatini (previously Swaziland) came into force in 2005. The amendments account for Eswatini's name.

South Africa's first tax treaty with Switzerland came into force in 1968. The amendments seek to address taxation of dividends, royalties and pensions.

Overall, the amendments to tax treaties authorises exchange of information concerning taxes of every kind and description.

After this briefing with the Committee, the next step is the signing of the tax treaties done by a Minister, designated by the President. Thereafter, National Treasury will brief the Committee on the ratification of the tax treaties.

Meeting report

The Chairperson asked that the Committee proceed with the briefing by National Treasury (NT) and the South African Revenue Services (SARS) on the Germany, Eswatini and Switzerland Double Taxation Agreement (DTA) and the formal ratification of the Kuwait Double Taxation Agreement (DTA). He asked who would lead the presentation.

Ms Yanya Mputa, Chief Director: Legal Tax Design, NT,said that she would lead the presentation from National Treasury side and Mr Franz Tomasek ,Head: Legislative Policy, SARS,will lead the presentation from the SARS side. She indicated that the presentation would proceed with the exception of the formal ratification on the Kuwait DTA; they are not able to present on this today, because the State Law Advisors advised that the finalise the internal processes of approvals before the formal ratification of the Kuwait DTA proceeds.

The Chairperson said that Parliament needs to be given a full explanation on why National Treasury and SARS are not ready to present the formal ratification of the Kuwait DTA. Members cannot proceed when they do not know what they are agreeing to, otherwise it creates a problem with procedure. He requested a full explanation so that it can be on record, then the meeting can proceed and the Committee can meet with National Treasury and SARS on another day for the briefing on the Formal Ratification of the Kuwait DTA.

Ms Mputa replied that she would later present on the process regarding tax treaties. She explained that in terms of the process, the Ministers would first sign the tax treaties and thereafter the treaties go to the State Law Advisors, so that the State Law Advisors can confirm if the treaty is ready for ratification. The issue with the Kuwait DTA is that there were many delays in the signing and finalising of the tax treaty, which even resulted in a court judgement. She explained that a South African Minister signed the tax treaty in 2019 and a Kuwait Minister only signed it in 2021. Due to the delays, the State Law Advisors briefed National Treasury and SARS, that there is further internal process required by Cabinet before the tax treaty is ratified. In this regard, National Treasury and SARS must adhere to the State Law Advisor protocol before they bring the formal ratification before Parliament. She asked if Mr Tomasek would add further clarity.

Mr Tomasek replied that he would not add any further comment as Ms Mputa had covered the explanation very well.

The Chairperson requested that Ms Mputa provide the Committee with the explanation in writing, so that it is on record, that the delay in the formal ratification comes from the executives and not Parliament.

Presentation by National Treasury and SARS:

Ms Mputa presented the following:

Purpose of tax treaties:

- Mainly for the elimination of double taxation between the two countries that are tax treaty partners.
- Provide certainty as to when and how tax is to be imposed in a country.
- Mitigate instances of non-taxation, or reduced taxation through tax evasion or avoidance.
- Increase economic ties and development between the two countries.

 Overview of the tax treaty process
- Through the Department of International Relations and Cooperation (DIRCO), National Treasury will receive a request to negotiate a tax treaty with another country. An analysis is done to determine if it is feasible for South Africa to enter into a tax treaty with the particular country. If approved, negotiations of a tax treaty are done by National Treasury and SARS.
- Signing of a tax treaty is done by the Minister, after the President has issued a Presidential Minute designating the name of the Minister responsible for signing such a tax treaty.
- A tax treaty will only bind South Africa after it has been ratified by resolution in both the National Assembly and the National Council of Provinces. The tax treaty will only enter into force once it has been ratified in both countries.

Protocol for amending tax treaty between South Africa and Germany:

The investment flows show that Germany is investing more into South Africa, than South Africa investing into Germany.

- Rationale for the protocol amending South Africa/Germany Tax Treaty:

In 2010 South Africa received a request from Germany to renegotiate the 2008 revised tax treaty. South Africa also proposed changes for the revised treaty. Negotiations of the protocol amending the 2008 DTA between South Africa and Germany took place and the final draft English text of the Protocol was considered finalised by the officials of both states on 16 October 2019.

Ms Celeste van der Lith,Manager: International Development & Treaties, SARS,presented the following amendments to the 2008 South Africa/Germany tax treaty:

The proposed preamble provides for the elimination of double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third states).

- Article 2: Taxes Covered

The proposed changes are based on South Africas aim to coordinate and streamline all the withholding tax rates applicable to royalties, dividends and interest.

- Article 5: Permanent Establishment

The new paragraph 4 provides updated exclusions to the permanent establishment definition; and an overall requirement that the exclusions only apply to activities that are of a preparatory or auxiliary nature.

- Article 11: Interest

The new Article 11 provides a right of taxation of interest in the source state, but limits the rate of tax to 5% of the gross amount of the interest, provided that the beneficial owner of the interest is a resident of the other state. It also provides exemptions from withholding tax on interest in respect of the state, Central Banks and for debt instruments listed on recognised stock exchanges.

- Article 12: Royalties

The new Article 12 provides a right of taxation of royalties in the source state, but limits the rate of tax to 5% of the gross amount of the royalties, provided that the beneficial owner of the royalties is a resident of the other State.

- Article 13: Capital Gains

The new paragraph 2 provides for gains arising from the alienation of shares in a company or comparable interests, deriving more than 50% of their value directly or indirectly from immovable property located in a state, may be taxed in that state. It also provides the measurement of the 50% over the 365 days preceding alienation to address a situation in which assets are contributed to an entity shortly before the alienation in order to dilute the proportion of the value that is derived from immovable property.

- Article 17: Pensions, Annuities and Similar Payments

The new paragraph 1 clarifies the German text of the main tax treaty.

- Article 18: Government Service

Paragraph 6 is added to Article 18, that provides that salaries, wages and other similar remuneration as well as pensions paid by the Association of Chambers of Industry and Commerce for services by individuals to the SA-German Chamber of Commerce and Industry from government funds shall be taxable only in the state which pays the salary, wages and other similar remuneration as well as pensions.

- Article 22: Elimination of Double Taxation

The new paragraph 1, which relates to the position of Germany on the elimination of double taxation with regards to its residents, has been updated in line with their domestic law or treaty policy. Paragraph 3 is deleted.

- Article 23: Non-discrimination

The current paragraph 5 which permits a branch profits tax that may be 5% higher than the normal tax rate is deleted and the current paragraph 6 is renumbered as paragraph 5.

- Article 25: Exchange of Information

The new Article 25 authorises full exchange of information for taxes of any kind or description, automatic exchange of information and the exchange of banking information.

- Article 25a: Assistance in the Collection of Taxes

Under this new Article the two states are empowered to collect taxes on behalf of each other.

- Article 26: Limitation of Benefits

A new paragraph 1 is inserted, which introduces a general anti-abuse rule based on the principal purpose of transactions or arrangements.

- Article 29: Entry into Force

The new paragraph 3 now refers to the DTA signed in 2008.

- The Amending Protocol shall be ratified and the instruments of ratification shall be exchanged at Pretoria as soon as possible. The Amending Protocol shall enter into force together with the tax treaty.

Ms Mputa presented the following:

Protocol amending tax treaty between South Africa and Eswatini:

The investment flows show that Eswatini is investing more into South Africa, than South Africa is investing into Eswatini.

- Rationale for the protocol amending South Africa/Eswatini Tax Treaty:

To amend the name from Swaziland to Eswatini; and to replace Article 25, dealing with exchange of information, to take into account recent changes in international standards.

Mr Morne Van Niekerk,SARS,presented the following amendments to the 2005 South Africa/Eswatini tax treaty:

- Article 3: General Definitions

The updated subparagraph (f)(i) defines the term competent authority” to mean: in the case of Eswatini, the Commissioner-General, Eswatini Revenue Authority or an authorised representative of the Commissioner-General”. In addition, the updated subparagraph (f)(ii) clarifies in the case of South Africa, that an authorised representative means an authorised representative of the Commissioner.

- Article 25: Exchange of Information

This new Article is in line with the updated OECD Model and extends to taxes of every kind and description. It ensures that bank secrecy or the absence of a domestic tax interest can no longer be used to deny a request for exchange of information.

The new Article also allows information received by a state to be used for other purposes when the competent authority of the supplying state authorises such use and such use is allowed under the laws of both states.

Ms Mputa presented the following:

Protocol amending tax treaty between South Africa and Switzerland:

South Africa as an emerging market invested in Switzerland more than Switzerland invested in South Africa in 2018 and 2019. Further strengthening the investment relationship between the two countries.

- Rationale for the protocol amending South Africa/Switzerland Tax Treaty:

To align with the changes to Article 10, dealing with taxation of dividends; the replacement of Article 12, dealing with taxation of royalties; the replacement of Article 18, dealing with taxation of pensions; replacement of Article 22, dealing with elimination of double taxation; and the replacement of Article 25, dealing with exchange of information.

Mr Van Niekerk presented the following amendments to the revised 2009 South Africa/Switzerland tax treaty:

- Article 3: General Definitions

The new subparagraph (e)(ii) defines the term competent authority to mean: in the case of Switzerland, the Head of the Federal Department of Finance or his authorised representative;”

- Article 10: Dividends

The new paragraph 2(a) and (b), updates the withholding tax rates on dividends.

- Article 12: Royalties

The new Article 12 introduces a right of taxation of royalties in the source state, but limits the rate of tax in the source state to 5% of the gross amount of the royalties, provided that the beneficial owner of the royalties is a resident of the other state.

- Article 18: Pension

The new Article 18 introduces an additional paragraph which ensures that contributions to a pension fund or similar institution are treated in the other state in the same way and subject to the same conditions and limitations as contributions made to a pension scheme that is recognised for tax purposes in that other state. This allows for equal and reciprocal treatment of contributions.

- Article 22: Elimination of Double Taxation

The new paragraph 2, which relates to the position of Switzerland on the elimination of double taxation with regards to its residents, has been updated in line with their domestic law or treaty policy.

- Article 25: Exchange of Information

The new Article is in line with the updated OECD Model and provides for the exchange of information concerning taxes of every kind and description.

- Article 4 (Article VII): Protocol

The current paragraph 1 under the existing protocol to the tax treaty is deleted and replaced by a new paragraph 1 which provides clarity regarding the term resident of a contracting state” under Article 4.

- Article 18 (Article VIII)

The updated paragraph 2 provides that the term other retirement benefits” in Article 18 includes; in South Africa, payments made by retirement annuity funds and, in Switzerland, payments from tied individual savings accounts. It is further clarified that income as referred to in Article 18 also includes lump sum payments.

- Article 25 (Article IX): Protocol

The Article clarifies the operational aspects of Article 25 to assist the competent authorities dealing with the exchange of information.

Mr Van Niekerk concluded that each of the states shall notify to the other in writing, through the diplomatic channel, of the completion of the procedures required by its law for the bringing into force of this Protocol.

Discussion

The Chairperson asked if the draft DTAs had been distributed to Members.

Mr Allen Wicomb, Committee Secretary, replied that Ms Teboho Sepanya did send the draft DTAs to Members.

Ms Teboho Sepanya, Committee Secretary, agreed that she sent all documentation to Members.

The Chairperson asked Ms Mputa if there are timeframes as to when Parliament should ratify the three DTAs that were presented.

Ms Mputa said that there was no specific timeframe because the signature process would depend on both countries. Although South Africa might have signed, if the other country has not yet signed then the DTA cannot be formally ratified in Parliament. It is difficult to set timeframes for tax treaties because it depends on the executives of both counties.

The Chairperson asked Ms Mputa to recap the tax treaty process for South Africas DTA with Germany, Eswatini and Switzerland.

Ms Mputa replied that in this meeting,  National Treasury and SARS have provided the informal briefings to the Standing Committee on Finance. The next step is for National Treasury and SARS to request the President to issue a Presidential Minute, to designate the name of the Minister responsible for signing such a tax treaty. After the tax treaty is signed by the designated Minister, the tax treaty will be ratified, provided that the State Law Advisors do not ask for other internal approvals.

The Chairperson asked if any Member had a clarity seeking question or wanted to make a comment.

(Members did not indicate that they had questions)

The Chairperson asked the Committee Secretary to confirm that Members had no questions.

Mr Wicomb said that he had also not seen any Members raising their hands and there were no questions in the chat-box either.

The Chairperson said that he would accept that Members agreed with what was presented. He reminded National Treasury and SARS to submit an explanation as to why the Kuwait DTA was not prepared to be formally ratified, so that the Committee can include it in the minutes.

He asked the Committee Secretary if there were any announcements.

Mr Wicomb said that there was a proposed debate on the Financial Sector Laws Amendment Bill, next week Tuesday, 7 September 2021. He has not received the updated parliamentary programme so he is not sure if it is going ahead. As per the Committee programme, there will not be a meeting on Tuesday, because of that debate. On Wednesday, 8 September 2021, there will be oral questions to the Economic Cluster, so it is also proposed that there is no Committee meeting for Wednesday. The next meeting for the Committee would be Tuesday, 14 September 2021, which is proposed to be a joint meeting with the Select Committee on Finance, where the Committee would receive a briefing by legal services on the regulations issued in terms of the Financial Management of Parliament Act and Provincial Legislatures Act.

The Chairperson said that it looks as if the debate on the Financial Sector Laws Amendment Bill will go ahead next week. The Committee Secretary should check with the Programming Committee, so that Members can be prepared.

The meeting was adjourned.

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