THE renegotiated double-taxation agreement between South Africa and Mauritius should not be a concern to any group that has structured its affairs properly, says Werksman tax head Ernest Mazansky.
His comments come as South Africa has renegotiated its double-taxation agreement with Mauritius following earlier concerns by the South African Revenue Service (SARS) and the Treasury that South African multinationals were abusing the current treaty, negotiated in 1996.
Mr Mazansky said where a Mauritian company was not merely a “post box” company but truly had its effective management in Mauritius, there was nothing to fear under the current treaty, nor would there be anything to worry about under the new treaty.
However, Mr Mazansky also said it was often easier said than done to ensure that there was no effective management in South Africa, which was why so many Mauritian structures were at risk.
Under South Africa’s domestic law a company is resident where it has its place of effective management, whereas under Mauritian law it is resident where it is incorporated or where it is managed and controlled. If, under the existing treaty, the company is resident in both countries, the tie-breaker article states that the company would be resident where it has its place of effective management.
Mr Mazansky said that in marginal cases there was no doubt that the new treaty deprived a taxpayer of legal rights to obtain a more certain outcome.
SARS commissioner Oupa Magashula said in a letter to Business Day this week that few companies would be affected by the change in the tie-breaker rule to decide a company’s country of residence if it was resident in both countries under their domestic laws. If no agreement could be reached between the South African and Mauritian tax authorities, the company would end up paying tax in both countries.
Mr Magashula said the emphasis placed on the uncertainty created about the possibility of double taxation was alarmist and incorrect. Far from resulting in double taxation, the mutual-agreement approach was intended to help counter abuses of treaties that might result in double non-taxation.
Mr Mazansky said if it was only a small minority that were at risk, one wondered why there was a need for the change and why the existing laws were not enforced more vigorously in respect of those minority of cases. “After all, if they fail under the new treaty, they would have failed under the old treaty,” Mr Mazansky said.
“While it is true, as the commissioner says, that a mutual-agreement procedure between tax authorities is not an uncommon method of resolving a deadlock as to residence, this does not make it any the more acceptable,” Mr Mazansky said. The treaty had also been renegotiated as it did not permit withholding taxes on interest and royalties.