South Africa, Mauritius DTA Revisions Could Catch Out Multinationals

by Lorys Charalambous, Tax-News.com, Cyprus

According to Johan Hatting, PricewaterhouseCoopers senior international tax manager, the revised double taxation agreement (DTA) between South Africa and Mauritius, which was signed on May 17 this year and should, from January 1, 2015, replace the original treaty signed in July 1996, could prove problematic for South African multinationals.

There had been fears that, due to National Treasury concerns that South African multinational companies were abusing the tax resident provisions of the old treaty through intermediate Mauritian investment and service companies, and thereby were being accused of reducing South Africa’s tax base, the DTA would, in fact, be cancelled. In effect, however, the agreement will survive, albeit with significant changes.

Hatting believes that “the most significant deviation in the new treaty concerns companies that are tax resident in both Mauritius and South Africa.” He points out that, while South Africa has usually followed the internationally-standard determination of tax residence as where a company has its “place of effective management,” that criterion is being substituted with administrative discretion in the revised DTA with Mauritius.

Accordingly, he adds, the South African Revenue Service (SARS) and the Mauritian authorities would have to “endeavor” to reach “mutual agreement” on whether a dual resident company should be taxed only in Mauritius or only in South Africa. Therefore, if SARS does not reach an agreement, the dual resident company could be subject to double tax.

“Effectively, it will in future be up to SARS and the Mauritian counterpart to determine where a dual resident entity must pay tax,” Hatting concludes. “Moreover, 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 complaint.”

Hatting comments that the revised DTA with Mauritius also “brings unwelcome news for foreign taxpayers that hold investments in South African property rich companies. Investment in mining will be particularly affected.” The 1996 DTA exemption from South African capital gains tax for such investments is repealed under the revised agreement.

The new treaty will also modify the South African withholding tax on dividends, interest and royalties, and introduce the latest OECD standard for the exchange of taxpayer information.

Hatting concludes that “the question is whether South African multinationals will relocate their international investment, finance and/or group services activities from Mauritius to South Africa when the new tax treaty becomes applicable. It may be that other countries that have been competing in this space far longer than South Africa may be the real benefactors.”