Australia And South Africa Update Tax Treaty

by Mary Swire, Tax-News.com, Hong Kong

02 April 2008

Australia and South Africa have signed a new protocol to revise the tax treaty between the two countries dating from 1999.

The protocol was signed by Australia’s High Commissioner in South Africa, Philip Green, and the acting Minister of Finance in South Africa, Geraldine Fraser-Moleketi, in South Africa on March 31st.

“The protocol updates the taxation arrangements between Australian and South Africa which will enhance Australia’s relationship with South Africa by further assisting trade and investment flows,” Australian Assistant Treasurer, Chris Bowen, explained.

“The protocol aligns withholding tax rate limits for dividends, interest and royalties and capital gains tax treatment more closely with Organisation for Economic Cooperation and Development (OECD) practice," he added.

The protocol addresses Australia’s ‘most favoured nation’ obligation in the existing treaty by inserting rules to protect taxpayers of one country operating in the other country from tax discrimination.

These rules broadly align with international tax treaty practice, and protect Australian nationals and businesses operating in South Africa and vice versa. The rules are similar to those found in other recent Australian tax treaties.

It also extends the scope of the existing exchange of information provisions to conform with modern OECD standards, and introduces measures which provide for cross-border collection of tax debts.

The protocol additionally amends the withholding tax rates that may be imposed on cross-border dividends, interest and royalties. Under the treaty, dividends, interest and royalties paid from one country (the source country) to a person who is a resident in the other country will generally remain taxable in both countries, but with certain new limits on the tax that the source country may charge on payments to residents of the other country.

The protocol will enter into force when both countries advise that they have completed their domestic requirements. In the case of Australia, legislation for this purpose will be introduced in parliament "as soon as practicable", according to Bowen.

The following is a summary of technical changes to the Australia/South Africa tax treaty:

Dividends

The new Dividends Article provides for a withholding tax rate limit of 5% for all non-portfolio inter-corporate dividends. This will replace the current zero rate for non-portfolio inter-corporate dividends paid out of profits that have borne full company tax. A 15% rate applies for all other dividends. These rates are consistent with the OECD Model Tax Convention.

The revision of the non-portfolio inter-corporate dividend withholding tax rate was negotiated in the context of the South African Government's announcement of changes to its system of taxing corporate profits in its 2007/08 Budget.

These changes include the phasing out of the secondary tax on companies (which is not subject to treaty limitations) and the introduction of a dividend tax on shareholders. The implementation of these changes is subject to renegotiation of dividend withholding tax rates by South Africa in several of its tax treaties, including its tax treaty with Australia.

Australian non-portfolio investment in South Africa will generally benefit from reduced total South African tax on corporate profits as a result of these changes. The protocol will not change Australia’s treatment of franked dividends. Franked dividends paid to South African residents will continue to be exempt from withholding tax.

Interest

Source country tax on interest will continue to be limited to 10%. However, no tax will be chargeable in the source country on interest derived by:

  • The government of the other country from the investment of official reserve assets; or
  • A financial institution resident in the other country.

These exemptions are subject to certain safeguards, which aim to assist in discouraging tax avoidance.

Royalties

The general limit for royalties will be reduced from 10% to 5%. The protocol also provides that amounts derived from equipment leasing (including container leasing) will be excluded from the royalty definition. Such amounts would either be treated as profits from international transport operations or as business profits.

Other features

The protocol also contains:

  • An expanded list of taxes covered;
  • A refined definition of ‘permanent establishment’ including prescribed time limits for the creation of a permanent establishment where an enterprise operates substantial equipment or is engaged in the exploration for, or exploitation of natural resources;
  • Provisions which align capital gains tax treatment more closely with Australian law and OECD practice. Australia’s taxing rights over Australian real property and the business assets of a foreign resident’s Australian permanent establishment are preserved; and
  • Improved integrity measures to provide for more effective exchange of information on a broader range of taxes, including goods and services tax, and to provide for reciprocal assistance in collection of taxes.

Upon entry into force, the provisions of the protocol relating to withholding taxes will have effect within two months, with other provisions having effect from the dates specified in the protocol.

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