South Africa: Uncertainty Arises Over New Double Tax Treaty with Mauritius

Foreign companies that have invested in South Africa via Mauritian-registered vehicles are also bound to be affected.

South Africa has renegotiated its double tax agreement with Mauritius following the South African Revenue Service’s (SARS’s) and the Treasury’s concerns that South African multinationals were abusing the treaty concluded in 1996.

The renegotiated treaty will make Mauritius far less attractive as a destination from which to expand into Africa, or for South African companies to invest into the continent and the rest of the world. But t ax experts are not convinced that making Mauritius less attractive will be to the benefit of South Africa as an investment destination.

There were other "tax favourable" destinations such as Botswana and Dubai that still offered strong competition.

Tax experts said on Sunday that the new treaty, expected to come into effect in 2015, raised "significant constitutional concerns", as it put the tax authorities in a position where they might exercise powers that properly belonged to Parliament.

Johan Hatting, PwC’s senior international tax manager, said the most significant deviation in the new treaty concerns companies that are tax resident in both Mauritius and South Africa. Such dual residents would become subject to double taxation.

Tax treaties usually resolved such double taxation by determining that a company would only be tax resident in the treaty state in which its "place of effective management" was situated.

Under the new Mauritius tax treaty, the effective management criterion was substituted with an "administrative discretion", Mr Hatting said. This meant SARS and the Mauritian authorities had to agree on whether a dual resident company should be taxed only in Mauritius or only in South Africa.

If SARS did not reach an agreement with its Mauritian counterpart, the company would pay tax in South Africa and in Mauritius.

Mr Hatting said it was not uncommon for tax authorities to negotiate some matters, but he was not aware of any other country were they had to agree on the residence status of a company.

The Organisation for Economic Co-operation and Development model tax treaties state that the place of effective management is where important management and commercial decisions necessary for the conduct of the enterprise’s business are made. A company may have more than one place of management, but it can have only one place of effective management at any one time.

But with the change to the treaty between South Africa and Mauritius, the final word on where effective management takes place will be with the tax authorities.

SARS spokesman Adrian Lackay said on Sunday if no agreement could be reached between the competent authorities where effect management took place, the company concerned would be denied the benefit of the tax treaty. Most companies had their place of effective management in the country in which they were incorporated, he said.

Where dual residence occurs, it often does so in the context of complex tax planning arrangements. It is, therefore, appropriate for the competent authorities to scrutinise the specific facts of these cases carefully before coming to a decision as to where the company is resident.

"A critical point to note is that even in the unlikely event that agreement cannot be reached between the competent authorities, South African law permits tax relief for tax paid by a resident company in another jurisdiction," Mr Lackay said.

The new treaty provides for a mutual agreement procedure between Mauritius and South Africa if a taxpayer believes it has not been taxed in accordance with the agreement in place between the two countries. Mr Lackay said under certain circumstances a taxpayer might invoke domestic dispute resolution mechanisms, which could end up with an approach to the courts.

Mr Hatting said the lack of clear guidelines that would be considered when deciding on the country in which tax was due caused uncertainty. "South African companies must be wary of their Mauritius structures."

The South African authorities have been critical of the Mauritian tax dispensation that has been far more favourable to companies than that of South Africa.

Finance Minister Pravin Gordhan announced a new headquarter company regime for South Africa over three years ago in an effort to attract foreign investment. The new regime was not met with great enthusiasm. Some changes were made to make it more attractive, but take-up has been tepid.