Page 734 - SAIT Compendium 2016 Volume2

BGR 9 INCOME Tax aCT: BINdINg gENERaL RuLINgS BGR 9
the dividends article of South Africa’s tax treaties thus enabling a non-resident shareholder to secure a lower rate of dividends tax when applicable.*
The liability for dividends tax on a dividend in specie falls on the company paying the dividend.† In such event the tax is not a tax on the shareholder but a form of corporate tax similar to STC. Whether a non-resident shareholder will be able to secure a tax credit for dividends tax in these circumstances will depend on the system for taxing dividends in the non-resident’s country of residence – the same principles that applied to STC will apply to dividends tax on a dividend in specie. Under section 64FA (2) (a) a company that distributes an asset in specie to a non-resident will be entitled to the lower rate speci ed in a tax treaty if the non-resident submits the required form to the company.
The question arises whether dividends tax is covered by South Africa’s tax treaties even though it may not be speci cally named as a covered tax.
Article 2 of the OECD Model Tax Convention on Income and on Capital (OECD Model) reads as follows: ‘ARTICLE 2
TAXES COVERED
1. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.
2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
3. The existing taxes to which the Convention shall apply are in particular: a) (in State A): .......................................................
b) (in State B):.......................................................
4. The Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any signi cant changes that have been made in their taxation laws.’
The United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) includes a virtually identical article. The OECD comments as follows on Article 2 of the OECD Model:‡
‘3. This paragraph gives a de nition of taxes on income and on capital. Such taxes comprise taxes on total income and on elements of income, on total capital and on elements of capital.’
(Emphasis added.)
Dividends tax is a tax on an element of income.
Certain tax treaties do not contain paragraphs 1 and 2 of the OECD and UN Models but nevertheless contain a similar provision to paragraph 4. For example paragraph 2 of Article 2 of the tax treaty between South Africa and the United States of America reads as follows:
‘2. This Convention shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any signi cant changes that have been made in their respective taxation laws or other laws affecting their obligations under the Convention, and of any of cial published material concerning the application of the Convention, including explanations, regulations, rulings, or judicial decisions.’
The test of “identical or substantially similar taxes” is applied to the listed taxes of both Contracting States.
The competent authority for South Africa has informed the competent authorities of all South Africa’s treaty partners about the introduction of dividends tax into South African domestic law and has furnished them with the relevant information. This has been effected under the paragraph in Article 2 which pertains to a change in domestic tax law, thereby ful lling the requirements stipulated in Article 2 and ensuring that dividends tax is viewed as a covered tax under South Africa’s tax treaties.
This process will be repeated for the withholding tax on interest thus ensuring that it is also viewed as a covered tax under South Africa’s tax treaties.
The competent authorities were also informed that dividends tax is similar to STC since it is also a tax on income. Consequently, it is considered to be a tax substantially similar to the taxes covered under Article 2 of the tax treaties.
3.4 Taxes which are not taxes on income or similar taxes
South African taxes as at the date of publication of this BGR which are not taxes on income or similar taxes, and thus do not qualify for treaty relief, include the following:
• Customs and excise duties
* Article 10 of the OECD Model contains the dividends article. For a list of the tax treaty rates see “Dividends Tax – Summary of DTA rates” (version 3) dated 21 June 2012 available on the SARS website under Tax Types/Dividends Tax.
† Section 64EA (b).
‡ Condensed version, 22 July 2010 at 75.
726 SAIT CompendIum oF TAx LegISLATIon VoLume 2