Renegotiations of double tax agreements take time

Our current international reputation does not help.
Asking treaty partners to give up their exclusive taxing rights on pension fund income so SA can also have a bite of the cherry may prove challenging. Image: Shutterstock

The South African government seems committed to continuing with the renegotiations of multiple tax treaties to ensure South Africa retains taxing rights on payments from local retirement funds.

However, it may take several years before the negotiations are finalised. SA has gone back to its treaty partners on several occasions in recent years, wanting to renegotiate the terms of the treaties.

The 2021 proposal to unilaterally tax retirement funds when a South African becomes a tax emigrant attracted heated responses from industry players. The proposal did not make it into the Taxation Laws Amendment Bill. In this year’s budget National Treasury conceded that it had to revise “multiple tax treaties” to ensure taxing rights.

Read: Is the new exit tax constitutional?

Ernest Mazansky, head of Werksmans Attorneys’ tax practice, says it became apparent that SA had no legal basis for the initial proposal. It could not make the change by simply amending the Income Tax Act. It would have been in breach of the double tax agreements (DTAs).

“This is not something any respectable government wishes to be found guilty of,” says Hugo van Zyl, cross-border tax and exchange control advisor.

Not so easy

Government still has its eye on the taxing rights. “The truth is that the only proper way to handle it is to amend the double tax agreements which offend them,” says Mazansky.

He adds that it may take years to get the renegotiations done in full.

“Some may be quicker than others, but treaty partners are not going to easily agree to give up their exclusive taxing rights.”

Read: The tricky thing about double tax agreements

Mazansky, a member of the South African Institute of Taxation’s international business tax work group, says SA renegotiated its treaties when the secondary tax on companies (where the tax was borne by the company) was abolished and a dividend-withholding tax was introduced.

This change was normal, neutral, and most countries have withholding taxes on dividends – but asking treaty partners to give up their exclusive taxing rights on pension fund income, in order for SA to have a bite of the cherry as well, may be more difficult.

The partners will most probably want to know what they are getting in return, says Mazansky.

National Treasury says the bilateral tax treaties that require renegotiations are those tax treaties that do not have source right of taxation on pensions. It adds that the negotiations have not yet commenced, but will probably start during this year.

Where to start

Joon Chong, partner at Webber Wentzel, presumes that SA will start with renegotiating the DTAs of countries that South Africans are flocking to.

She mentions the UK, Australia, New Zealand, the People’s Republic of China, the Hong Kong special administrative region, Denmark, Germany, Italy, Portugal and Spain.

The UK, Australia and New Zealand have sole taxing rights on SA-sourced pension income of residents in their countries, despite it being paid from SA.

Chong notes that in most instances the retirement funds would have accumulated to the emigrant while they worked in South Africa, meaning the source of the funds is SA and the funds would also have been invested tax-free in SA.

The emigrants enjoyed the benefit of tax deductions for their retirement contributions while in SA, and tax-free growth in the fund.

“It would only be fair to allow South Africa taxing rights on the annuities or lump sum withdrawal from these retirement funds,” adds Chong.

However, until treaties are successfully renegotiated the exclusive taxing rights remains in place. Some commentators remark that not everyone may be willing to give up this right.

Van Zyl says most new DTAs now allow for both countries to have taxing rights on retirement income. However, the taxpayer is granted a credit if the same amount is taxed in the country of residence and in SA. This is to alleviate the impact of double taxation.

Read: G7 reaches historic agreement on global tax reform

Lost shine

SA was a “shining star” with the dawn of democracy; everyone wanted to do business with SA and everyone wanted to sign treaties with us. Since then SA has lost some of its shine.

The country has also not improved its international reputation by the way it conducts its foreign affairs policies, one commentator said on condition of anonymity.

“Double tax agreements are not only a treasury-to-treasury matter. They also involve the foreign affairs ministries of the various countries …

“… and it does not help if you are sympathetic to North Korea or refuse to condemn the Russian invasion of the Ukraine.”

Technical issues

Van Zyl says some technical issues, where tax is incorrectly deducted from non-residents’ retirement income, are currently being experienced.

He suspects this stems from the change that became effective in March this year where the South African Revenue Service (Sars) does an override tax calculation on the total income of retirees to determine the tax that should be withheld by the retirement fund.

He says despite non-residents having obtained a so-called “nil directive” (an application for relief from SA tax on pension and annuities in terms of a DTA) it is being overriden and pension funds are incorrectly instructed by Sars to deduct tax in instances where SA has no taxing rights.

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