Bad news for the bloke in the suit sitting on the beach

Mauritius has long been a favoured destination for tax nerds.

Prior to 2001, many South African companies scored billions in tax savings by simply paying royalties to Mauritian companies, paying minimal tax in Mauritius and returning tax-free dividends to South Africa. Many of these tax arrangements have now been closed down by the Treasury.

South Africa tries to promote itself as the springboard for international investment in Africa. We have a preferential international-headquarter company tax package that attempts to compete with Mauritius. But Mauritius still offers substantially lower corporate tax rates, no capital gains tax and a range of international tax treaties. So the bloke who stands out in a suit among the holiday revellers is usually a tax nerd.

Although there are huge volumes written on tax residence, each case depends on its own merits and interpretation. Even with the tests contained in the legislation, the intended result of an arrangement is often challenged by the tax authorities.

South Africa recently concluded a new tax treaty with Mauritius. It poses a risk to inward investors to South Africa from Mauritius because of a “deadlock clause”, whereby both the Mauritian and South African tax authorities target the same taxpayer.

The new treaty provides that in the case of a dispute between the tax authorities, they will come to an agreement. But if they cannot agree, the tax treaty will be of no force or effect. The taxpayer is then left trying to eliminate double taxation through the use of tax credits and rebates.

The agreement also provides a generous maximum withholding tax rate on royalties of 5%. Even though dgfev online casino South Africa has again delayed the implementation of withholding tax on interest, the treaty provides for a maximum of 10%. Withholding tax on dividends is limited to 5% (if the shareholding exceeds 10%) and 15% in all other cases.

Will the new treaty cause investors to favour the South African tax package for international investment over the Mauritian package? Tax considerations aside, with the current state of the South African economy, I doubt it.

The agreement still has to be ratified by parliament, published in our Government Gazette and ratified by Mauritius. This is usually a formality.

Any company with dealings between South Africa and Mauritius would not be doing much wrong if it assessed its tax residence exposure to the new treaty sooner rather than later.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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