SA-Mauritius tax treaty comes into force

Government has gazetted the South Africa-Mauritius tax treaty which came into force at the end of May, said National Treasury.

“This new treaty reflects changes in the tax policies of the two countries and is in line with international best practices to deal with tax abuse as outlined in the Organization for Economic Cooperation and Development (OECD) Model Tax Convention. The new treaty deals inter alia with the treatment of dual residence for persons other than individuals and withholding taxes on interest and royalties,” said National Treasury on Thursday.

The tax treaty, which came into force on 28 May, was gazetted on Wednesday. It replaces the 1996 South Africa-Mauritius tax treaty.

In November 2009, the two countries started renegotiations for the new tax treaty with the renegotiations being finalised, in January 2011. The main driver for the renegotiation of the old tax treaty was to curb abuse of the old treaty.

The new treaty was signed by the two countries on 17 May 2013. The South African Parliament ratified the new treaty on 14 September 2013. Mauritius notified South Africa of its ratification of the new treaty on 28 May 2015.

The main changes to the old tax treaty include a revised test for dual residence for persons other than individuals; withholding taxes on interest and royalties; capital gains tax; removal of tax sparing provision and assistance in tax collection.

When coming to dual residence for persons other than individuals the tie-breaker clause in the new tax treaty, in Article 4(3), follows the alternative test under paragraph 24.1 of the Commentary to the OECD Model Tax Convention. It provides that the Competent Authorities of the Contracting States shall, in any case where a person other than an individual is a resident of both States, endeavour to settle the question by mutual agreement and determine the mode of application of the Agreement to such person.

In order to provide greater certainty to the small number of companies that may be affected by the change, South Africa and Mauritius have signed a Memorandum of Understanding (MoU) which sets out the factors that the two competent authorities will take into account in deciding the country of residence.

The MoU draws on the guidance provided in commentaries to the OECD and UN Model Tax Conventions, as well as the ongoing Base Erosion and Profit Shifting (BEPS) initiative work, so its approach will be familiar to multinational enterprises.