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ICAZ TAX SEMINAR
DOUBLE TAX TREATIES: COMPANIES
Presented by M. NGORIMA
22 February 2018
DISCUSSION POINTS
Page 2
1. What are double tax treaties?
2. Model Treaties
3. OECD Model Treaty – Basic template
4. Model Treaty – Chapters
5. Double Tax Articles
6. Double Taxation Agreements
ICAZ Tax Seminar
WHAT ARE DOUBLE TAX TREATIES?
Page 3
International agreements between two or more countries
Relieve double taxation -allocate taxing rights between the treaty
partners
Remove the problem of “dual residence” by assigning to one country
Prevent fiscal evasion –provides for exchange of information etc
ICAZ Tax Seminar
MODEL TREATIES
The OECD Model Treaty is often used as a basis for discussion
This is a template, used as an aid to negotiation
The specific treaty will take into account the tax systems in the
respective states
Other Models –UN, US
We will concentrate on the OECD Model for our analysis of treaty
principles and common issues
Every “real” treaty is different, even though they may look the same at
first glance –in a client situation, it is essential to examine the treaty in
front of you
Ensure that you are using the current treaty
ICAZ Tax Seminar
Page 4
THE OECD MODEL TREATY – BASIC TEMPLATE
Page 5
Split into chapters
Each Chapter has one or more Articles
Taxation of income articles usually give you your “answer”
But the rest is important too –the devil can be in the detail
ICAZ Tax Seminar
THE MODEL TREATY - CHAPTERS
Page 6
Scope of the treaty –Persons and Taxes covered
Definitions –General, “Resident”, “Permanent Establishment”
Taxation of Income (allocation of taxing rights)
Taxation of Capital
Methods for elimination of double taxation (exemption, credit)
Special provisions –Mutual Agreement, Exchange of Information
Procedures for entry into force and termination
ICAZ Tax Seminar
DOUBLE TAX ARTICLES
Page 7
Article 1: Persons covered
Article 2: Taxes covered
Article 3: General definition
Article 4: Resident
Article 5: Permanent Establishment
Article 6: Income from immovable property
Article 7: Business Profits
Article 8: International transport
Article 9: Associated Enterprises
Article 10: Dividends
Article 11: Interest
Article 12: Royalties
Article 13: Technical fees
Article 14: Capital Gains
Article 15: Income from employment
Article 16: Directors’ fees
ICAZ Tax Seminar
DOUBLE TAX ARTICLES
Page 8
Article 17: Entertainers\ Sports persons
Article 18: Pension\Annuity
Article 19: Government Services
Article 20: Students
Article 21: Other Income
Article 22: Elimination of double taxation
Article 23: Non-Discrimination
Article 24: Mutual Agreement Procedure
Article 25: Exchange of information
Article 26: Collection of Tax
Article 27: Diplomats
Article 28: Entry in force
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TREATY SCOPE: ARTICLE 1
Page 9
Treaty only applies to persons who are residents of both states
PE cannot claim treaty benefits
“Person” defined in Zimbabwe/South Africa agreements
“Includes an individual , an estate, a trust, a company and any other
body of persons treated as an entity for tax purposes.
ICAZ Tax Seminar
TAXES COVERED: ARTICLE 2
Page 10
Treaties apply to taxes on income (including gains and capital
appreciation), and on capital
HC and FC taxes defined
Includes similar taxes subsequently imposed
- Income Tax
- NRST
- NRTF
- NRTR
- RTI
- CGT
ICAZ Tax Seminar
GENERAL DEFINITIONS: ARTICLE 3
Page 11
This article defines treaty terms such as: ART
- Person 3.1 (a)
- Company 3.1 (b)
- Enterprise 3.1 (c )
Terms not defined 3.2
Definition of respective territories
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DOUBLE TAX TREATIES: RESIDENCE – ARTICLE 4
Page 12
“Resident” for treaty purposes if liable to tax in a Contracting State
because of domicile, residence, place of management or other
criterion of a similar nature
Excludes cases where liability is restricted to income sources in that
State
A company can be resident in both Contracting States under the above
rule, in which case there is a “tie-breaker” clause
ICAZ Tax Seminar
DOUBLE TAX TREATIES: RESIDENCE – TIE-BREAKERS
Page 13
Traditionally, the tie-breaker gives residence status to (only) the State in
which the place of effective management (POEM) is situated
In some treaties (including US, Canada), residence is determined by Mutual
Agreement Procedure (MAP) between the two Contracting States
Trend towards MAP tie-breakers in other new treaties
OECD Commentary suggests criteria to be considered in MAP –very similar to
the existing POEM considerations, but adds that the use of the tie-breaker
for tax avoidance can be a valid consideration
If no agreement is reached, or if the Competent Authorities so decide, the
company will be dual-resident
ICAZ Tax Seminar
RESIDENCE – ARTICLE 4 [Cont’d]
Page 14
What happens where there is no single location for board meetings/POEM?
New communication technologies –video conferences, virtual meetings online
OECD discussion draft (2003) looked at possible alternative tie-breaker clauses
Commentary suggests mutual agreement procedure as an alternative to
effective management
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PERMANENT ESTABLISHMENT : ARTICLE 5
Page 15
1. For the purposes of this Agreement, the term "permanent establishment" means
a fixed place of business through which the business of an enterprise is wholly
or partly carried on.
2. The term "permanent establishment" shall include especially: —
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a warehouse, in relation to a person providing storage facilities for others;
(g) a mine, an oil or gas well, a quarry or any other place of extraction of
natural resources; and
(h) an installation or structure used for the exploration of natural resources.
3. The term "permanent establishment" shall be deemed to include: —
(a) a building site, a construction, assembly or installation project or any
supervisory activity in
ICAZ Tax Seminar
PERMANENT ESTABLISHMENT : ARTICLE 5
Page 16
. The term "permanent establishment" shall be deemed to include: —
(a) a building site, a construction, assembly or installation project or any
supervisory activity in connection with such site or project, but only if such
site, project or activity continues for a period of more than six months;
(b) the furnishing of services, including consultancy services, by an enterprise
through employees or other personnel engaged by the enterprise for such
purposes, but only where activities of that nature continue (for the same or a
connected project) within a Contracting State for a period or periods exceeding
in the aggregate 183 days within any twelve-month period commencing or
ending in the year of assessment concerned; and
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PERMANENT ESTABLISHMENT : ARTICLE 5
Page 17
.
c) the performance of professional services or other activities of an
independent character by an individual, but only where those services or
activities continue within a Contracting State for a period or periods exceeding
in the aggregate 183 days within any twelve-month period commencing or
ending in the year of assessment concerned
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INCOME FROM IMMOVABLE PROPERTY: ARTICLE 6
1. Income derived by a resident of a Contracting State from immovable property
(including income from agriculture or forestry) situated in the other
Contracting State may be taxed in that other State.
2. (i) “Immovable property" as defined in the Contracting State in which the
property in question is situated.
(ii) include property accessory to immovable property, livestock and
equipment used in agriculture and forestry, rights to which the provisions
of general law respecting landed property apply,
(iii) usufruct of immovable property and rights to variable or fixed payments
as consideration for the working of, or the right to work, mineral
deposits, sources and other natural resources.
(iv) Ships and aircraft shall not be considered as immovable property.
Page 18
ICAZ Tax Seminar
BUSINESS PROFITS : ARTICLE 7
1. The profits of an enterprise of a Contracting State shall be taxable only in that
State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries
on business as aforesaid, the profits of the enterprise may be taxed in the
other State but only so much of them as is attributable to that permanent
establishment.
2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of
a Contracting State carries on or has carried on business in the other
Contracting State through a permanent establishment situated therein, there
shall in each Contracting State be attributed to that permanent establishment
the profits which it might be expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the same
or similar conditions and dealing wholly independently with the enterprise of
which it is a permanent establishment.
Page 19
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BUSINESS PROFITS : ARTICLE 7 [Cont’d]
3. In determining the profits of a permanent establishment, there shall he allowed
as deductions those deductible expenses which are incurred for the purposes of
the business of the permanent establishment, including executive and general
administrative expenses so incurred, whether in the State in which the
permanent establishment is situated or elsewhere.
4. Insofar as it has been customary in a Contracting State to determine the profits
to be attributed to a permanent establishment on the basis of an
apportionment of the total profits of the enterprise to its various parts, nothing
in paragraph 2 of this Article shall preclude that Contracting State from
determining the profits to be taxed by such an apportionment as may be
customary. The method of apportionment adopted shall, however, be such that
the result shall be in accordance with the principles contained in this Article.
Page 20
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INTERNATIONAL TRANSPORT : ARTICLE 8
1. Profits of an enterprise of a Contracting State from the operation of ships,
aircraft, or road or rail transport vehicles in international traffic shall be
taxable only in that State.
Page 21
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ASSOCIATED ENTERPRISES : ARTICLE 9
Page 22
1. Where: —
(a) an enterprise of a Contracting State participates directly or indirectly in
the management, control or capital of an enterprise of the other
Contracting State; or
(b) the same persons participate directly or indirectly in the management,
control or capital of an enterprise of a Contracting State and an enterprise
of the other Contracting State;
and in either case conditions are made or imposed between the two enterprises
in their commercial or financial relations which differ from those which would
be made between independent enterprises, then any profits which would, but
for those conditions, have accrued to one of the enterprises, but, by reason of
those conditions, have not so accrued, may be included in the profits of that
enterprise and taxed accordingly.
ICAZ Tax Seminar
DIVIDENDS, INTEREST & ROYALTIES:
ARTICLE 10 to 12 [Cont’d]
Page 23
Many countries impose WHT or income tax on payments made to non-residents
• Some times only taxation at source thus only WHT
Purpose of treaty articles is to limit the rate of WHT
• A treaty rate between 0% and 15% is most common
Can sometimes remove WHT altogether –“may only be taxed” in the residence
state (i.e. the country where the recipient is located)
Domestic WHT may be lower than treaty rate, but the treaty is still useful as it
protects from future changes, providing certainty
ICAZ Tax Seminar
DIVIDENDS, INTEREST & ROYALTIES: ARTICLE 10 to 12
[Cont’d]
Page 24
Definitions can be found in the treaty
Articles may be subject to anti-avoidance provisions • Within the treaty article itself; and/or
• Overrides in domestic law
• Enterprise clause like NL-HK treaty
“Beneficial ownership” requirement • Agents
• Nominees
“Subject to tax” requirement in some treaties
If “effectively connected” to a PE, these articles do not apply • Instead, the income is fully taxed under Article 7
ICAZ Tax Seminar
DIVIDENDS : ARTICLE 10 [Cont’d]
Page 25
Definition based on FC’s domestic rules
Doesn’t apply to:
- additional corporate tax on distributions
- prepayment of tax on profits
Hybrid entities
WHT on branch remittances
ICAZ Tax Seminar
DIVIDENDS : ARTICLE 10 [DTA ZIM/S. AFRICA]
Page 26
1. Dividends paid by a company which is a resident of a Contracting State
to a resident of the other Contracting State may be taxed in that other
State.
2. However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident and according to
the laws of that State, but if the beneficial owner of the dividends is a
resident of the other Contracting State. the tax so charged shall not
exceed:
(a) 5% of the gross amount of the dividends if the beneficial owner is a
company which holds directly at least 25 % of the capital of the
company paying the dividends;
(b) 10% of the gross amount of the dividends in all other cases.
The competent authorities of the Contracting States shall by
mutual agreement settle the mode of application of these
limitations.
The provisions of this paragraph shall not affect the taxation of the
company in respect of the profits out of which the dividends are paid.ICAZ Tax Seminar
INTEREST : ARTICLE 11
Page 27
Defined as income from debt claims –Art.11.3
Specific treaties can be wider
Interest in excess of Arms’ length interest rate = dividend
Sourcing rules
Thin Cap
Interest received by partner could be classified interest, not
partnership profits
Interest on hybrid loan
ICAZ Tax Seminar
INTEREST : ARTICLE 11 [DTA ZIM/S. AFRICA]
Page 28
1. Interest arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in
which it arises, and according to the laws of that State, but if the
beneficial owner of the interest is a resident of the other Contracting
State, the tax so charged shall not exceed 5 % of the gross amount of
the interest.
The competent authorities of the Contracting States shall by mutual
agreement settle the mode of application. of this limitation.
ICAZ Tax Seminar
ROYALTIES : ARTICLE 12
Page 29
Is it a royalty within scope of domestic law?
Is it a royalty within treaty definition?
If not, only taxable if PE exists
Treaty definition -very wide
Relates to right to use
Know-how
Franchising
Technical etc fees –see later
Film etc rents often excluded and taxed under Art 7
Services or royalty?
Example
A Zimbabwean Company pays a royalty of $10,000 to a South African
based company.
NRTF 10%
ICAZ Tax Seminar
TECHNICAL SERVICES AND MANAGEMENT FEES:
ARTICLE 13
Page 30
Some countries impose withholding taxes on management or technical fees
Could apply to services used in FC, even if performed outside
There is no article in the OECD Model to cover these
Sometimes included in the Royalties article and taxed at the same WHT rate
Sometimes the parties add a separate Technical Services article
If treaty is silent, they will fall within the Business Profits article
See earlier regarding Services PE
ICAZ Tax Seminar
DTA: ZIM\SOUTH AFRICA: - ARTICLE 13
Page 31
Taxable in payee country
Payer to withhold up to 5%
Not applicable if Permanent Establishment exists
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CAPITAL GAINS: ARTICLE 14
Page 32
Gains derived from alienation immovable property referred to in Article 6 and
situated in the other Contracting State, or from the alienation of shares in a
company the assets of which consist directly or indirectly principally of such
property, may be taxed in that other State.
Gains from the alienation of movable property forming part of the business
property of a permanent establishment which an enterprise of a Contracting
State has in the other Contracting State, including such gains from the
alienation of such a permanent establishment (alone or with the whole
enterprise), may be taxed in that other State.
ICAZ Tax Seminar
INCOME FROM EMPLOYMENT: ARTICLE 15
Page 33
Employment tax where services are rendered, however contracting state may
tax if;
(a) the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any twelve-month period
commencing or ending in the year of assessment concerned; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a
resident of the other State; and (c) the remuneration is not borne by a
permanent establishment which the employer has in the other State.
ICAZ Tax Seminar
DIRECTORS’ FEES: ARTICLE 16
Page 34
Directors' fees and other similar payments derived by a resident of a
Contracting State in that person's capacity as a member of the board of
directors of a company which is a resident of the other Contracting State may
be taxed in that other State.
ICAZ Tax Seminar
ENTERTAINERS AND SPORTSPERSONS:
ARTICLE 17
Page 35
Notwithstanding the provisions of Articles 7 and 15, income derived by a
resident of a Contracting State as an entertainer such as a theatre, motion
picture, radio or television artiste, or a musician, or as a sportsperson, from
that person's personal activities as such exercised in the other Contracting
State, may be taxed in that other State.
ICAZ Tax Seminar
PENSIONS AND ANNUITIES: ARTICLE 18
Page 36
Subject to the provisions of paragraph 2 of Article 19, pensions and other similar
remuneration for past employment, and annuities, arising in a Contracting State
and paid to a resident of the other Contracting State, may be taxed in the first-
mentioned State.
The term "annuity" means a stated sum payable periodically at stated times
during life or during a specified or ascertainable period of time under an
obligation to make the payments in return for adequate and full consideration
in money or money's worth.
Notwithstanding the provisions of paragraph 1 of this Article, pensions paid and
other payments made under a public scheme which is part of the social security
system of a Contracting State, a political subdivision or a local authority thereof
shall be taxable only in that State.
ICAZ Tax Seminar
GOVERNMENT SERVICE: ARTICLE 19
Page 37
1(a) Salaries, wages and other similar remuneration paid by a Contracting State
or a political subdivision or a local authority thereof to an individual in
respect of services rendered to that State or subdivision or authority shall be
taxable only in that State.
(b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Contracting State if the services are rendered in
that State and the individual is a resident of that State who: —
(i) is a national of that State; or
(ii) did not become a resident of that State solely for the purpose of
rendering the services.
ICAZ Tax Seminar
STUDENTS, APPRENTICES AND BUSINESS TRAINEES:
ARTICLE 20
Page 38
A student, apprentice or business trainee who is present in a Contracting State
solely for the purpose of the student, apprentice or business trainee's education or
training and who is, or immediately before being so present was, a resident of the
other Contracting State, shall be exempt from tax in the first-mentioned State on
payments received from outside that first-mentioned State for the purposes of the
student, apprentice or business trainee's maintenance, education or training.
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OTHER INCOME: ARTICLE 21
Page 39
1. Items of income of a resident of a Contracting State, wherever arising, not
dealt with in the foregoing Articles of this Agreement shall be taxable only in
that State.
2. The provisions of paragraph 1 shall not apply to income, other than income
from immovable property as defined in paragraph 2 of Article 6, if the
recipient of such income, being a resident of a Contracting State, carries on
business in the other Contracting State through a permanent establishment
situated therein and the right or property in respect of which the income is
paid is effectively connected with such permanent establishment. In such case
the provisions of Article 7 shall apply.
3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a
resident of a Contracting State not dealt with in the foregoing Articles of the
Agreement and arising in the other Contracting State may also be taxed in that
other State.
ICAZ Tax Seminar
ELIMINATION OF DOUBLE TAXATION: ARTICLE 22
Page 40
Double taxation shall be eliminated as follows: —
(a) In South Africa, subject to the provisions of the law of South Africa
regarding the deduction from tax payable in South Africa of tax payable in
any country other than South Africa (which shall not affect the general
principle hereof), Zimbabwean tax paid by residents of South Africa in
respect of income taxable in Zimbabwe, in accordance with the provisions
of this Agreement, shall be deducted from the taxes due according to South
African fiscal law. Such deduction shall not, however, exceed an amount
which bears to the total South African tax payable the same ratio as the
income concerned bears to the total income; and
(b) In Zimbabwe, subject to the provisions of the law of Zimbabwe regarding
the allowance as a credit against Zimbabwean tax of the tax payable in a
territory outside Zimbabwe (which shall not affect the general principle
hereof) South African tax payable, whether directly or by deduction, in
respect of taxable income or chargeable gains from sources within South
Africa shall be allowed as a credit against any Zimbabwean tax computed by
reference to the same taxable income or chargeable gains by reference to
which the South African tax is computed.
ICAZ Tax Seminar
NON-DISCRIMINATION: ARTICLE 23
Page 41
1. Nationals of a Contracting State shall not be subjected in the other Contracting
State to any taxation or any requirement connected therewith, which is other
or more burdensome than the taxation and connected requirements to which
nationals of that other State in the same circumstances, in particular with
respect to residence, are or may be subjected.
ICAZ Tax Seminar
MUTUAL AGREEMENT PROCEDURE: ARTICLE 24
Page 42
1. Where a person considers that the actions of one or both of the Contracting
States result or will result for that person in taxation not in accordance with
this Agreement, that person may, irrespective of the remedies provided by the
domestic law of those States, present a case to the competent authority of the
Contracting State of which the person is a resident or, if the case comes under
paragraph 1 of Article 23, to that of the Contracting State of which the person
is a national. The case must be presented within three years from the first
notification of the action resulting in taxation not in accordance with the
provisions of the Agreement.
ICAZ Tax Seminar
EXCHANGE OF INFORMATION: ARTICLE 25
Page 43
1. The competent authorities of the Contracting States shall exchange such
information as is foreseeably relevant for carrying out the provisions of this
Agreement or to the administration or enforcement of the domestic laws
concerning taxes of every kind and description imposed on behalf of the
Contracting States, or of their political subdivisions or local authorities,
insofar as the taxation thereunder is not contrary to the Agreement. The
exchange of information is not restricted by Articles 1 and 2.
ICAZ Tax Seminar
EXCHANGE OF INFORMATION: ARTICLE 25 [Cont’d]
Page 44
3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to
impose on a Contracting State the obligation: —
(a) to carry out administrative measures at variance with the laws or
administrative practice of that or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State; and
(c) to supply information which would disclose any trade, business, industrial,
commercial or professional secret or trade process, or information, the
disclosure of which would be contrary to public policy (ordre public).
ICAZ Tax Seminar
MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS:
ARTICLE 27
Page 45
Nothing in this Agreement shall affect the fiscal privileges of members of
diplomatic missions or consular posts under the general rules of international law
or under the provisions of special agreements.
ICAZ Tax Seminar
ENTRY INTO FORCE: ARTICLE 28
Page 46
Each of the Contracting States shall notify the other in writing. through the
diplomatic channel, of the completion of the procedures required by its law for
the bringing into force of this Agreement. The Agreement shall *enter into force on
the date of the later of these notifications.
It is assumed this DTA, gazetted on the 8th April, 2016 , has been brought *into
force by the above notifications – none of which has appeared on the Gazette –
Editor.
ICAZ Tax Seminar
DOUBLE TAXATION AGREEMENTS
Page 47
The following agreements are in force and the applicable
withholding taxes are as follows:
ICAZ Tax Seminar
Thank You
THANK YOU
Questions
BDO Zimbabwe
Office: +263 4 745242 / 745246
ICAZ Seminar
Page 48
DISCLAIMER
Page 49
Whilst every effort has been made to present the most current, correct and clearly
expressed information possible, inadvertent errors can occur and are subject to
change. The information is intended to serve as a general guideline and may not apply
directly to specific circumstances. Nothing in this presentation should be construed as
advice and professional advice should be sought before acting thereupon.
Copyright of this publication rests with BDO Tax & Advisory Services (Pvt) Ltd. All rights
reserved. Copying of this information, in whole or in part, is prohibited without prior
written permission.
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