ICAZ TAX SEMINAR

DOUBLE TAX TREATIES: COMPANIES

Presented by M. NGORIMA

22 February 2018

DISCUSSION POINTS

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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

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WHAT ARE DOUBLE TAX TREATIES?

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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

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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

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THE OECD MODEL TREATY – BASIC TEMPLATE

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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

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THE MODEL TREATY - CHAPTERS

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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

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DOUBLE TAX ARTICLES

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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

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DOUBLE TAX ARTICLES

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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

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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.

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TAXES COVERED: ARTICLE 2

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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

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GENERAL DEFINITIONS: ARTICLE 3

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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

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“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

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DOUBLE TAX TREATIES: RESIDENCE – TIE-BREAKERS

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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

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RESIDENCE – ARTICLE 4 [Cont’d]

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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

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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

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PERMANENT ESTABLISHMENT : ARTICLE 5

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. 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

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.

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.

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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.

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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.

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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.

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ASSOCIATED ENTERPRISES : ARTICLE 9

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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.

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DIVIDENDS, INTEREST & ROYALTIES:

ARTICLE 10 to 12 [Cont’d]

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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

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DIVIDENDS, INTEREST & ROYALTIES: ARTICLE 10 to 12

[Cont’d]

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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

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DIVIDENDS : ARTICLE 10 [Cont’d]

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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

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DIVIDENDS : ARTICLE 10 [DTA ZIM/S. AFRICA]

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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

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INTEREST : ARTICLE 11

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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

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INTEREST : ARTICLE 11 [DTA ZIM/S. AFRICA]

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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.

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ROYALTIES : ARTICLE 12

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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%

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TECHNICAL SERVICES AND MANAGEMENT FEES:

ARTICLE 13

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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

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DTA: ZIM\SOUTH AFRICA: - ARTICLE 13

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Taxable in payee country

Payer to withhold up to 5%

Not applicable if Permanent Establishment exists

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CAPITAL GAINS: ARTICLE 14

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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.

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INCOME FROM EMPLOYMENT: ARTICLE 15

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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.

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DIRECTORS’ FEES: ARTICLE 16

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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.

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ENTERTAINERS AND SPORTSPERSONS:

ARTICLE 17

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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.

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PENSIONS AND ANNUITIES: ARTICLE 18

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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.

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GOVERNMENT SERVICE: ARTICLE 19

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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.

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STUDENTS, APPRENTICES AND BUSINESS TRAINEES:

ARTICLE 20

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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

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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.

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ELIMINATION OF DOUBLE TAXATION: ARTICLE 22

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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.

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NON-DISCRIMINATION: ARTICLE 23

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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.

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MUTUAL AGREEMENT PROCEDURE: ARTICLE 24

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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.

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EXCHANGE OF INFORMATION: ARTICLE 25

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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.

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EXCHANGE OF INFORMATION: ARTICLE 25 [Cont’d]

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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).

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MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS:

ARTICLE 27

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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.

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ENTRY INTO FORCE: ARTICLE 28

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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.

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DOUBLE TAXATION AGREEMENTS

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The following agreements are in force and the applicable

withholding taxes are as follows:

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Thank You

THANK YOU

Questions

BDO Zimbabwe

mngorima@bdo.co.zw

Office: +263 4 745242 / 745246

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DISCLAIMER

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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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