Tax treaty may lead to double taxation

Cape Town - The new tax treaty between South Africa and Mauritius could see multinationals being subjected to double taxation if a deal on dual residency is not reached, according to PwC international tax senior manager Johan Hatting.

Hatting said the new treaty stemmed from the abuse of the previous one.

Some feared the SA Revenue Service (Sars) and the National Treasury would simply terminate the treaty because it was being abused by local multinationals, he said.

The new treaty will come into force on January 1 2015.

"The most significant deviation in the new treaty concerns companies that are tax residents in both Mauritius and South Africa," said Hatting.

Business Day reported that the changes are bound to cause uncertainty.

Hatting told the publication that the new treaty raises "significant constitutional concerns".

He said that it puts tax authorities in a position where they might exercise powers that belong to parliament.

Tax treaties usually resolve the problem of double taxation by determining that a firm would only be a taxpayer in the treaty state in which its "place of effective management" is situated, said Hatting.

However, he noted that Mauritius substituted the effective management criterion with an "administrative discretion".

Under the new treaty, Sars and the Mauritian authorities had to reach mutual agreement on whether a dual resident company be taxed only in Mauritius or only in South Africa.

"If Sars does not reach an agreement, the dual resident company will be subject to double tax," he said.

Sars spokesperson Adrian Lackay is reported to have said that relief mechanisms are available in the event that an agreement in not reached.

"South African law permits tax relief for tax paid by a resident company in another jurisdiction," he said.

 - Fin24