TAX CONVENTION WITH SOUTH AFRICA - IRS

1 TAX CONVENTION WITH SOUTH AFRICAGENERAL EFFECTIVE DATE UNDER ARTICLE 28: 1 JANUARY 1998 TABLE OF ARTICLESA rticle 1---------------------------------Genera l ScopeArticle 2---------------------------------Taxes CoveredArticle 3---------------------------------Genera l DefinitionsArticle 4---------------------------------Reside nceArticle 5---------------------------------Perman ent EstablishmentArticle 6--------------------------------- income from Immovable (Real) PropertyArticle 7---------------------------------Busine ss ProfitsArticle 8---------------------------------Shippi ng and Air TransportArticle 9---------------------------------Associ ated EnterprisesArticle 10--------------------------------Divide ndsArticle 11--------------------------------Intere stArticle 12--------------------------------Royalt iesArticle 13--------------------------------Capita l GainsArticle 14--------------------------------Indepe ndent Personal ServicesArticle 15--------------------------------Depend ent Personal ServicesArticle 16--------------------------------Direct ors FeesArticle 17--------------------------------Entert ainers and SportsmenArticle

2 18--------------------------------Pensio ns and AnnuitiesArticle 19--------------------------------Govern ment ServiceArticle 20--------------------------------Studen ts, Apprentices and Business TraineesArticle 21--------------------------------Other IncomeArticle 22--------------------------------Limita tion on BenefitsArticle 23--------------------------------Elimin ation of Double TaxationArticle 24--------------------------------Non-di scriminationArticle 25--------------------------------Mutual Agreement ProcedureArticle 26--------------------------------Exchan ge of Information and Administrative AssistanceArticle 27--------------------------------Diplom atic and Consular OfficersArticle 28--------------------------------Entry into ForceArticle 29--------------------------------Termin ationLetter of Submittal---------------------of 13 June.

3 1997 Letter of Transmittal-------------------of 26 June, 1997 The Saving Clause -------------------Paragraph 4 of Article 1 MESSAGEFROMTHE PRESIDENT OF THE UNITED STATESTRANSMITTINGCONVENTION BETWEEN THE UNITED STATES OF AMERICA ANDTHE REPUBLIC OF SOUTH AFRICA FOR THE AVOIDANCE OFDOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASIONWITH RESPECT TO TAXES ON income AND capital GAINS,SIGNED AT CAPE TOWN FEBRUARY 17, 1997 LETTER OF SUBMITTALDEPARTMENT OF STATE,Washington, June 13, PRESIDENT,The White House. THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to theSenate for advice and consent to ratification, the CONVENTION Between the United States ofAmerica and the Republic of SOUTH AFRICA for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with Respect to Taxes on income and capital Gains, signed at CapeTown on February 17, 1997 ("the CONVENTION ").

4 Currently, there is no income tax CONVENTION between the United States and SOUTH income tax CONVENTION between the United States and SOUTH AFRICA of December 13, 1946was terminated July 1, 1987, pursuant to the terms of that CONVENTION and Section 313 of theComprehensive Anti-Apartheid Act of 1986. The proposed CONVENTION generally follows thepattern of the model treaty. It establishes maximum rates of tax that may be applied tovarious types of income , protection from double taxation of income , exchange of information toprevent fiscal evasion, and standard rules to limit the benefits of the CONVENTION so they areavailable only to persons that are not engaged in treaty shopping. Like other taxconventions, this CONVENTION provides rules specifying when income that arises in one of thecountries (the source country ) and is beneficially owned by residents of the other country (the"country of residence") may be taxed by the source country.

5 The CONVENTION establishes maximum rates of tax that may be imposed by the source countryon specified categories of income , including dividends, interest, and royalties, to residents of theother country that are the same as those in the model treaty and in many recent conventionswith OECD countries. Pursuant to Article 10, dividends from direct investments are subject totax by the source country at a rate of five per cent. The threshold ownership criterion for directinvestment is ten per cent, consistent with other modern treaties, in order to facilitate directinvestment. Other dividends are generally taxable by the source country at 15 per cent. In general, under Article 11, interest derived and beneficially owned by a resident of aContracting State is exempt from tax by the source country and may be taxed only in the State inwhich the owner of the income resides.

6 Under Article 12, royalties derived and beneficiallyowned by a resident of a Contracting State may also be taxed only in the State in which theowner of the income resides. These rates of taxation on royalty and interest income do not apply, however, if the beneficialowner of the income is not a resident of, but carries on business in the source country and theincome is attributable to a permanent establishment in the source country. In that situation, theincome is to be considered either business profit or income from independent personal servicesand is subject to the provisions of Articles 7 and 14, which deal with these classes of income . Like other tax treaties, this CONVENTION provides the standard anti-abuse rules for certainclasses of investment income in Articles 10 and 11.

7 The taxation of capital gains, described in Article 13 of the CONVENTION , follows the patternof the model tax treaty. It provides that gains from the sale of real property (including real property interest) are taxable in the State in which the property is situated. Gains fromthe sale of personal property that is part of a permanent establishment or fixed base may be taxedin the State in which the permanent establishment or fixed base is located. The proposedConvention permits taxation of profits from international carriage by ships or airplanes only bythe country of residence. Gains, including gains from the sale of ships, aircraft, or containersoperated or used in international traffic are taxable only in the Contracting State in which thealienator is located.

8 Article 7 of the proposed CONVENTION generally follows the standard rules for taxation by onecountry of the business profits of a resident of the other. The non-residence country's right to taxsuch profits is generally limited to cases in which the profits are attributable to a permanentestablishment located in that country. The proposed CONVENTION , however, grants rights to taxbusiness profits that generally are somewhat broader than those found in the and OECD model treaties. Under the proposed CONVENTION , pursuant to the definition of a "permanentestablishment" in Article 5 (2) (k), an enterprise will have a permanent establishment in aContracting State if its employees or other personnel provide services within that State for 183days or more within a 12-month period in connection with the same or a connected project.

9 As do all recent tax treaties, this CONVENTION preserves the right of the United States toimpose its branch profits tax in addition to the basic corporate tax on a branch's business (Article10). The proposed CONVENTION , at Article 7, also accommodates a provision of the 1986 TaxReform Act that attributes to a permanent establishment or fixed base income that is earnedduring the life of the permanent establishment or fixed base but is deferred and not received untilafter the permanent establishment or fixed base no longer exists. Consistent with treaty policy, Article 8 of the new CONVENTION permits only the countryof residence to tax profits from international carriage by airplanes and ships.

10 This reciprocalexemption also extends to income from the rental of ships or aircraft if the rental income isincidental to income from the operation of the craft in international traffic. The taxation of income from the performance of personal services under Articles 14 and 15of the proposed CONVENTION is subject to rules that essentially follow those of the modeltreaty. The 183-day personal service requirement in the definition of permanent establishment(Article 5) is adopted in the definition of fixed base in Article 14. Under Article 18 of the proposed CONVENTION , at the request of SOUTH AFRICA , the taxtreatment of pensions differs from that in the model treaty. Pensions will be subject tolimited source-country tax.