What you need to know

By Fanus Jonck

Bilateral relief is achieved by two countries entering into an agreement (treaty) aimed at providing relief from double tax.

Section 108 of the Income Tax Act provides that the National Executive of South Africa may enter into an agreement with the government of any other country to regulate the taxation of income, profits, gains, and donations which may be taxable in both countries. The agreements also provide for the rendering of reciprocal assistance in the administration and collection of taxes in both countries. In other words, the Revenue Services of one country may ask the Revenue Services of the other country for help or information in collecting the taxes of any taxpayer.

It is important to note that a double taxation agreement (or DTA for short) cannot impose more tax than is provided for in the Income Tax Act of a country.

A double tax agreement is an agreement entered into between two states in which mutual agreement is reached on the manner of taxation of different types of income and capital gains. The principal objective of the agreement is the elimination of double tax, i.e. the taxation of the same amount in both countries.

The application of international tax law (treaty law) is determined as follows:

• There must be a person (the taxpayer).The term “person” is usually defined in the treaty (usually in Article 3), and generally excludes a permanent establishment.

• The person must be resident in at least one of the states. Note that for the purposes of the treaty a person can only be resident in one of the states and not in both. The treaty has rules for determining the state of residence of a person.

• The person must carry on economic activities or have assets in the other state.
  
  
• The activities or assets must give rise to income or capital receipts which are subject to tax (as defined in the treaty).    
                                       
• Tax must be paid in both the state of source and the state of residence.

Relief from double tax is achieved either by the treaty only or by a combination of the treaty law and the domestic law of states which are party to the treaty. The relief varies from article and depends on the wording used in the article. The articles in a treaty generally use one of two phrases:

1. Shall only be taxed (in one of the states)

When such wording is used, the treaty (without the assistance of domestic law) provides relief in that only one state has the right to tax, the other being prohibited from taxing. The phrase “shall only be taxed” is referred to by Vogel (Klaus Vogel on Double Tax Conventions, Kluwer Law International) as a rule with complete legal consequences.

2. May be taxed (in one of the states)

In such cases both states have a right to tax the income, i.e. the treaty does not prohibit the taxing in any one of the states. Vogel refers to this phrase as a rule with incomplete or open legal consequences which must be completed by an article (usually 23) in the agreement. This then requires one of the states (usually the state of residence) to provide relief in terms of its domestic law or in terms of the treaty by either exempting the income from tax or by granting a credit in respect of tax paid in the other state.

If a South African resident works in the UK, then the UK could tax the taxpayer as their source of the income is there. South Africa can also tax the taxpayer as they are a South African tax resident and South Africa taxes on worldwide income since 2001.

Thanks to the double tax agreement between South Africa and the UK, the taxpayer will be however able to deduct the UK tax from the South Africa tax and therefore not pay double tax.

If the person works more than 183 days in a 12 month period abroad (and part of it is at least one continuous period of 60 days) then he will also enjoy the benefit that the first R1,25 million of the income will be tax exempt.

South Africa do not have double tax agreements with all countries and agreements vary. Some countries, for example the UAE, rules that only they may tax employees. South Africans that work in the UAE for a UAE company are therefore not taxable in South Africa on their UAE income.

• You are welcome to contact the tax consultant Fanus Jonck (tax@jonck.net) with your tax queries.

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