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PRELIMINARY BRIEFING: KUWAIT, SWITZERLAND, NETHERLANDS AND LUXEMBOURG

This preliminary briefing discusses the purposes and interactions of tax treaties in Kuwait, Switzerland, Netherlands, and Luxembourg, including the South Africa-Kuwait Tax Treaty Protocol, South Africa-Switzerland Tax Treaty Protocol, South Africa-Netherlands Protocol, and South Africa-Luxembourg Tax Treaty Protocol.

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PRELIMINARY BRIEFING: KUWAIT, SWITZERLAND, NETHERLANDS AND LUXEMBOURG

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  1. PRELIMINARY BRIEFING: KUWAIT, SWITZERLAND, NETHERLANDS AND LUXEMBOURG Standing Committee on Finance Presenter: Lutando Mvovo | Director, Tax Policy, National Treasury | 18 August 2015

  2. Purpose of tax Treaties Three main purposes from a policy point of view • Prevent double taxation of the same income • limit the right of a source country to tax passive income by reducing tax to a lower rate and residence country must provide credit or exemption or • giving the residence country exclusive right to tax the passive income • Create Fiscal Stability • termination made by giving 6 months notice to the other treaty partner • provides for dispute resolution mechanism (MAP) • Prevent tax avoidance and evasion • exchange of information and • assistance in tax collection

  3. Interaction between tax treaties domestic law Income Tax Act • Section 108 (2): • Agreement approved by Parliament • Published in the government gazette • Have effect as if enacted in the Income Tax Act

  4. TAX TREATY BENCHMARK • Country tax profile: • Tax system [basis of tax, domestic tax rates, domestic and treaty withholding tax rates] • Special tax vehicles and instruments [effective tax rates, tax on interest, dividends, royalties, capital gains etc.] • Treaty network and variations [common trends + common treaty partners] • Interrelationship between the tax systems of two countries [whether distort economic activity]. • Potential tax avoidance [e.g. transfer pricing] and treaty shopping

  5. SOUTH AFRICA-KUWAIT TAX TREATY PROTOCOL

  6. SOUTH AFRICA-KUWAIT TAX TREATY PROTOCOL • South Africa-Kuwait tax treaty was signed on 17 February 2004; • It is one of the nine tax treaties that had a zero rate withholding tax on dividends; • It had to be renegotiated before the new dividends tax could be implemented; • Eight of the nine tax treaties have been signed and are now in force; • Kuwait is the only tax treaty still awaiting signature; • The new dividends tax came into operation on 1 April 2012;

  7. SOUTH AFRICA-SWITZERLAND TAX TREATY PROTOCOL

  8. SOUTH AFRICA-SWITZERLAND PROTOCOL • The South Africa-Switzerland tax treaty into force on 11 August 1968; • It was revised in 2007 because it was old and required modernisation in line with international trends; • The revised tax treaty entered into force on 27 January 2009; • In 2009, Switzerland removed restrictions in their domestic law on the exchange of information (including banking secrecy rules) as a result of pressure from the G20; • The renegotiation of the Article 25 became necessary to in order to adapt it to the new commitments made by Switzerland to the G20 and the OECD South Africa; • The negotiation also addressed potential weaknesses in the treaty, such as zero rate on royalties

  9. South Africa-Netherlands Protocol to Tax Treaty

  10. SA-Netherlands Tax Treaty Protocol • The current tax treaty between South Africa and Netherlands came into force on 28 December 2008; • Renegotiation of the Protocol to the tax treaty became necessary due to the introduction of witholding tax on interest; • The DTA also had zero rates interest, royalties; • It did not have a provision dealing with the taxation of capital gains on property rich companies which resulted in double non-taxation;

  11. SouthAfrica- Luxembourg Tax Treaty Protocol

  12. The South Africa–Luxembourg Tax Treaty Protocol • DTA between SA and Luxembourg first came into force in 8 September 2000; • At that time SA was still on a source-based system of taxation, did not have withholding taxes on dividends and interest nor capital gains tax; • The DTA also had zero rates interest, royalties; • It did not have a provision dealing with the taxation of capital gains on property rich companies which resulted in double non-taxation; • The change in South Africa’s policy such as the introduction of witholding tax on interest and the above weakness in this tax treat were the reason for the renegotiation of some articles in this treaty

  13. The South Africa–Luxembourg Tax Treaty Protocol • The negotiation also addressed potential dual residence by changing the tie–breaker clause from the place of effective management to mutual agreement on a case-by-case basis; • It also addressed other issues such as exchange of information and assistance in tax collection issues

  14. THANK YOU

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