ABC Proprietary Limited v The Commissioner for the South African Revenue Services
| Jurisdiction | South Africa |
| Judge | Hack AJ |
| Judgment Date | 12 June 2019 |
| Citation | 2019 JDR 1292 (Tax) |
| Docket Number | 14287 |
| Court | Tax Court |
Hack AJ:
This matter concerns the application of various agreements, being conventions and amending protocols, between the Republic of South Africa and other countries entered into for the avoidance of double taxation and the prevention of fiscal evasion, with respect to taxes on income and or income and capital (referred to herein as a "double taxation agreements" or "DTA"). I refer herein to South Africa without specific references to the individual entities, authorities or departments, unless necessary.
Appellant both resides and is a registered tax payer in South Africa. The owner of all its shares is a company both resident and a taxpayer in the Kingdom of the Netherlands (hereinafter "the Netherlands"). The appellant declared dividends in April 2012 and October 2012 and the shareholder made declarations and undertakings, which were provided to the respondent on 22 March 2012, that the appellant was liable to pay 5% tax on the dividends in accordance with Article 10(2) of the DTA (as amended by protocal) between South Africa and the Netherlands. The amounts were paid by the appellant to the respondent. Subsequently the appellant and its shareholder took the view that the aforesaid declarations and undertakings were incorrect. On 12 August 2013 a declaration and undertaking given by the shareholder was presented to the respondent recording that the liability for a subsequent dividend in March 2013 is 0% in accordance with the provisions of Article 10(10) of the DTA. On 25 November 2014 appellant addressed correspondence to the respondent seeking a refund of the tax paid on the previous dividends declared since 1 April 2012. This was in terms of section 64L(3) of the Income Tax Act, Act 58 of 1962. The terms of this provision are common cause. On 24 March 2016 the respondent rejected this claim for a refund. Respondent rejected the revised interpretation of the DTA which the taxpayer now sought to advance. On 11 May 2016 the appellant filed a formal objection to each of the rejections of the respective claims which the respondent refused to refund, supported by a letter in explanation. The respondent replied to the objections in a single document on 11 July 2016 in which it ruled that the objections are disallowed in full. Thereafter, on 23 August 2016, the appellant lodged its notice of appeal against the disallowance of the objection which it had lodged, with a covering letter. A statement of grounds of assessment and opposing of appeal was filed by the respondent. Appellant filed a statement of its grounds of appeal. All these aforesaid documents comprise the dossier which in civil trial parlance would be the pleadings of the case before the court.
At the hearing the court was advised that the parties had agreed on a statement of agreed facts and that oral evidence would be led by the respondent of one witness, Ms X. She was a significant role player in the events that are relevant. The court was also advised that the parties had furthermore agreed to refer to a bundle of documents. The statements of
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agreed facts, the oral evidence and the contents of the documents, it was agreed, would constitute the evidence before the court.
The material and relevant evidence led by the respondent was that some time prior to September 2006, the South African government took the decision to significantly change the corporate tax structure of the country. The decision was made to substitute the existing secondary tax on companies which was payable by a resident company when it paid a dividend to a shareholder to one in terms of which the tax liability was that of the shareholder who received the dividend. To facilitate the collection of the tax, a system providing for a withholding tax mechanism, was to be introduced. This policy decision was to bring the South African corporate tax regime into line with other countries. In doing so, however, the country was creating a new tax which would affect foreign companies operating and or investing in South Africa. The countries in which these companies reside look to these companies for tax income. The policy change of South Africa required the implementation of new terms in international agreements so that South Africa could recover its portion of taxation from foreign shareholders. Accordingly a number of agreements were concluded or more specifically existing agreements were amended by protocols. The stated objective was to conclude agreements in terms of which the tax rate payable in South Africa would be 5% if the South African company was wholly owned by a foreign resident. This was in line with the prevailing norm. Other rates applied under other circumstances but a detailed discussion thereof is not relevant. Having made the policy decision South African government departments commenced a course of action to implement the decision.
South Africa identified 10 countries with whom it needed to revise agreements. Those that are relevant to this matter are: the Netherlands, Sweden and Kuwait. Negotiations took place with each individual country. Each have different relationships with South Africa and different interests which they would wish to pursue, preserve or improve. So it was explained in evidence that while negotiating what would be an appropriate tax rate on dividends other matters were placed on the agenda to form part of the terms to be agreed upon. While the documents comprising these treaties or amending protocols do in various respect have similar articles it is necessary to appreciate and understand that this was therefore not a simple process of getting each country to rubber stamp a single treaty document. Each agreement was individually negotiated and contained individual terms. Therefore, to determine the rights and obligations of each contracting country, consideration must be given to the individual terms of each agreement. What is however also important is the process by which such agreements come into formal existence. Each county differs. So it is not simply a matter of signing a document. Each country, including South Africa has its own procedures to ratify and finally bring into being an enforceable, binding agreement. The time line of when each agreement came into force is important to an understanding of
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the dispute between the parties herein. In the hearing the emphasis was placed on Kuwait. It should be noted there was also references in the dossier to other countries (Cyprus and Oman) but this need not be dealt with herein.
An overview of the relevant agreements and the time lines is as follows:
On 24 May 1995 an agreement came into being with Sweden;
On 17 February 2004 an agreement was concluded with Kuwait which came into force on 25 April 2006;
On 10 October 2005 an agreement was concluded with the Netherlands.
During 2006 the decision was taken to impose taxation on dividends and the process commenced to negotiate amendments to existing treaties where required. Of material relevance is that individual negotiations took place with the Netherlands, Sweden and Kuwait;
On 8 July 2008 agreement was reached with the Netherlands to provide for 5% taxation in South Africa on dividends of the category in question herein and the original agreement with the amending protocol came into force on 28 December 2008.
On 7 July 2010 agreement was reached with Sweden to provide for 5% taxation in South Africa on dividends of the category in question herein and the amending protocol came into force on 18 March 2012.
Ms X stated in her evidence that negotiations with Kuwait were concluded but by the date of the hearing before us Kuwait had not yet ratified the agreement and therefore the amendment of the agreement with Kuwait was not in force. The existing agreement with Kuwait (sub-paragraph (b) above) which came into force on 25 April 2006 provides for 0% taxation in South Africa on dividends. That remained the terms binding on South Africa despite agreement having been reached to amend them at the time South Africa took the steps to change its tax regime.
Despite the fact that the Government of Kuwait (and certain other countries) had not yet ratified the amendment of the double taxation agreements between them and South Africa, the South African government proceeded to change the law on taxation on company dividends effective on 1 April 2012.
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The appellant's case is that it is not liable to pay tax to South Africa on dividends paid to its Netherland's Shareholder, in accordance with the terms of the double taxation agreement between South Africa and the Netherlands. It is not disputed that the provisions that it relies on are subparagraphs (1); (2) and more importantly subparagraph (10) of article 10 which read as follows:
'Article 10. Dividend
Dividends paid by a company which is resident of a Contracting State [South Africa [1] ] to a resident of the other Contracting State [Netherlands] may be taxed in that other State [Netherlands].
However, such dividends may also be taxed in the Contracting State [South Africa] 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 dividend is a resident of the other Contracting State [Netherlands], the tax so charged shall not exceed:
5 percent of the gross amount of the dividends if the beneficial owner is a company which holds at least 10 percent of the capital of the company paying the dividends; or
10 percent of the gross amount of the dividend in all other cases.
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If under any convention for the avoidance of double taxation concluded after the date of conclusion of this Convention between the Republic of South Africa and a third country, South Africa...
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