Some Thoughts on the Interpretation of Tax Treaties in South Africa

• Jurisdiction: South Africa
• Pages: 31-52
• Author: I Du Plessis
• Date: 25 May 2019
• Published date: 25 May 2019

Some Thoughts on the Interpretation of Tax

Treaties in South Africa

I DU PLESSIS*

University of the Stellenbosch

1 Introduction

South Africa is a party to approximately 70 bilateral treaties for the

prevention of double taxation on different types of income.

1

Most of South

Africa’s treaties are based in some way on the Model Tax Convention drafted

by the Organisation for Economic Co-operation and Development (OECD

MTC). The OECD MTC is by far the most inf‌luential of the model tax

conventions and is used widely, not only by OECD members, but also by

non-OECD members (such as South Africa). It is important to note, though,

that the OECD MTC is not an international treaty that is binding on its

members.

2

As a model tax convention, it is used by countries as a basis from

which to negotiate tax treaties.

3

Thus, although an actual treaty between two

countries (eg, South Africa and another country) may not be worded exactly

like the OECD MTC, many of the terms used in the actual treaty may adopt

the wording of the model or contain its wording with some adjustments. The

OECD MTC is updated every two to three years,

4

and is accompanied by

commentary drafted by the OECD.

5

In a number of fairly recent decisions, the South African courts have been

called upon to apply some of the tax treaties entered into by South Africa with

a view to establishing a taxpayer’s liability to tax in South Africa. The

purpose of this article is to examine some of these decisions and to glean

some thoughts on the approach taken by South African courts to the

interpretation of tax treaties entered into by South Africa. In order to achieve

this, the status of tax treaties in South Africa will be discussed and recent

decisions regarding such status will be considered. Some general comments

* BCom (Law) LLB (Stell) LLM (Taxation) (UCT). Senior Lecturer, Department of Mercantile Law,

University of Stellenbosch. I am grateful for the comments received from Professors MJ de Waal

(University of Stellenbosch) and L Olivier (University of Johannesburg) in their capacities as supervisor

and external co-supervisor, respectively, on a chapter of a dissertation which I plan to submit for

examination in future. This article is based on the relevant chapter of the dissertation. None of the views

herein should be ascribed to them, however.

1

Lynette Olivier & Michael Honiball International Tax:A South African Perspective 5 ed (2011) at

291.

2

Philip Baker Double Taxation Conventions: A Manual on the OECD Model Tax Convention on

Income and on Capital 3 ed (2002) in par A.11.

3

Ibid.

4

David A Ward et al The Interpretation of Income Tax Treaties with Particular Reference to the

Commentaries of the OECD Model (2005) at 7–8. The latest update was adopted by the OECD Council

in July 2010.

5

Baker op cit note 2 in par A.06; DavidA Ward ‘The Role of the Commentaries on the OECD Model

in the Tax TreatyInterpretation Process’ (2006) March Bulletin for International Taxation 97.

31

(2012) 24 SA Merc LJ 31

© Juta and Company (Pty) Ltd

regarding the interpretation of tax treaties will follow and provide the required

background for a discussion of the South African decisions on the

interpretation of treaties.

2 Status of Tax Treaties in South African Law

Any tax treaty has a dual nature: f‌irst, it is an international agreement

entered into between two states (ie, a bilateral agreement) and, second, it

becomes part of domestic law.

6

This second aspect of a tax treaty’s nature will

be relevant to this part of the research. There are different procedures by

which double tax treaties form part of domestic law in each state. In some

states, the treaty automatically becomes part of domestic law when it takes

effect. In other states, the treaty becomes part of domestic law upon

parliamentary approval, whilst in still others, legislation is needed to make the

treaty part of domestic law.

7

In some countries, once the treaty becomes part

of the domestic law, it has no status higher than any other law. If there is a

conf‌lict between the provisions of a tax treaty and the domestic income tax

legislation, the question that arises is how the conf‌lict should be resolved. In

countries where a treaty has a status higher than domestic legislation, a

conf‌lict is resolved by the treaty’s higher status.

8

The Constitution of the Republic of South Africa, 1996 (‘the Constitution’),

provides that an international agreement binds the Republic only after it has

been approved by resolution in both the National Assembly and the National

Council of Provinces.

9

Furthermore, any international agreement becomes

law in the Republic when it is enacted into law by national legislation.

10

In

other words, in order to be bound on an international level, South Africa

requires parliamentary approval for a double taxation agreement. Thereafter,

6

Baker op cit note 2 in par E.02.

7

Idem in par F.01.

8

Idem in par F.03.

9

Section 231(2) of the Constitution of the Republic of South Africa, 1996 (‘the Constitution’).

Section 231(3) provides that an agreement of a technical, administrative or executive nature, or an

agreement which does not require either ratif‌ication or accession, entered into by the national executive

binds the Republic, without the need for parliamentary approval. It is submitted that the provisions of

s 108(2), which envisages parliamentary approval, indicate that double taxation agreements are not

of the kind referred to in s 231(3). In practice, tax treaties are dealt with in terms of s 231(2): Olivier &

Honiball op cit note 1 at 295.

10

Section 231(4) of the Constitution. Scholtz considers that the incorporation of the concept of the

self-executing provision in the Constitution is unfortunate, and argues convincingly that the reference

to self-executing provisions can be ignored (Werner Scholtz ‘A Few Thoughts on Section 231 of the

South African Constitution, Act 108 of 1996’(2004) 29 South African Yearbook of International Law

202 at 216). Some academic authors are of the view that tax treaties are not self-executing (eg, Emil

Brincker ‘The Conclusion and Force of Double TaxationAgreements’ in: AP de Koker & Emil Brincker

Silke on International Tax (2010) in par 12.7.1; Olivier & Honiball op cit note 1 at 304), whilst others

argue that treaties are self-executing (Johann Hattingh ‘South Africa: The Volkswagen Case and the

Secondary Tax on Companies: Part 1 – The Outcome’(2009) October Bulletin for International Fiscal

Taxation 442 at 446; idem ‘Elimination of International Double Taxation’ in: AP de Koker & Emil

Brincker Silke on International Tax (2010) in par 36.14).

(2012) 24 SA Merc LJ32

© Juta and Company (Pty) Ltd