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TechnicalServiceFeesworkshop

Welcome

DomesticlawoverviewoftechnicalservicelegislationandSAsource

DeborahTickle

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DomesticlawoverviewConsiderationsirtdomestictaxwhencrossbordertechnicalservicestakeplace:• Non-residentsprovidingtechnicalservicesin/toSouth

Africa:– SAsource(GIdefinitionandcaselaw+s9)?– PE(DTA+guidelines+caselaw)?;– Disclosure(taxreturns/reportablearrangements);– WHT(s51A-H)?

• Residentsprovidingtechnicalservicestonon-residents:– Sections6quat;6quin(nolonger);

• TransferPricing.

Covering:

• Sourceanddeemedsource• Taxreturndisclosure/Reportablearrangements

• Theserviceswithholdingtax

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Source- technicalservices• Actualsource- percaselaw:generally theplacewherethephysicalservicesarerendered;

• Deemedsource– s9(2)(e),9(2)(f):– (e)incurredbyanSAresidentandreceivedoraccruediro the‘…impartingof…technical knowledge…orinformation,ortherenderingof,orundertakingtorender, anyassistance orserviceinconnectionwiththeapplicationofsuchknowledgeorinformation,’unlessattributabletoaPEo/sSA.

NBPEdefinedins1withreftoArticle5ofMTCofOECD.

Deemedsource- technicalservicescontinued

– (f)receivedoraccruediro “impartingof…technical…knowledgeorinformationforuseintheRepublic..or therenderingof, orundertakingtorender,anyassistanceorserviceinconnectionwiththeapplicationorutilisation ofsuchknowledgeorinformation’

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Disclosure

• SATaxReturnmustbesubmittedbyeveryjuristicperson:– 2014- ‘...whichderivedserviceincomefromasourcewithintheRepublic’(Gaz no.37767);

– 2015- ‘whichderivedincomefromasourceintheRepublic’(Gaz no.38874)

• ReportableArrangements(s34–s390fTAA):NBs35(2):‘iftheCommissionerhaslistedthearrangementinapublicnotice’.

Reportablearrangements:GovtGazette(no39650)3Feb2016

• 2.6Anarrangement fortherendering to aperson,thatisaresident, oranon-residentwithaPEinRSAtowhichitrelates,of….technicalservices, ito whichnon-residentrepresentative is,orisexpected tobe,physicallypresentinSAicworforpurposesofrenderingthoseservices;andtheexpenditure incurred on/after3Feb2016 inrespectthereofexceedsorwillexceedR10mn,andnotremunerationper4th schedule.

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TheServicesWHT-effective1Jan2017(?)

• Servicefees(s51A):“amountthatisreceivedoraccruedinrespectoftechnicalservices….butdoesnot includeservicesincidentaltotheimpartingof…technical…knowledgeorinformation,ortherenderingof….anyassistanceorserviceinconnectionwiththeapplicationorutilisationofsuchknowledgeorinformation”

TheServicesWHTcont• Rate15%(finaltax);• Mustbe:

– Paidtoforeignperson;– SAsourced(s51B);

• Exemptif:– NaturalpersonpresentinSA>183days;– ConnectedtoPEandforeignpersonregisteredasSAtaxpayer;– Ptisremunerationpaidbyemployertoemployee.

• ReducedrateifDTAanddeclaration.OnlyreallyappliesifSAsourcedservicefees+noDTA+noPEinSA.

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Workshop onCross-borderTaxationofTechnicalServicesFees

JohannHattinghAssociateProfessor

DepartmentofCommercialLawUCTTaxInstitute

i. TaxPolicyii. TaxHistory

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Agenda

• TaxPolicy– Generaltheory– Taxtreaties

• History– Country practices–ModelConventionhistory

TaxPolicy• Incometax&equity– Benefitstheory– Abilitytopay

• Incometaxchargedonnetgain/profitvs.finalgrosscharge:– taxesbasedonturnover&collectionmechanisms;– Earnedvsunearnedincome;– Impactofexchangeofinformation?

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Grosstaxationofearnedincome

Source:F.Krause,Unpublished MComdissertation,UniversityofPretoria,2015.

TaxPolicy• Incometax&neutrality– Nodistortion.

• Revenueraisingbasedonconsumption vs.source.– Classic conception:Economicallegiance(basedonbenefitstheory)confineswhomaybetaxed.

– CompareUNMComm §§1-2,16,72-74(example):Redefiningsourceintheimageofconsumption?Avoidance?

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TaxPolicy• OECDvsUNModeltreatmentofservices.– SeeB.Arnold,TheTaxationofIncomefromServicesunderTaxTreaties:CleaningUptheMess,BIFD2010, vol.65,No.2

A.Clausesaimedatregulatingtaxationoftech.feesatsource

• 1959India-USATT(artVI)• 1961India-FinlandTT(artVIII)• 1971AndeanMTT(art14)• 1973CARICOMMTT(art13)• 1975India-TanzaniaTT(artXV)• 1981India-UKTT(art13)• 1984UK-PRChinaTT(art13)• 1989India-USATT(art12&MoU)• 1993India-UKTT(art13)

B.Clausesdealingwiththerelationshipbetweentech.fees,royalties/other income

• 1960India-JapanTT(artX(e))• 1962USA-JapanTT(MoU)• 1975Brazil-GermanyTT(Protocol)• 1981India-ItalyTT(Protocol)• 1989India-USATT(art12&MoU)

TaxHistory

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TaxHistoryA.ArticleVI,1959USA– Indiataxtreaty:

‘Amountspaidbyanenterpriseofoneoftheterritoriesfortechnicalservicesfurnishedbyanenterpriseoftheotherterritoryshallnotbesubjecttotaxbythefirst-mentioned territoryexceptinsofarassuchamountsareattributabletoactivitiesactuallyperformedinthefirst-mentioned territory.Incomputingtheincomesosubjecttotax,thereshallbeallowedasdeductionstheexpensesincurredinthefirst-mentionedterritoryinconnectionwiththeactivitiesperformedinthatterritory.’

TaxHistoryA.Article13,1973CARICOMmultilateral taxtreaty:

‘1.Managementchargesarising inaSchedule1StateandpaidtoaresidentofaSchedule2StatemaybetaxedintheSchedule2State.2.However, suchmanagementchargesmaybetaxedintheStateinwhichtheyariseandaccording tothelawofthatState,butifthatStateisaSchedule1Statethetaxsochargedshallnot exceed10percentofthegrossamount ofsuchmanagementcharges.3.Theterm"managementcharges"asusedinthisArticlemeanspaymentfortheprovision ofindustrial orcommercial adviceorformanagement,ortechnical services orsimilarservicesorfacilities.4.Theprovisions ofparagraphs 1and2ofthisArticleshallnotapplyiftherecipient hasintheStateinwhichthepaymentarisesapermanentestablishmentwithwhichsuchpaymentiseffectively connected.Insuchacase,theprovisions ofArticle7ofthisAgreementshallapply.’

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TaxHistoryA.ArticleXV,1975India-Tanzaniataxtreaty:

‘1.ManagementorprofessionalfeesarisinginaContractingStateandpaidtoaresidentoftheotherContractingStatemaybetaxedinthatotherState.2.However,suchmanagementorprofessionalfeesmaybetaxedintheContractingStateinwhichtheyarise,andaccordingtothelawofthatState,butthetaxsochargedshallnotexceedtwentypercentofthegrossamountofthemanagementorprofessionalfees.3.Theterm"managementorprofessionalfees"asusedinthisArticlemeanspaymentsofanykindtoanyperson,otherthantoanemployeeofthepersonmakingthepayments,inconsiderationforanyservicesofamanagerial,technicalorconsultancynature.’

TaxHistoryB.MoU,1962USA– Japantaxtreaty:[comp.UNComm §82]

‘Itisunderstoodthat,wherearesident,corporation,orotherentityofoneofthecontractingStatesrenderstechnicalservicestoaresident,corporation,orotherentityoftheothercontractingStatebypreparingordevelopingdesigns,models,plans,drawings,orotherlikeproperty,orbyperformingengineering,research,testing,experimental,orotherlikeservicesandwheresuchservicesarerenderedintheformerState,thepaymentsinrespectofsuchserviceswhichcovercostsandanormalprofitfortheservicesinvolvedandwhicharenotcontingentupon,orcoterminouswith,theuseof,ortherighttouse,theproductofsuchservicesortheprofitsorsalesderivedfromtheuseoftheproductofsuchservicesinthelatterStatearenottobeconsideredasroyaltypayments.’

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TaxHistoryB.Protocol,1975Brazil-Germanytaxtreaty:

‘Itisunderstoodthattheprovisionsofparagraph 2(b)ofArticle12[royalties]shalllikewiseapplytoincomederivedfromtherenderingoftechnicalassistanceandtechnicalservices.’

TaxHistoryB.Protocol,1981India-Italytaxtreaty:

‘ItisunderstoodthatwithreferencetoArticle23,theexpression"otherincome"includesfeesfortechnicalservices’

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TaxHistoryA+B.Art.12&MoU,1989India-USAtaxtreaty:[compUNMcom §§51,75]

‘4.ForpurposesofthisArticle,"feesforincludedservices"meanspaymentsofanykindtoanypersoninconsiderationfortherenderingofanytechnicalorconsultancyservices(includingthroughtheprovisionofservicesoftechnicalorotherpersonnel)if suchservices:(a)areancillaryandsubsidiarytotheapplicationorenjoymentoftheright,propertyorinformation forwhichapayment,describedinparagraph3[royalty]isreceived;or(b)makeavailabletechnicalknowledge,experience,skill,know-how,orprocesses,orconsistofthedevelopmentandtransferofatechnicalplanortechnicaldesign.’

TaxHistoryA+B.Art.12&MoU,1989India-USAtaxtreaty:[compUNart.XX(3)]

‘5.Notwithstanding paragraph 4,"feesforincluded services"doesnot includeamountspaid:(a)forservicesthatareancillary andsubsidiary, aswellasinextricablyandessentially linked,tothesaleofproperty[…];(b)forservicesthatareancillary andsubsidiary totherentalofships,aircraft,containersorotherequipmentusedinconnectionwith theoperation ofshipsoraircraft in international traffic;(c)forteaching inorbyeducational institutions;(d)forservicesforthepersonaluseoftheindividual orindividuals makingthepayment;or(e)toanemployeeofthepersonmaking thepayments ortoanyindividualorfirmofindividuals (otherthanacompany)forprofessionalservicesasdefinedinArticle 15(IndependentPersonalServices).’

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TaxHistoryA+B.Art.12&MoU,1989India-USAtaxtreaty:• Detailcommentaryand12examplesinanMoU:‘Bytechnicalservices,wemeaninthiscontextservicesrequiringexpertiseinatechnology.Byconsultancyservices,wemeaninthiscontextadvisory services.’

• Legalstatus?Embodiesoriginalintention?

TaxHistory• OECDvsUNModelhistory.

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End.

TechnicalServicesintheModelConventionsandSATreaties

CraigWest

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Servicesintreaties• Multipleinstances• Excluding:– Employment– Sportspersons– Governmentservice– AttributionarisingfromaPE

• Including:– ServicesinPEs– IndependentPersonalServicearticles– Royalties– Specificarticlesfortechnicalservices

StatusQuo

• OECD2014Model– Paragraphs42.11to42.48oftheOECDCommentary

– Onlyincludes services (excl employment,sportspersons, Governmentserviceetc)whereaPEexists

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StatusQuo

• UN2011Model– IncludesanenterpriseservicePE(Art5(3)(b))– Noseparatetechnicalservicefeearticle

StatusQuo

• SADC2011Model– NoCommentarytosupport themodel– IncludesinPE• EnterpriseservicePE(perUNModel)• IndividualservicePE(replicatesUNModelcommentaryversion)

– Includesspecialarticlefortechnicalfees

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UNProposedArticlevSADCModelUNModel1.FeesfortechnicalservicesarisinginaContractingStateandpaidtoaresidentoftheotherContractingStatemaybetaxedinthatotherState.

SADCModel1.TechnicalfeesarisinginaContractingStateandpaidtoaresidentoftheotherContractingStatemaybetaxedinthatotherState.

Comment:ImpliestaxationinsourceStatewithadditionalrighttotaxinresidenceState

UNProposedArticlevSADCModelUNModel2.However,notwithstandingArticle14andsubjecttotheprovisionsofArticles8,[17and20], fees fortechnicalservicesarisinginaContractingStatemayalsobetaxedintheContractingStateinwhichtheyariseandaccordingtothelawsofthatState,butifthebeneficialownerofthefees isaresidentoftheotherContractingState,thetaxsochargedshallnotexceed___percentofthegrossamountofthefees.

SADCModel2.However,suchtechnicalfeesmayalsobetaxedintheContractingStateinwhichtheyarise,andaccordingtothelawsofthatState,butifthebeneficialownerofthetechnicalfeesisaresidentoftheotherContractingState,thetaxsochargedshallnotexceed…...percentofthegrossamountofthetechnicalfees.

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UNProposedArticlevSADCModelUNModel3.Theterm“feesfortechnicalservices”asusedinthisArticlemeansanypaymentinconsiderationforanyserviceofamanagerial,technicalorconsultancynature,unlessthepaymentismade:(a)toanemployeeofthepersonmakingthepayment;(b)toadirectorortop-levelmanagerialofficialofacompanythatisaresidentoftheContractingStateinwhichthefeesarise;(c)forteachinginorbyeducationalinstitutions[aspartofadegreegrantingprogram];(d)byanindividualforservicesforthepersonaluseoftheindividual;or[(e)forservicesthatareancillaryandsubsidiary,aswellasinextricablyandessentiallylinked,tothesaleofproperty].

SADCModel3.Theterm“technicalfees”asusedinthisArticlemeanspaymentsofanykindtoanyperson,otherthantoanemployeeofthepersonmakingthepayments,inconsiderationforanyserviceofatechnical,managerialorconsultancynature,unlessthepaymentisthereimbursementofactualexpensesincurredbythatpersonwithrespecttotheservice.

UNProposedArticlevSADCModelUNModel4.Theprovisionsofparagraphs1and2shallnotapplyifthebeneficialowneroffeesfortechnicalservices,beingaresidentofaContractingState,carriesonbusinessintheotherContractingStateinwhichthefeesfortechnicalservicesarisethroughapermanentestablishmentsituatedinthatotherState,orperformsintheotherContractingStateindependentpersonalservicesfromafixedbasesituatedinthatotherState,andthefeesfortechnicalservicesareeffectivelyconnectedwitha)suchpermanentestablishmentorfixedbase,orb)businessactivitiesreferredtoin(c)ofparagraph1ofArticle7.InsuchcasestheprovisionsofArticle7orArticle14,asthecasemaybe,shallapply.

SADCModel4.Theprovisionsofparagraphs1and2shallnotapplyifthebeneficialownerofthetechnicalfees,beingaresidentofaContractingState,carriesonbusinessintheotherContractingStateinwhichthetechnicalfeesarise,throughapermanentestablishmentsituatedthereinandthetechnicalfeesareeffectivelyconnectedwithsuchpermanentestablishment.Insuchcase,theprovisionsofArticle7shallapply.

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UNProposedArticlevSADCModelUNModel5.ForthepurposesofthisArticle,subjecttoparagraph6, feesfortechnicalservicesshallbedeemed toariseinaContractingStateifthepayer isaresidentofthatStateorifthepersonpayingthefees,whether thatpersonisaresidentofaContractingStateornot,hasinaContractingStateapermanentestablishmentorafixedbaseinconnectionwithwhichtheobligationtopaythefeeswas incurred,andsuchfeesarebornebythepermanentestablishmentorfixedbase.

SADCModel5.Technical feesshallbedeemedtoariseinaContractingStatewhen thepayer isaresidentofthatState.Where,however,thepersonpayingthetechnicalfees,whether thatpersonisaresidentofaContractingStateornot,hasinaContractingStateapermanentestablishmentinconnectionwithwhichtheobligationtopaythetechnicalfeeswasincurred,andsuchtechnicalfeesarebornebythepermanentestablishment,thensuchtechnicalfeesshallbedeemedtoariseintheState inwhichthepermanentestablishmentissituated.

UNProposedArticlevSADCModelUNModel6.ForthepurposesofthisArticle,feesfortechnicalservicesshallbedeemednottoariseinaContractingStateifthepayer isaresidentofthatStateandcarriesonbusinessintheotherContractingStateorathirdState throughapermanentestablishmentsituatedinthatotherStateorthethirdState,orperformsindependentpersonalservicesthroughafixedbasesituatedinthatotherStateorthethirdStateandsuchfeesarebornebythatpermanentestablishmentorfixedbase.

SADCModelNoequivalent

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UNProposedArticlevSADCModelUNModel6.Where,byreasonofaspecialrelationshipbetween thepayerandthebeneficialownerofthefeesfortechnicalservicesorbetween bothofthemandsomeotherperson,theamountofthefees,havingregardtotheservicesforwhichtheyarepaid,exceedstheamountwhichwouldhavebeenagreeduponbythepayerandthebeneficialownerintheabsenceofsuchrelationship,theprovisionsofthisArticleshallapplyonlytothelast-mentionedamount.Insuchcase,theexcesspartofthefeesshallremain taxableaccordingtothelawsofeachContractingState,dueregardbeinghadtotheotherprovisionsofthisConvention.

SADCModel6.Where,byreasonofaspecialrelationshipbetween thepayerandthebeneficialownerorbetweenbothofthemandsomeotherperson,theamountofthetechnicalfeespaidexceedstheamountwhichwouldhavebeenagreeduponbythepayerandthebeneficialownerintheabsenceofsuchrelationship,theprovisionsofthisArticleshallapplyonlytothelast-mentionedamount.Insuchcase,theexcesspartofthepaymentsshallremain taxableaccordingtothelawsofeachContractingState,dueregardbeinghadtotheotherprovisionsofthisAgreement.

PositionsonSADCModelPositionsonArticle13(TechnicalFees)Angola,Mauritius,Namibia,SouthAfricaandZimbabwereservetherightnottoinclude thisarticle

Paragraph3Lesothoreservestherighttoexclude thewords“unlessthepaymentisthereimbursementofactualexpensesincurredbythatpersonwithrespecttotheservice.”

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SA’scurrenttreaties

• UseofArticle5(3)(b)UNModelorequivalent

• Appearsin31of75treaties inforce• In3treaties (US,LesothoandThailand)appearsinArt5(2)– refABandBDHoldingsLLClater

Thefurnishingofservices,includingconsultancyservices,byanenterprisethroughemployeesorotherpersonnelengagedbytheenterpriseforsuchpurpose,butonlyifactivitiesofthatnaturecontinue(forthesameoraconnectedproject)withinaContractingStateforaperiodorperiodsaggregatingmorethan183daysinany12-monthperiodcommencingorendinginthefiscalyearconcerned

CommentaryonArt5(3)(b)

• Para8(p108):– Inclusion aslargeprofitsmadeinprovisionofservicetodeveloping country

– Someobjectto183daysas• Shortdurationcanyieldprofit• Stayisirrelevanttorighttotax(likeArt17)• Concernsofabusivestructurestoavoidtimeframe

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SA’scurrenttreaties• UseofArticle5(3)(c)UNModelcommentaryaddition

followingdeletionofArt14(onlytreatywithHongKong)

• Therest(14oftheearlier31),prefer:the performanceofprofessionalservicesorotheractivitiesofanindependentcharacterbyanindividual,butonlywherethoseservicesoractivitiescontinuewithinaContractingStateforaperiodorperiodsexceedingintheaggregate183daysinanytwelve-monthperiodcommencingorendinginthefiscalyearconcerned.

• PeriodtobecomePEdiffer(most183days)

Foranindividual,theperformingofservicesinaContractingStatebythatindividual,butonlyiftheindividual’sstayinthatStateisforaperiodorperiodsaggregatingmorethan183dayswithinanytwelve-monthperiodcommencingorendinginthefiscalyearconcerned

CommentaryonUNArt5(3)(c)

• UNCommentaryheaded:“AlternativetextforcountrieswishingtodeleteArticle14”

• NoSAtreatyusingtheprovisionalsohasArt14

• SeychellesProtocol2012deleteditsArt14andinsertedArt5(3)(c)

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SA’scurrenttreaties

• Article12inclusionoftechnicalservices– Subtle:(butgenerallyacceptedtobe“know-how”)• “thesupplyofscientific,technical,industrialorcommercialknowledgeorinformation”(AustralianProtocol; Indonesia)

– Overt:• India:“RoyaltiesandTechnicalServices”• Pakistan:“RoyaltiesandFeesforTechnicalServices”

SA’scurrenttreaties

• Article14:Independent PersonalServices– DeletedbyOECDin2000– RemainsinUN2011Model– Slightvariationsbetweenclauses– In48of75treatiesinforce(only 11ofthe48post2000)

– AllexceptUSandSeychelles (before2012Protocol)include adefinition forprofessionalservices

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SA’scurrenttreaties

• Technicalfeearticles– Botswana(technicalfees)– SADCmember– Ghana(managementfees)– Lesotho(technicalfees)– SADCmember–Malaysia(technicalfees)– Swaziland(technicalfees)– SADCmember– Tunisia(technicalfees)– Uganda(technicalfees)

SA’scurrenttreaties• Offshoreactivities(incl relatedtechnicalservices)?– Denmark(ActivitiesinConnectionwithPreliminarySurveys) – deemedPE

– Ireland(Miscellaneous RulesApplicable toCertainOffshoreActivities)

– Netherlands(OffshoreActivities)+protocolreferringtotechnicalserviceswithrespecttoArt7

– Norway(OffshoreActivities)

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