Technical Service Fees workshop - University of Cape Town · of any technical or consultancy...
Transcript of Technical Service Fees workshop - University of Cape Town · of any technical or consultancy...
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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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?