SA/Mauritian double tax agreement: what’s all the fuss?

The South African and Mauritius governments recently signed a new double-taxation agreement (DTA), which could come into effect as soon as January 1, 2014. Numerous press releases have appeared since the signing of the DTA, raising many concerns about its

What’s all the fuss about?

The main concern is about the “tie breaker” clause, which, in the absence of the two countries reaching mutually agreement, determines where the entity, usually a company or trust, resides for DTA purposes.

The tie breaker clause under the current Act provides that companies and trusts will be deemed to be a resident where effective management is located. That has changed in the newly signed DTA, which now calls for the residency to be settled by mutual agreement between SA and Mauritius.

So the new tie breaker clause provides no clarity – and if agreement cannot be reached between the two countries, the DTA will not be applicable to the entity. In the absence of a tie breaker clause, this could effectively result in an entity being subject to double taxation i.e. in both SA and Mauritius.

The tie breaker clause contained in the current DTA ensures this cannot happen by determining that the company is resident where the company’s place of effective management is situated.

Whereto now?

One of the reasons for SA’s insistence on a process of mutual agreement is so that SARS can get a better understanding of current and future business arrangements with Mauritius prior to agreeing to where a company will be deemed resident. This enables SARS to identify and possibly prevent aggressive tax planning arrangements they believe would result in tax leakage from SA.

What is certain is that this will potentially have a huge impact on existing companies who are relying on the current DTA provisions. The Mauritius Revenue Authorities have indicated that they would continue to apply “the place of effective management” test but SA has not yet made public the criteria it will apply.

Companies possibly affected by this change in the tax agreement would be well advised to seek expert advice to ensure they do not inadvertently become subject to double taxation.