    [Senate Treaty Document 105-9]
    [From the U.S. Government Publishing Office]

    105th Congress                                              Treaty Doc.
                                    SENATE

     1st Session                                                      105-9
    _______________________________________________________________________

                       TAX CONVENTION WITH SOUTH AFRICA

                                   __________

                                    MESSAGE

                                      from

                       THE PRESIDENT OF THE UNITED STATES

                                  transmitting

      CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF
    SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF
       FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS,
                     SIGNED AT CAPE TOWN FEBRUARY 17, 1997

     June 26, 1997.--Convention was read the first time and, together with
    the accompanying papers, referred to the Committee on Foreign Relations
              and ordered to be printed for the use of the Senate

                             LETTER OF TRANSMITTAL

                                  ----------

                                        The White House, June 26, 1997.
    To the Senate of the United States:
        I transmit herewith for Senate advice and consent to
    ratification the Convention Between the United States of
    America and the Republic of South Africa for the Avoidance of
    Double Taxation and the Prevention of Fiscal Evasion with
    Respect to Taxes on Income and Capital Gains, signed at Cape
    Town, February 17, 1997. Also transmitted is the report of the
    Department of State concerning the Convention.
        This Convention, which generally follows the U.S. model tax
    treaty, provides maximum rates of tax to be applied to various
    types of income and protection from double taxation of income.
    The Convention also provides for the exchange of information to
    prevent fiscal evasion and sets forth standard rules to limit
    the benefits of the Convention so that they are available only
    to residents that are not engaged in treaty shopping.
        I recommend that the Senate give early and favorable
    consideration to this Convention and give its advice and
    consent to ratification.

                                                    William J. Clinton.

                              LETTER OF SUBMITTAL

                                  ----------

                                           Department of State,
                                             Washington, June 13, 1997.
    The President,
    The White House.
        The President: I have the honor to submit to you, with a
    view to its transmission to the Senate for advice and consent
    to ratification, the Convention Between the United States of
    America and the Republic of South Africa for the Avoidance of
    Double Taxation and the Prevention of Fiscal Evasion with
    Respect to Taxes on Income and Capital Gains, signed at Cape
    Town on February 17, 1997 (``the Convention'').
        Currently, there is no income tax convention between the
    United States and South Africa. The income tax convention
    between the United States and South Africa of December 13, 1946
    was terminated July 1, 1987, pursuant to the terms of that
    convention and Section 313 of the Comprehensive Anti-Apartheid
    Act of 1986. The proposed Convention generally follows the
    pattern of the U.S. model treaty. It establishes maximum rates
    of tax that may be applied to various types of income,
    protection from double taxation of income, exchange of
    information to prevent fiscal evasion, and standard rules to
    limit the benefits of the Convention so they are available only
    to persons that are not engaged in treaty shopping. Like other
    U.S. tax conventions, this Convention provides rules specifying
    when income that arises in one of the countries (the ``source
    country'') and is beneficially owned by residents of the other
    country (the ``country of residence'') may be taxed by the
    source country.
        The Convention establishes maximum rates of tax that may be
    imposed by the source country on specified categories of
    income, including dividends, interest, and royalties, to
    residents of the other country that are the same as those in
    the U.S. model treaty and in many recent conventions with OECD
    countries. Pursuant to Article 10, dividends from direct
    investments are subject to tax by the source country at a rate
    of five percent. The threshold ownership criterion for direct
    investment is ten percent, consistent with other modern U.S.
    treaties, in order to facilitate direct investment. Other
    dividends are generally taxable by the source country at 15
    percent.
        In general, under Article 11, interest derived and
    beneficially owned by a resident of a Contracting State is
    exempt from tax by the source country and may be taxed only in
    the State in which the owner of the income resides. Under
    Article 12, royalties derived and beneficially owned by a
    resident of a Contracting State may also be taxed only in the
    State in which the owner of the income resides.
        These rates of taxation on royalty and interest income do
    not apply, however, if the beneficial owner of the income is
    not a resident of, but carries on business in the source
    country and the income is attributable to a permanent
    establishment in the source country. In that situation, the
    income is to be considered either business profit or income
    from independent personal services and is subject to the
    provisions of Articles 7 and 14, which deal with these classes
    of income.
        Like other U.S. tax treaties, this Convention provides the
    standard anti-abuse rules for certain classes of investment
    income in Articles 10 and 11.
        The taxation of capital gains, described in Article 13 of
    the Convention, follows the pattern of the U.S. model tax
    treaty. It provides that gains from the sale of real property
    (including a U.S. real property interest) are taxable in the
    State in which the property is situated. Gains from the sale of
    personal property that is part of a permanent establishment or
    fixed base may be taxed in the State in which the permanent
    establishment or fixed base is located. The proposed Convention
    permits taxation of profits from international carriage by
    ships or airplanes only by the country of residence. Gains,
    including gains from the sale of ships, aircraft, or containers
    operated or used in international traffic are taxable only in
    the Contracting State in which the alienator is located.
        Article 7 of the proposed Convention generally follows the
    standard rules for taxation by one country of the business
    profits of a resident of the other. The non-residence country's
    right to tax such profits is generally limited to cases in
    which the profits are attributable to a permanent establishment
    located in that country. The proposed Convention, however,
    grants rights to tax business profits that generally are
    somewhat broader than those found in the U.S. and OECD model
    treaties. Under the proposed Convention, pursuant to the
    definition of a ``permanent establishment'' in Article 5(2)(k),
    an enterprise will have a permanent establishment in a
    Contracting State if its employees or other personnel provide
    services within that State for 183 days or more within a 12-
    month period in connection with the same or a connected
    project.
        As do all recent U.S. tax treaties, this Convention
    preserves the right of the United States to impose its branch
    profits tax in addition to the basic corporate tax on a
    branch's business (Article 10). The proposed Convention, at
    Article 7, also accommodates a provision of the 1986 Tax Reform
    Act that attributes to a permanent establishment or fixed base
    income that is earned during the life of the permanent
    establishment or fixed base but is deferred and not received
    until after the permanent establishment or fixed base no longer
    exists.
        Consistent with U.S. treaty policy, Article 8 of the new
    Convention permits only the country of residence to tax profits
    from international carriage by airplanes and ships. This
    reciprocal exemption also extends to income from the rental of
    ships or aircraft if the rental income is incidental to income
    from the operation of the craft in international traffic.
        The taxation of income from the performance of personal
    services under Articles 14 and 15 of the proposed Convention is
    subject to rules that essentially follow those of the U.S.
    model treaty. The 183-day personal service requirement in the
    definition of permanent establishment (Article 5) is adopted in
    the definition of fixed base in Article 14.
        Under Article 18 of the proposed Convention, at the request
    of South Africa, the tax treatment of pensions differs from
    that in the U.S. model treaty. Pensions will be subject to
    limited source-country tax. The residence country may also tax,
    subject to a foreign tax credit, if the source country has
    taxed the pension.
        Article 22 of the proposed Convention contains significant
    anti-treaty-shopping rules making the Convention's benefits
    unavailable to persons engaged in treaty shopping.
        The proposed Convention also contains the standard rules
    necessary for administering the Convention, including rules for
    the resolution of disputes under the Convention (Article 25).
    The information-exchange provisions of the proposed Convention
    (Article 26) make clear that South Africa is obligated to
    provide U.S. tax officials such information as is necessary to
    carry out the provisions of the Convention. The information is
    understood to include bank information. Consistent with U.S.
    policy, South African information will be available to U.S.
    authorities regardless of whether South Africa has a ``tax
    interest'' in the information.
        The Convention would permit the General Accounting Office
    and the tax-writing committees of Congress to obtain access to
    certain tax information exchanged under the Convention for use
    in their oversight of the administration of U.S. tax laws and
    treaties (Article 26).
        In accordance with Article 28, the United States and South
    Africa must notify each other that their constitutional
    requirements for entry into force of the Convention have been
    satisfied. The Convention will enter into force 30 days after
    the later of the notifications. It will have effect, with
    respect to taxes withheld at the source, for amounts paid or
    credited on or after the first day of January following entry
    into force. In other cases the Convention will have effect with
    respect to taxable periods beginning on or after the first day
    of January following the date on which the Convention enters
    into force.
        Article 29 provides that the proposed Convention will
    remain in force indefinitely unless terminated by one of the
    Contracting States. Either State will be able to terminate the
    Convention after five years from the date on which the
    Convention enters into force by giving prior notice of at least
    six months through diplomatic channels.
        A technical memorandum explaining in detail the provisions
    of the Convention will be prepared by the Department of the
    Treasury and will be submitted separately to the Senate
    Committee on Foreign Relations.
        The Department of the Treasury and the Department of State
    cooperated in the negotiation of the Convention. It has the
    full approval of both Departments.
        Respectfully submitted,
                                                    Madeleine Albright.