[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.