Tax Treaties: Portugal, Saudi Arabia and Switzerland to be ratified

Select Committee on Finance05th September 2007

Presentation by Yanga MputaTax Policy Unit, National Treasury

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Tax Treaty Approval Process

• Tax treaties are a reflection of the fundamental tax policy choices of each country

• Tax treaties are in many instances the outcome of negotiated settlements based on some or other concession to the domestic law, reflecting critical tax policy choices for each country

• It is therefore important that Parliament approve any tax treatybefore it is binding

• In South Africa this approval process is done in accordance withs231 of The Constitution, read with s108(2) of the Income Tax Act

• We believe that the tax treaties with Portugal, Saudi Arabia andSwitzerland being presented today for the Portfolio Committee’s approval, constitute what is in South Africa’s best interest

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SA / Portugal tax treaty

• New tax treaty signed on 13 November 2006

• Aim of the tax treaty with Portugal: – Strengthen existing economic relations

• One of the factors driving relations between the two countries is, the presence of a large Portuguese community in South Africa

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SA / Portugal tax treaty-Investment and Trade Flows

• Investment flows:– Investment by Portugal into South Africa was R95.4 million in

2002 and R33.8 million in 2003 – Investment by South Africa into Portugal was R5.1 million in

2002 and R7.8 million in 2003 • Trade Flows:

– Exports to Portugal were R727 million in 2004, R915 million in 2005 and R1.3 billion in 2006

– Imports from Portugal were R797 million in 2004, R640 million in 2005 and R749 million in 2006

• SA owned/managed companies in Portugal– Alcobre, Homenet, SmartPac, Netcare, Tsumeb, Carrol Boyes

• Portuguese owned/managed companies in SA– Sonae, Amorim, Pestana Group, Cimpor, Construtora do

Tamega, Caixa Geral de Depositos(CGD), Banif, BPI, BancoPrivado-BPP, Bes Investmento

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SA / Saudi Arabia tax treaty

• New tax treaty signed during the Presidential visit to Saudi Arabia in March 2007

• Aim of the tax treaty with Saudi Arabia : – Economic Benefit– Strengthening of relations with the countries of the

Gulf Region

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SA / Saudi Arabia tax treaty-Economic Developments

• The presidential visit to Saudi Arabia in March 2007 strengthened the existing bilateral relations between the two countries

• Saudi Arabia is the major supplier of crude oil to South Africa, with 34.2% of South Africa’s crude oil imported from Saudi in 2006

• Saudi Arabia is the 3rd largest market (after Israel and UAE) for South Africa’s products in the Middle East

• Approximately 5 000 to 10 000 South African expatriates are in Saudi Arabia

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SA / Saudi Arabia tax treaty-Investment and Trade Flows

• Investment flows:– In 2005 total investment by Saudi Arabia into South Africa was (-R513

million+R2,408 million)= R1.9 billion (negative balance results from a liability of R2,408 million of dividends paid to Saudi Arabia)

– Investments by South Africa into Saudi Arabia are insignificant• Trade Flows:

– Exports to Saudi Arabia were:R1.5 billion in 2004, R1.9 billion in 2005 and R2.1 billion in 2006

– Imports from Saudi Arabia were:R17.1 billion in 2004, R19.4 billion in 2005 and R24.5 billion in 2006

• SA owned/managed companies in Saudi Arabia– Group 5, Bateman, Foschini, Nando’s, Mugg & Bean, Galito Old

Mutual• Saudi Arabia owned/managed companies in SA

– Saudi Ager (invested in Cell C), Amintit, Flowtide, Bin Laden, Sheikh Zahid, Shabatl, Dallah, Albaraka Bank, AlYateen Trading

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Special feature on the Saudi Arabia tax system

Generally Saudi Arabia do not levy income tax on its nationals. The tax structure is as follows:

• Zakat– All Saudi nationals, companies and Citizens Gulf Cooperation

Council (GCC) carrying on business in Saudi are subject to Zakat, a religious tax

– The rate is 2.5% annually• Personal Income Tax

– Individual employees: All individual employees, both Saudi nationals and expatriates, are not subject to tax

– Self employed Expatriates: Non Saudi nationals who derive income from investments in Saudi businesses or professionals activities (e.g. doctors, lawyers) are subject to tax in Saudi

• Business Income Tax– Business income tax is levied only on Non Saudi and non Gulf

Cooperation Council nationals carrying on business in Saudi

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SA / Switzerland tax treaty

• Renegotiation of the existing tax treaty

• First tax treaty between South Africa and Switzerland came into force on 11 July 1968

• During this time, SA tax policy was not yet developed

• The proposed (new) tax treaty address certain aspects that are not present in the existing treaty

• This proposed tax treaty signed on 8 May 2007 will terminate the existing tax treaty

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SA / Switzerland tax treaty-Economic Developments

• Existing economic ties between South Africa and Switzerland continue to grow strongly

• This is evident from the following:– Swiss Business Hub SA opened in May 2007 –The main aim of Swiss

Hub SA is to promote investment and economic activity for Swissfirms in southern Africa.

– Trade and Investment Network Switzerland/South Africa (TINSSA) launched in April 2004 -The main aim of TINSSA is to strengthen economic ties between Africa and Switzerland and to provide an information network of business opportunities.

– “Business Kickoff” 2010 launched in 2006 -The objective of this project is to act as a channel for Swiss companies to reach South African companies and discuss joint projects around the 2010 Soccer World Cup.

– MOU on developmental cooperation signed between South Africa andSwitzerland in September 1994 – Swiss Agency for Development and Cooperation supports these bilateral programmes in South Africa.

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SA / Switzerland tax treaty-Investment flows

• Swiss investments into SA• Total Swiss FDI in South Africa amounted to R7.2 billion in 2004. • Total Swiss portfolio investment in South Africa amounted to

R11.1 billion in 2004. • SA investments into Switzerland

• Total South African FDI in Switzerland amounted to R354 million in 2004

• South Africa’s portfolio investments in Switzerland amounted to R1.4 billion in 2004.

• SA owned/managed companies in Switzerland• De Beers Centenary, Compagnie Financiere Richemont, Sappi

Trenfor Trading, Decillion, Investec, Glencore, Louis Group, Dimension Data, Brait, Tradex Handels-und Beratungs AG, Octane Holdings, and South African Airways.

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SA / Switzerland tax treaty- Trade Flows

• Exports to Switzerland • Exports to Switzerland are as follow:

– R7.3 billion in 2004, – R7.9 billion in 2005, – R11.6 billion in 2006.

• Imports from Switzerland • Imports from Switzerland are as follow:

– R3 billion in 2004, – R4.5 billion in 2005, – R4.1 billion in 2006.

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Preliminary Hearings: Lesotho, Sudan

Portfolio Committee on Finance20 June 2007

Presentation by Yanga MputaTax Policy Unit, National Treasury

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Purpose of Tax Treaties

Policy• Promote economic growth by providing

certainty to cross border investments• Prevent double taxation of the same income

through– Certainty of tax treatment– Assignment of taxing rights between the two treaty

countriesAdministration• Exchange of information• Mutual Agreement Procedure

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Reasons for the Lesotho Treaty (Content)

• Strengthening of existing economic ties• Promoting regional cooperation (SADC)• Renegotiation of the old tax treaty• First tax treaty between South Africa and

Lesotho came into force in 1997 • During that time, South Africa was still on

source based system of taxation and did not have a capital gains tax regime

• Hence the current tax treaty between South Africa and Lesotho does not cover all aspects

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SA / Lesotho tax treaty-Investment Flows

Investment by Lesotho:– Total investment by Lesotho into South

Africa was R3.1 billion in 2005 Investment by South Africa:

– Total investment by South Africa into Lesotho was R991 million in 2005

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SA / Lesotho tax treaty- Cross Border Movement of Individuals

• Lesotho nationals working in South Africa• Exchange of tourists between the two

countries• Students from Lesotho studying at South

Africa universities

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Reasons for the Sudanese tax treaty (Content)

• Target by Sudan• Promote economic growth• Promoting cooperation across the African

continent

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SA / Sudan tax treaty- Investment Flows

• Level of investment flows between the two countries are still insignificant

• SA Companies operating in Sudan– PetroSA– Transnet– Global Railway Engineering Consortium of

South Africa

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SA / Sudan tax treaty-Trade Flows

• Exports to Sudan:– Exports to Sudan were R302 million in 2004,

R434 million in 2005 and R463 million in 2006

• Imports from Sudan:– Imports from Sudan were R5.6 million in

2004, R0.6 million in 2005 and R2.5 million in 2006

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THANK YOU