Globalisation, cross-border transactions and a booming e-commerce environment are posing challenges for the collection of taxes – events that have prompted tax authorities across the world to move collectively to counter the loss of tax revenues within their tax jurisdictions. Although double tax agreements (DTAs) assist with the collection of income taxes, the major questions that arise are usually related to how various authorities enforce compliance and collection of indirect taxes, with most concern being directed at the effective collection of Value-Added Tax (VAT).
The impact electronic commerce could have on the enforcement and collection of taxes was first raised by the Organisation for Economic Co-ordination and Development (OECD) in 1999, when the Ottawa Taxation Framework Conditions were published. A crucial issue identified was the tax administration of aspects of electronic commerce. The following principles were established in this watershed document:
- Revenue authorities should maintain their ability to secure access to reliable and verifiable information in order to identify taxpayers and obtain the information necessary to administer their tax system.
- Countries should ensure that appropriate systems are in place to control and collect taxes.
- International mechanisms for assistance in collection of tax should be developed, including proposals for an insert of language in the OECD Model Tax Convention.
Complications with the collection and enforcement of VAT payments, however, may be attributed to limitations imposed on the application of DTAs. These agreements relate primarily to income tax and the disclosure of information, with enforcement articles that are part of these agreements applying only to taxes covered by the DTA.
DTAs generally do not include or extend to VAT and none of the DTAs South Africa has entered into with other states extend to VAT. Thus, issues arise as to how South Africa, as well as other VAT jurisdictions, can effectively obtain the information necessary to identify taxpayers and enforce the collection of VAT.
South Africa currently has more than 70 DTAs in place, which include some new protocols that have become effective recently.
When interpreting and relying on the provisions of a particular DTA, however, one would have to begin by determining whether the taxes in question are indeed covered by the DTA. Articles 1 and 2 of a DTA based on the OECD model set out the type of persons and type of taxes covered by the DTA.
However, when addressing international tax concerns, one has a tendency to revert to the regular articles more often, typically, withholding taxes in respect of dividends, interest and royalties.
As discussed above, and with due consideration being given to the international boom in e-commerce transactions, it is becoming more important to interpret and apply the provisions of the articles that determine the scope of the DTA (that is, articles 1 and 2) in conjunction with the administrative articles, which include the Exchange of Information Article – article 26.
In this regard, it is worth highlighting that DTAs concluded before 2000 were most likely to have determined that contracting parties were limited to only requesting information from one another in respect of taxes covered in article 2 of the DTA. This ensured that if a contracting state required information in respect of VAT, it would not be able to rely on the Exchange of Information Article, since VAT did not fall within the ambit of article 2 at that stage.
This is illustrated by the DTA entered into between South Africa and Belgium, effective between the two nations since 9 October 1998. Article 26(1) of this DTA reads as follows:
The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article 1 [our emphasis].
In terms of the above, it is clear that the Exchange of Information Article could be relied on only in respect of taxes covered by the DTA; in other words, the taxes set out in article 2. This article further determines that the ambit thereof will not be restricted by the provisions of article 1; in other words, the type of person covered by the DTA. It is therefore our view that in the event of Belgium or South Africa requesting assistance from each other in respect of VAT, neither state would be able to rely on the Exchange of Information Article.
The amendments to the Exchange of Information Article can, however, be clearly observed in DTAs concluded after 2000. These DTAs include the Protocol entered into between South Africa and the Netherlands, which reads as follows:
The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2 [our emphasis].
It is our view that if the Netherlands or South Africa requested assistance from each other regarding VAT, both states would be able to rely on the Exchange of Information Article in this regard.
Reliance on the Exchange of Information Article could be effected by request, when a specific case is being dealt with, automatically, or spontaneously.
Although these are primary methods, the exchange process is not limited to these methods. Additional methods could include, for instance, information obtained through a tax examination conducted abroad. Even though this process may seem impractical, it is something that could be pursued more regularly in future.
While revised South African DTAs have not all come into effect, each DTA is due to be amended primarily because of the change in dividend receipts.
While not a member of the OECD, South Africa nevertheless follows OECD guidelines with respect to the interpretation of DTAs. It would therefore appear that the country has taken the opportunity to expand the application of the disclosure of information articles on concluding its revised DTAs.
This is of particular relevance when recent changes to the VAT Act are considered. These address electronic services supplied by foreign electronic services that will be required to register for VAT in South Africa. Electronic services supplied by foreign suppliers that exceed R50 000 made to a South African resident or where payment originates from a South African bank account will be impacted on by the changes to the Act.
As the recent amendments affect foreign suppliers who have no other presence in South Africa, questions have arisen about how South Africa intends to enforce the registration and compliance of foreign suppliers.
However this may be achieved, there is no doubt that there will continue to be an expanding global trend for tax authorities to disclose information to enable applicable tax jurisdictions to identify taxpayers. This is condoned by the revised DTAs, which endorse the sharing and disclosure of information. It can be expected that all DTAs will be revised in this regard.
Anne Bardopoulos is Manager, VAT, at Deloitte and Janien Jonker is Manager, International Tax, also at Deloitte