By Robyn Berger Monday, February 22, 2021

As the South African National Treasury scrambles to protect the country’s shrinking tax base, some potent tools that could be used to shore up revenue collections are lying idle.

One of these is the beneficial ownership test that became extremely relevant when dividends tax came into effect in February 2007, 13 years ago – and which is not being used to its full effect, according to Robyn Berger, Executive: Tax at leading African law firm, Bowmans.

‘I have never seen SARS challenge the rate at which tax is withheld on dividend payments to foreign shareholders through an audit of the beneficial ownership test,’ she says.

The purpose of this test is to ensure that only the beneficial owner of the income stream in question qualifies for the Double Tax Agreement (DTA) relief afforded. This helps prevents ‘treaty shopping’, where a taxpayer establishes a presence in a third country through which to invest into South Africa, simply because that country has a more favourable DTA with South Africa.

‘Other countries examine this test regularly so it should be perfectly acceptable for South Africa to do so without undermining the validity of its DTA network,’ she says. ‘To me, this has always seemed like low-hanging fruit that remains unpicked.’

Another delayed development that could make it easier for South Africa to challenge taxpayers on the dividends withholding tax rate, would be the multilateral instrument (MLI) that South Africa signed on 7 June 2017.

Berger says the MLI is intended to be a quick-fix way to renegotiate selected DTAs to align with the outcomes of the Base Erosion and Prof Shifting (BEPS) initiative run by the Organization for Economic Cooperation and Development (OECD). ‘However, three years later, the MLI is yet to progress through the channels that will allow it to come into force.’

She notes that the MLI also has a powerful tool to prevent treaty shopping, namely the Principal Purpose Test (PPT).  Once in force, this test would apply to the majority of South Africa’s DTAs.

‘However, one may argue that South Africa does not need this extraordinary measure that comes with the MLI, as we already have powerful legislation in existence that could, if used appropriately, combat DTA shopping,’ says Berger. ‘Some consolidation may be appropriate.’