Tag: Article 5

Preface paragraph 9

The main mechanisms for resolving issues that arise in the application of international tax principles to MNEs are contained in these bilateral treaties. The Articles that chiefly affect the taxation of MNEs are: Article 4, which defines residence; Articles 5 and 7, which determine the taxation of permanent establishments; Article 9, which relates to the taxation of the profits of associated enterprises and applies the arm’s length principle; Articles 10, 11, and 12, which determine the taxation of dividends, interest, and royalties, respectively; and Articles 24, 25, and 26, which contain special provisions relating to non-discrimination, the resolution of disputes, and exchange of information ...

South Africa vs. AB LLC and BD Holdings LLC, May 2015, Tax Court, Case No: 13276

US companies, AB LLC and BD Holdings LLC, came to South Africa in 2007 to perform certain services for X, a company based in and operating from South Africa. To perform these services they concluded a contract with X. There only purpose for coming to South Africa was to perform the services and earn income or profits in terms of the contract. Having achieved this objective they left the country in 2008. Furthermore in 2009 they recieved a succes bonus for the work performed in 2007 and 2008. On 14 June 2011 they were assessed for taxation purposes for the 2007, 2008 and 2009 years by the Revenue Service. The total taxable amount for these years, although only earned during the period February 2007 to May 2008, according to the respondent, was R 63.990.639. The assessment was based on the provisions of Articles 7(1), 5(1) and 5(2)(k) of the DTA. According to these assessments the US companies were liable for tax for those years for the income it earned in South Africa during the stay here in 2007 and 2008. It was contended by the US companies that once the requirements of articles 5(2) are met the focus of the enquiry shifts to the requirements in article 5(1), and only if the requirements of article 5(1) are met can it be safely concluded that the existence of a “permanent establishment” has been proved. On this basis the, even if it were found that the requirements of article 5(2)(k) were met in this case (it specifically eschewed any concession to the effect that they were met), it nevertheless has still to be found that the requirements of article 5(1) had been met in order for being held liable for taxation for the income earned (or the profits it made) from operations in this country. The Court refered to basic rules of interpretation: “The need to interpret international treaties in a manner which gives effect to the purpose of the treaty and which is congruent with the words employed in the treaty is well established.” And: “As mentioned above the term must be given a meaning that is congruent with the language of the DTA having regard to its object and purpose.” The defining characteristic in terms of article 5(1) is that it must be “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Thus, the nonresident party (the appellant in this case) is not required to carry out all its business from the “fixed place of business” so established. In this sense, even if some of the obligations were performed from another premises, they would, nevertheless, have established “a permanent establishment”. The Tax Court dismissed the appeal and ruled in favor of the Revenue Service. The Court also upheld a penalty imposition of 100%. The court disagreed with the taxpayer’s argument that it had not intended to avoid the tax but had merely misinterpreted the law in good faith. The court noted: “The appellant must accept responsibility for its own error regardless of whether the error was bona fide or not. In these circumstances, it cannot be held that the respondent acted erroneously, or failed to exercise his discretion judiciously, when only waiving part of the additional tax he was entitled to impose, or that the imposition of the additional tax at all was unduly harsh. The appellant benefitted significantly from the waiver granted by the respondent. In my judgment, taking the waiver into account, it cannot be said that the additional tax imposed is disproportionately punitive. I find no fault with its imposition. Hence, its appeal against the additional tax must fail.” AB LLC and BD Holdings LLC v Commissioner of SARS CASE NO 13276 AB LLC place of management ...