On 24 July 2006 the Convention between the Government of the Republic of South Africa and the Government of the Federative Republic of Brazil for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, came into force. The convention, similar to other double tax agreements, determines the taxing rights of each country where a resident of one contracting state earns income from a source in the other contracting state.
On 4 July 2018 the South African Revenue Service (SARS) issued Binding Private Ruling (BPR) 307, which deals with relief from the double taxation of interest in terms of the convention.
If a South African-resident company (the applicant) proposes to enter into trades in respect of bonds issued by the Brazilian government, it must:
- enter into a purchase and resell agreement with international counterparties under which it will acquire bonds from the counterparties and agree to sell them back to the counterparties on specified dates and for specified prices which will each include an interest component; and
- acquire bonds in the market without any associated resell arrangements.
In either case, the applicant may receive interest from the Brazilian government as the issuer of the bonds during the term of the transaction. The interest that the applicant will receive will not be subject to tax in Brazil.
In respect of the purchase and resell agreement, the applicant must pay the counterparties so-called manufactured payments calculated with reference to the interest that it will receive while holding each bond. The applicant must recognise the purchase and resell agreements and the bonds at fair value in profit or loss in terms of International Financial Reporting Standard 9. BPR 307 further states that Section 24JB(2) of the Income Tax Act (58/1962) will apply to the instruments.
Applicable legal provisions
Under Article 11(4)(b) of the convention, subject to Article 11(4)(a), interest from securities, bonds or debentures issued by the government of a contracting state, a political subdivision thereof or any agency (including a financial institution) wholly owned by that government or a political subdivision thereof will be taxable only in that state.
Article 11(4)(a) of the convention states that interest arising in a contracting state and derived and beneficially owned by the government of the other contracting state, a political subdivision thereof, the central bank or any agency (including a financial institution) wholly owned by that government or a political subdivision thereof, will be exempt from tax in the first-mentioned state.
Section 24JB of the Income Tax Act applies to 'covered persons'. According to this section, the definition of a 'covered person' includes:
- the South African Reserve Bank;
- 'banks' as defined in Section 1 of the Banks Act (94/1990);
- 'long-term insurers' as defined in Section 1 of the Long-Term Insurance Act (52/1998); and
- 'short-term insurers' as defined in Section 1 of the Short-Term Insurance Act (53/1998).
SARS ruled in BPR 307 that Article 11(4)(b) of the convention grants exclusive taxing rights to Brazil in respect of the interest that applicants receive on bonds issued by the Brazilian government, which means that the interest will not be taxable in South Africa.
SARS added an additional note in BPR 307 stating that its ruling does not cover the application or interpretation of any general or specific anti-avoidance provision or doctrine and does not pronounce on the deductibility of any expenditure incurred by applicants in relation to transactions.
Under Section 9(2)(b) of the Income Tax Act, if an amount constitutes 'interest' as defined in Section 24J of the act, the interest is deemed to have been received or accrued from a South African source if it is:
- attributable to an amount incurred by a person that is a resident, unless the interest is attributable to a permanent establishment which is situated outside South Africa; or
- received or accrued in respect of the use or application in South Africa by any person of any funds or credit obtained in terms of any form of interest-bearing arrangement.
Although the matter is not specifically dealt with in BPR 307, it appears that where Article 11(4)(b) of the convention applies, the source rules in Section 9(2)(b) of the act do not apply.
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