TaxNewsFlash-Africa

August 11, 2009
No. 2009-08

South Africa: Order-Filling Dependent Agent May Be a Permanent Establishment Under Provisions of the Income Tax Treaty with Mauritius

The following discussion examines the possibility that an order-filling dependent agent (that is, an agent that regularly fills orders from a stock of goods maintained by that agent) could be a permanent establishment under provisions of the South Africa-Mauritius income tax treaty.

Background

Various model tax conventions exist to provide a framework for countries to base their treaties on to avoid double taxation under the domestic tax laws of both countries where the taxpayer becomes liable for tax in both. The major model conventions are:

The OECD Model Convention
The UN Model Convention
The U.S. Model Convention

Each model convention has a different structure. A country can base the wording of its treaties on any of these model conventions; however, the model convention only serves as a guideline, and countries are free to deviate from their structure.

The model conventions themselves also do not serve as binding legal authority; however, the various commentaries on the model conventions can provide persuasive authority when the meaning of the wording is in dispute.

Permanent Establishment Under the South Africa-Mauritius Income Tax Treaty

The majority of South Africa’s income tax treaties is based on the OECD Model Convention. However, in some instances a treaty may diverge from the language of the OECD Model Convention, adopt the wording and structure of the other model conventions, or even combine the language of two model conventions—such as in the case of Article 5 of the South Africa-Mauritius income tax treaty.

Identical to the language used in the OECD Model Tax Convention and the UN Model Convention, the South Africa-Mauritius income tax treaty defines a “permanent establishment” in Article 5 as:

…a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Article 5(4) of the South-Africa-Mauritius income tax treaty contains a list of exclusions to this definition, and that list specifically provides that the maintenance of a stock of goods or merchandise belonging to the enterprise solely for purposes of storage, display, or delivery will not constitute a permanent establishment.

The list of exclusions in the South-Africa-Mauritius income tax treaty conforms with the OECD Model Convention, but not to the UN Model Convention which fails to exclude the maintenance of a stock of goods for purposes of delivery as a permanent establishment. The UN Model Convention, however, does provide that a permanent establishment of an enterprise is created when a dependant agent of that enterprise regularly fills orders and delivers goods from stock of the enterprise. Article 5(5) of the South Africa-Mauritius income tax treaty adopts this language.

As a result of combining the provisions of the OECD Model Convention and the UN Model Convention, the South Africa-Mauritius income tax treaty excludes the maintenance of a stock of goods for purposes of delivery as a permanent establishment under Article 5(4), unless a dependant agent maintains the stock of goods and fills orders on the enterprise’s behalf, as stipulated in Article 5(5).

Article 5(5), therefore, overrides the more general provisions of article 5(4) because it specifically concerns the scenario where the maintenance and delivery function is performed by a dependant agent. According to the Commentary on the UN Model Convention, the agent need not even have the authority to conclude contracts on behalf of the enterprise; the agent could merely be dependant on the enterprise for the instructions to fill the orders on its behalf and needs to act in accordance with those instructions.

Due to this specific deeming provision in Article 5(5) of the South Africa-Mauritius income tax treaty, it is necessary for an enterprise to exercise care before appointing an agent to maintain a stock of goods and deliver on the enterprise’s behalf in Mauritius or in South Africa. If this function is outsourced, prudent taxpayers would want to verify that the agent performing this function is independent of the enterprise.

For more information, contact a tax professional with KPMG in South Africa:

Gustav van den Berg, +27 (0) 11 647 7951, gustav.vandenberg@kpmg.co.za

Robyn Nathan, +27 (0) 11 647 5714, robyn.nathan@kpmg.co.za

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2009 KPMG Services (Proprietary) Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in TaxNewsFlash-Africa is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to US-KPMGWNT@kpmg.com. For more information, contact KPMG’s Federal Tax Legislative and Regulatory Services Group at + 1 202.533.4366, 2001 M Street NW, Washington, DC 20036-3310.

To unsubscribe from TaxNewsFlash-Africa, reply to US-KPMGWNT@kpmg.com and type ‘TaxNewsFlash Unsubscribe' in the subject line, then click on the SEND button.

Privacy | Legal