There will be a new “Tie Breaker” clause in the treaty to address the situation in which a company or other entity appears to reside in both states. It provides that the tax authorities of each State shall endeavour to resolve the matter by mutual agreement. The South African Ministry of Finance explains that this test was proposed as an accepted test of the Organisation for Economic Co-operation and Development (OECD) model contract as part of its Profit Reduction and Profit Shifting (BEPS) initiative. South Africa and Mauritius have signed a Memorandum of Understanding that defines the factors that will be taken into account by the two states when deciding on the country of residence. These include meetings of the board of directors, but also “the place where the day-to-day management of the company is exercised”. Walker said Mauritius is generally chosen for a holding site to invest in Africa because it has an extensive network of double taxation treaties with African countries, adding that “this could be a pr relations disaster for Mauritius, regardless of the real impact of the changes, and even if Mauritius, as a holding company, remains favourable to African investment. The mere fact that the new agreement allows a withholding tax on interest and royalties will damage their reputation as a “gateway to Africa”. Both roundings use the accounting method to eliminate double taxation. A protocol to the treaty, signed on the same day, provides that South Africa, when concluding a tax treaty with another state providing for a lower tax rate on dividends, must inform Mauritius and enter into negotiations to allow for comparable treatment.
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