The old tax treaty contained a “tax saving” provision, but it was removed from the new agreement. Under a tax-free provision, the foreign investing country grants the inclusion of notional taxes that the country of investment waives due to tax incentives or holidays in the country of investment. However, some feared that the provision of the old treaty had been used for “double non-taxation”. 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”. Both roundings use the accounting method to eliminate double taxation.
It also contains a provision for a tax saving credit, according to which Mauritius considers the tax payable in South Africa as the tax payable elsewhere, but which has been reduced or cancelled by South Africa to promote economic development. 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”. Where a company is established in both Contracting States, the competent authorities shall determine by mutual agreement the domicile of the company for the purposes of the Treaty. If the authorities do not reach a mutual agreement, the undertaking is considered outside the scope of the Treaty, with the exception of the provisions of Article 25 (exchange of information). The following capital gains realized by a person established in one Contracting State may be taxed by the other State: Mauritian holding companies are generally used as a structure for foreign companies investing in Africa. Tax activists like Action Aid have criticized the use of holding companies in the Mauricie region, calling the practice “tax avoidance,” indicating that it “deprives poor countries of hundreds of millions of dollars in taxes.” The new agreement does not change the maximum withholding tax rate on dividends of 5% for companies holding 10% or more of the dividend company`s capital. However, the new agreement lowers the withholding tax rate from 15% to 10% for other owners. South Africa takes further steps to open up the electricity market Profits from the sale of other property by a State established in a Contracting State may be taxed only by that State. According to the South African Ministry of Finance, the main reason for the renegotiation of the treaty was “control of abuses” of the old treaty. The new treaty was signed by both countries on 17 May 2013 and the South African Parliament ratified it on 14 September 2013, but Mauritius did not inform South Africa of the ratification of the new treaty until 28 May 2015.