Double tax agreements (DTAs) are often misunderstood. People with cross-border investments, income or business interests may assume that a treaty – an agreement between two countries that stipulates how taxing rights will be allocated – between South Africa and another country automatically protects them from being taxed twice.
In reality, a DTA is not a complete tax code, and relying on it without understanding the underlying domestic tax rules can lead to unexpected costs. Understanding what these agreements cover – and where their protection ends – is essential to effective cross-border tax planning.
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Domestic tax law comes first
A DTA does not create a tax liability. That is determined by the domestic legislation of the relevant country. A country may tax an individual because they are resident or semi-resident there, because income arises from a source within its borders, or because a business operates there through a permanent establishment.
In South Africa, the Income Tax Act 58 of 1962 generally taxes residents on their worldwide income and non-residents on income from a South African source.
A DTA becomes relevant when domestic law establishes a potential tax liability. Its purpose is to regulate the countries’ respective taxing rights and provide relief where applicable. It can restrict or reduce tax that domestic law would otherwise impose, but it cannot create a liability where none exists.
Starting with the treaty before establishing the position under domestic law is therefore a common mistake.
Not all treaties are the same
South Africa has separate DTAs with individual countries. Although many draw on the OECD Model Tax Convention, and some on the United Nations Model, each reflects the terms negotiated between the two countries.
Definitions, withholding tax rates, residence rules, permanent establishment tests and relief mechanisms can differ significantly. A provision that protects a taxpayer under one treaty may be absent or more restrictive under another.
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Treaties can also change. They may be amended, replaced or terminated, while multilateral initiatives such as the OECD’s Multilateral Instrument can modify how existing agreements operate.
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Anyone relying on a DTA for tax planning should therefore confirm that they are consulting the applicable version, including relevant amendments and effective dates. Advice based on outdated provisions can have costly consequences.
Check which taxes the treaty covers
Another important consideration is the type of tax involved. DTAs generally address specified taxes on income, and capital gains tax falls within the South African income tax system. However, an income tax treaty should not automatically be assumed to cover estate duty or inheritance taxes.
South Africa has concluded only a limited number of agreements dealing with taxes on estates. Someone with assets in more than one country who assumes an income tax treaty will prevent double taxation on death could therefore be exposed to an unexpected liability.
The relevant tax must be identified first, followed by confirmation that the applicable treaty covers it.
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Relief does not always eliminate double taxation
South Africa’s extensive treaty network helps mitigate double taxation, but relief does not necessarily eliminate every additional tax cost.
Where South Africa grants a credit for foreign tax paid, that credit is generally limited to the South African tax attributable to the same income. If the foreign tax is higher, the excess may not be recoverable.
Consider a South African resident who earns foreign income of R1 million and pays R400 000 in foreign tax. If the South African tax attributable to that income is R270 000, the South African credit is capped at R270 000.
No South African tax would remain payable on that income, but the additional R130 000 in foreign tax would not be recovered through the credit.
The result is a real tax cost that may not have been anticipated. A treaty can provide valuable relief without delivering the tax-neutral outcome a taxpayer expected.
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Relief may be available without a treaty
The absence of a DTA does not necessarily mean that double taxation cannot be mitigated. South African domestic law provides for unilateral relief in certain circumstances.
Section 6quat of the Income Tax Act allows qualifying foreign tax credits for certain foreign taxes paid on foreign-source income included in South African taxable income, subject to prescribed conditions and limitations.
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In some circumstances, a deduction may also be available. The Estate Duty Act 45 of 1955 provides a measure of relief for certain foreign death duties on qualifying foreign assets.
These provisions have their own requirements and limitations, but they can be important where South Africa has no relevant treaty with the other country or where a treaty does not cover the tax concerned.
A practical approach to cross-border tax
The starting point for any cross-border tax assessment should be to establish the liability under each country’s domestic law. The next steps are to identify the correct and current treaty, establish whether it covers the tax in question, apply its allocation and relief provisions, and consider whether domestic law offers additional relief.
For individuals and businesses with international interests, the distinction matters. A DTA is a framework for coordinating taxing rights, not a blanket guarantee against double taxation.
Understanding its scope and limitations before making financial or estate-planning decisions can help avoid costly surprises.
Sarah Simson, is a consultant attorney at Thomson Wilks.
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