“Most favoured nation” clauses can be found in Double Taxation Agreements (DTA). These clauses are essentially where the tax treatment accorded by one state to another state must be no less favourable than the tax treatment extended to a third state.
Such a clause was the subject of a recent dispute in the Cape Town Tax court in ABC (Pty) Ltd v CSARS (case No. 14287).
The taxpayer was a South African company whose sole shareholder was a resident of the Netherlands. The taxpayer paid dividends to its shareholder in 2012 and declarations were made that 5% dividends tax was payable in terms of Article 10(2) of the DTA between South Africa and the Netherlands. The tax was paid but the shareholder subsequently took the view that the tax should have been 0% and requested a refund.
The taxpayer’s case was founded on the principle of the most favoured nation. The DTA between South Africa and Netherlands provided that if in future any state was given better terms, then those better terms would also apply to the Netherlands. Two years after the Netherlands DTA was amended the DTA with Sweden was amended. While this also provided for dividends tax at 5%, the Sweden DTA states that if any other contracting state had better terms (whether existing or in the future) than those also apply to Sweden. The Kuwait DTA does have better terms than Sweden, that is 0% dividends tax. It was argued by the taxpayer that because Sweden has been benefited by the better terms with Kuwait after the Netherlands DTA was concluded with South Africa, the Netherlands must also be given the better benefit.
The Court held that, although DTAs have the force of statute, they ae a product of an agreement, and therefore the legal principles relating to the interpretation of agreements will apply. Applying these principles, the Court concluded that the provisions of the Netherlands DTA are clear in that if another state receives preferential treatment from South Africa in the future, Netherlands must be given the same preference. When the new DTA was concluded with Sweden the residents of Kuwait had preferential treatment and the residents of Sweden were entitled to the same treatment. It followed that Netherlands residents were also entitled to such preference.
The Court accordingly ordered SARS to refund the amount of dividends tax that was overpaid.
This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc