Written by Linda Ensor | From Business Day Live

South Africa needs to finalise the renegotiation of its tax treaty with Mauritius as soon as possible to prevent the loss of large sums of money through “treaty shopping” the Davis tax committee has urged.

The committee released its interim report on ways to prevent base erosion and profit shifting last week, one of the chapters of which dealt with treaty abuse.

South Africa’s renegotiated draft tax treaty with Mauritius was signed in May last year and ratified by Parliament five months later but according to the tax committee report its finalisation “appears to have stalled” as it has not yet been ratified by the Mauritian authorities.

According to the committee’s interim report South Africa’s current double tax treaty with Mauritius — which is meant to apply only to residents of both countries — allows for treaty shopping. This is when non-residents use the benefits that a tax treaty grants to residents of the contracting states by using a “conduit company” in one of these states in order to shift profits out of them. “When a conduit company is set up in a tax-haven jurisdiction, this can result in tremendous loss of revenue for the signatories to the treaty,” the report notes.

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