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of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. …’ The purpose of the article in the OECD MTC is ‘to end a particular form of discrimination resulting from the fact that interest … allowed without restriction when the recipient is resident, is restricted when he is a non-resident’.8 Article 24(4), like any other treaty provision, is a lex specialis, introduced specifically to curtail the application of the more general, domestic provisions of the Act, such as section 23M.9

Whether section 23M and Article 24(4) are in conflict depends on the reason why interest deductibility is limited under section 23M, why certain taxpayers are treated differently to others. If it is because a non-resident, like a South African public benefit organisation, for instance, is not subject to tax in this country, then the discrimination is not based on the residence of the creditor, but rather its tax status, meaning that the discrimination is justified. If, however, discrimination in the treatment of interest expenditure has its root in the residence status of the creditor, then the discrimination is prohibited by Article 24(4).

Were one then to interrogate the rationale for the treatment in section 23M, its first limitation against wide application is immediately apparent: section 23M cannot apply where the South African interest withholding tax is levied. This is because the interest withholding tax is also a tax which the creditor is subject to,10 meaning that interest paid to a non-resident would, in the ordinary course of things, be subject to tax, placing it beyond the realm of section 23M. The section only operates to limit interest deductibility where amounts paid are not subject to tax in South Africa. In other words, nonresident creditors are subject to tax in South Africa on interest received that is subject to the withholding tax on interest, the effect of which is that section 23M cannot be applied in those instances unless a tax treaty grants taxing rights exclusively to the recipient state.11 This would be the case, generally, for only nineteen of South Africa’s seventy-nine tax treaty partners.

Conceivably, section 23M could then apply since, in the case of those nineteen countries, the creditor will not be subject to tax on any interest received from South Africa. However, the reason for non-taxation in South Africa is now glaring: the creditor is not subject to tax because it has access to the beneficial treatment in the relevant treaty allocating taxing rights to the residence state because it is a resident of that state. The creditor’s residence is thus the cause of

8 OECD MTC Commentaries on Article 24 at paragraph 73. The OECD MTC Commentaries are relevant in interpreting the application of a double tax treaty: see ITC 1878 [2015] 77 SATC 349 at para 22. See also ITC 1503 [1990] 53 SATC 342. It follows that the OECD MTC Commentaries are extremely relevant in interpreting the content of a tax treaty’s provisions. Not only do they form part of ‘background material’ and are therefore important when interpreting a tax treaty’s provisions as a statutory instrument (Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA)), but they also carry weight in terms of the interpretative approach prescribed by the Vienna Convention on the Law of Treaties (which principle South Africa subscribes to in a context such as the present: ITC 1914 [2018] 80 SATC 472). 9 See in this regard Krok v CSARS 2015 (6) SA 317 (SCA) at para 24 where the effect of South Africa’s double tax treaties concluded in terms of section 108 of the Act is discussed, as also its effect and application in relation to the remainder of the provisions in the Act. See also Commissioner for the South African Revenue Service v Tradehold Ltd [2012] ZASCA 61, 74 SATC 263, at para 16, where the Court confirmed that ‘[o]nce brought into operation a double tax agreement has the effect of law’. A tax treaty is, after all, lex specialis, overriding the general, domestic provisions of the Act (Maisto, G (Ed), Tax Treaties and Domestic Law, IBFD (2006) at p 1: lex specialis derogat legi generali). 10 See the definition of ‘tax’ in section 1 of the Act read with section 50C, which makes it plain that it is the creditor that is taxed on the interest received, not the debtor. 11 A reduced rate provided for would still mean that the creditor is – even to a limited extent – subject to tax on the interest in South Africa.


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