BPR: Taxability of Interest Where DTA Between SA and Brazil Applies
A Binding Private Ruling (BPR) 307 was issued by the South African Revenue Service on 4 July 2018 which deals with the application of DTA relief in respect of the double taxation of interest.
To summarise the facts of the ruling, the following is noted:
- The applicant, a South African resident company, wished to trade in government bonds purchased from the Brazilian government.
- These bonds would be purchased from and sold to counterparties at an agreed date and price (effectively including an element of interest).
- Bonds would also be purchased in the market without any resell arrangements being entered into.
- The applicant would earn interest on these bonds from the Brazilian Government for the period that it held such bonds.
- The interest would not be subject to tax in Brazil.
In terms of the DTA between South Africa and Brazil it is noted that –
- Interest arising in the source country can be taxable in both the source country and the country of residence. However, the source country cannot impose a tax exceeding 15%.
- An exception to this rule is where the security, debenture or bond from which the interest arises is wholly owned by the Government in which case it is only taxable in that country.
Based on the above DTA the ruling from SARS confirms that as the interest will arise a result of bonds wholly owned by the Brazilian government, Brazil has exclusive taxing rights to such interest therefore such interest is not taxable in South Africa. This ruling does however also state that this ruling does not cover the application or interpretation of any general or specific anti-avoidance provisions nor does it pronounce on the deductibility of any expenditure incurred by the applicant in relation to the transactions.