The taxation of
cross-border transactions is predominantly governed by the Organization for
Economic Co-operation and Development (OECD) Model Convention that South Africa
and other jurisdictions have adopted through a network of double tax
conventions (DTCs). These DTCs are incorporated into domestic law via section
108(2) of the Income Tax Act and read alongside section 231 of the
Constitution. However, conflicts between domestic law and DTCs (treaty override)
pose a significant legal challenge. South Africa’s legal framework remains
ambiguous as to whether DTCs or domestic legislation takes precedence in such
cases as evidenced by existing case law.
This article examines
the conflict between Article 24(4) of the OECD Model Convention and section 23M
of the Income Tax Act. The author draws on key case law and argues that DTCs
should take precedence over domestic legislation in cases of conflict unless
the override aligns with the fundamental objectives of the DTC. The analysis
explores examples of both ‘justifiable’ and ‘prohibited’ treaty overrides and
ultimately concludes that section 23M constitutes a prohibited override of
Article 24(4).
The article also
contrasts this view with that of Du Plessis who supports applying
interpretative principles to resolve treaty overrides. Furthermore, the author
contends that section 23M does not constitute an anti-avoidance provision under
Article 9 as its formula applies uniformly to both arm’s length and non-arm’s length
transactions.