A double tax agreement (DTA) is a formal agreement between two countries that outlines the taxation of income derived from cross-border transactions involving residents of the respective nations. This agreement aims to mitigate barriers to international trade, particularly by addressing issues such as double taxation, which may arise when income is taxed in both jurisdictions. Additionally, DTAs serve to prevent tax evasion and avoidance by residents of the signatory countries. By establishing such agreements, countries work towards creating a more equitable and transparent taxation environment for individuals and businesses engaged in cross-border transactions (N Kekana ‘Factors Militating against the Efficacy of the Mutual Agreement Procedure: A Comparison between South Africa, Kenya, Uganda and Ghana’ (2024) 57 CILSA 1).
I agree that cross-border transactions have gained significant prominence, promoted economic growth and strengthened international trade. However, this article aims to explore the complex issues related to cross-border taxation and evaluate potential solutions and the role of a competent authority to effectively address these challenges vis-à-vis the resolution of disputes and the related gaps in South Africa. This article argues that a primary concern in the realm of cross-border taxation is base erosion and profit shifting (‘base erosion and profit shift’ refers to a process where companies or multination’s usually shifts profits in one country to other countries with lower tax rates, this is to exploit loopholes and therefore avoid paying tax).
According to s 231(2) of the Constitution, read together with s 108(1) of the Income Tax Act 58 of 1962, clarifies that once a double tax agreement is ratified, its provisions shall become effective as if they were incorporated into the Income Tax Act itself (AW Oguttu ‘Resolving Double Tax Treaty Disputes: The Challenges of Mutual Agreement Procedure with a Special Focus on Addressing the Concerns of Developing Countries in Africa – The South African and Ugandan Experience’ 2015 SAYIL 160).
The purpose of this article is to provide an overview of the gaps in cross-border tax with the objective to find solutions (Kekana (op cit)).
Taxpayers engaged in cross-border transactions often face difficulties when seeking to resolve treaty disputes through domestic legal remedies, as such remedies may be insufficient given the international nature of the transactions. It is important to note that there is currently no international court specifically tasked with resolving disputes arising from taxation not in accordance with the double tax agreement. Rather, tax treaties between countries typically incorporate the Mutual Agreement Procedure (MAP). MAP serves as the principal framework on a global scale for resolution of tax treaty disputes (Oguttu (op cit) at 161).
‘The MAP is administered by the “competent authorities” of the contracting states’ (Oguttu (op cit) at 161). The challenge in relation to tax treaty disputes is that taxpayers and tax authorities frequently experience a lack of clarity in understanding the MAP. This uncertainty accounts for the results of many irregular double-tax disputes in most developing countries, despite the prevalence of tax treaty disputes. Furthermore, many tax authorities lack the requisite experience to effectively implement the procedure in the MAP (Oguttu (op cit) at 162).
I find that these cross-border tax challenges pose significant difficulties for taxpayers and tax authorities. Base erosion and profit-shifting strategies, driven by gaps in different tax rules between different countries, have led to irregular double-tax for taxpayers. Additionally, the complexity of tax agreements between countries has created ambiguity and disputes regarding cross-border taxations (Oguttu (op cit)).
In South Africa, the MAP is a mechanism enacted within its DTAs to address disputes arising from the interpretation or application of treaty provisions. In cases of taxation not in accordance with the DTA, MAP provides a framework for taxpayers to seek relief.
The competent authorities of the involved jurisdictions will subsequently engage in discussions in order to resolve the issue, with the aim of reaching an agreement on the correct application of treaty provisions. It is essential to acknowledge that while the MAP can be an effective instrument for addressing disparities in cross-border taxation, its success is contingent on the willingness of the jurisdictions to collaborate and their familiarity with the procedure (L Olivier and M Honiball International Tax: A South African Perspective 5ed (Cape Town: Juta 2011) at 356-360).
Article 25(1) of the United Nations Model Double Taxation Convention between Developed and Developing Countries explicitly states that MAP is generally accessible to ‘taxpayers irrespective of any judicial and administrative remedies available under the domestic law of the contracting states’ (Oguttu (op cit) 163). Consequently, it is imperative for taxpayers to understand the relationship between domestic remedies and the MAP process in their countries. In certain jurisdictions, the procedural rules of tax administrations may prohibit the simultaneous pursuit of a MAP case and domestic remedies. If a domestic court has rendered a decision on a specific case, the competent authority may be bound by that ruling and, as a result, may not have the capacity to engage in a MAP with the other jurisdiction (H Ault ‘Dispute Resolution: the Mutual Agreement Procedure’ (www.un.org, accessed 10-4-2025)).
In light of the challenges taxpayers encounter with double taxation, they may turn to the competent authority of their country of residence to assess whether their objection or complaint is justified. Article 25 specifies that if the taxpayer’s objection is deemed valid, the competent authority should first strive to resolve the matter unilaterally, for example, by granting a tax credit or providing an exemption to eliminate double taxation. If this approach proves ineffective, the competent authority is then required to engage the competent authority of the other contracting country.
Tax treaty disputes and base erosion and profit-shifting strategies, arising from discrepancies arising in the MAP framework between countries, have led to instances of double taxation for taxpayers. Additionally, the complexity of tax agreements between nations contributes to ambiguity and disputes related to taxation of cross-border transactions. Countries such as South Africa frequently conclude double tax agreements to mitigate barriers to international trade when their residents undertake business transactions across other contracting states (M Markham ‘The comparative dimension regarding approaches to decision-making in international tax arbitration’ in Scholarship, Practice and Education in Comparative Law: A Festschrift in Honour of Mary Hiscock (Singapore: Springer 2019) at 115-135).
Although these treaties delineate the allocation of taxing rights and seek to prevent double taxation by limiting claims from each contracting state, disputes may nevertheless arise regarding the proper application of these treaties. To eliminate double taxation, countries should incorporate arbitration clauses into their double tax agreements, thereby providing as an alternative arbitration without imposing it as a requirement.
Furthermore, fostering collaboration among nations and developing a comprehensive understanding of each state’s domestic dispute resolution rules will facilitate more effective tax treaty dispute resolution and the establishment of mechanisms addressing double-tax transactions. This strategy is crucial for preserving the integrity of the international tax system. Additionally, the establishment of bilateral agreements represents a significant advancement toward ensuring the effective enforcement of treaty provisions and eliminates double taxation (Markham (op cit) at 115-135).
Phakisho Mello LLB LLM (NWU) is a lecturer at the North-West University, Faculty of Law.
This article was first published in De Rebus in 2025 (May) DR 22.
