DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS (8) Paragraph 2 　　Paragraph 2 is intended to deal with the potential for abuse when a performer's income does not accrue to the performer himself, but to another person. Foreign performers commonly perform in the United States as employees of, or under contract with, a company or other person. 　　The relationship may truly be one of employee and employer, with no abuse of the tax system either intended or realized. On the other hand, the "employer" may, for example, be a company established and owned by the performer, which is merely acting as the nominal income recipient in respect of the remuneration for the performance (a "star company"). The performer may act as an "employee," receive a modest salary, and arrange to receive the remainder of the income from his performance in another form or at a later time. In such case, absent the provisions of paragraph 2, the income arguably could escape host-country tax because the company earns business profits but has no permanent establishment in that country. The performer may largely or entirely escape host-country tax by receiving only a small salary in the year the services are performed, perhaps small enough to place him below the dollar threshold in paragraph 1. The performer might arrange to receive further payments in a later year, when he is not subject to host-country tax, perhaps as deferred salary payments, dividends or liquidating distributions. 　　Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the taxpayer's rights to the benefits of the Convention when there is a legitimate employee-employer relationship between the performer and the person providing his services. Under paragraph 2, when the income accrues to a person other than the performer, and the performer or related persons participate, directly or indirectly, in the receipts or profits of that other person, the income may be taxed in the Contracting State where the performer's services are exercised, without regard to the provisions of the Convention concerning business profits (Article 7) or independent personal services (Article 14). Thus, even if the "employer" has no permanent establishment or fixed base in the host country, its income may be subject to tax there under the provisions of paragraph 2. Taxation under paragraph 2 is on the person providing the services of the performer. This paragraph does not affect the rules of paragraph 1, which apply to the performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary payments to the performer, which fall under paragraph 1. 　　For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the person providing the services of the performer) if that other person has control over, or the right to receive, gross income in respect of the services of the performer. Direct or indirect participation in the profits of a person may include, but is not limited to, the accrual or receipt of deferred remuneration, bonuses, fees, dividends, partnership income or other income or distributions. 　　Paragraph 2 does not apply if it is established that neither the performer nor any persons related to the performer participate directly or indirectly in the receipts or profits of the person providing the services of the performer. Assume, for example, that a circus owned by a U.S. corporation performs in South Africa, and promoters of the performance in South Africa pay the circus, which, in turn, pays salaries to the circus performers. The circus is determined to have no permanent establishment in South Africa. Since the circus performers do not participate in the profits of the circus, but merely receive their salaries out of the circus? gross receipts, the circus is protected by Article 7 and its income is not subject to South African tax. Whether the salaries of the circus performers are subject to South African tax under this Article depends on whether they exceed the $7,500 threshold in paragraph 1. 　　Since pursuant to Article 1 (General Scope) the Convention only applies to persons who are residents of one of the Contracting States, if the star company is not a resident of one of the Contracting States then taxation of the income is not affected by Article 17 or any other provision of the Convention. Paragraph 3 　　Paragraph 3 provides an exception to the rules in paragraphs 1 and 2 in the case of a visit to a Contracting State by a performer who is a resident of the other Contracting State and whose visit is substantially supported by the public funds of his State of residence or of a political subdivision or local authority of that State. In the circumstances described, only the State of residence of the performer may tax his income from performances so supported in the other State. This rule is not found in the U.S. or OECD Models. Paragraph 4 　　Paragraph 4 authorizes the Contracting States, through an exchange of diplomatic notes, to increase the $7,500 threshold referred to in paragraph 1 to reflect economic and monetary developments. This rule is intended to operate as follows: if, after the Convention has been in force for some time, inflation rates have been such as to make the $7,500 exemption threshold for entertainers or athletes unrealistically low in terms of the original objectives intended in setting the threshold, the Contracting States may agree to a higher threshold without the need for formal amendment to the treaty and ratification by the Contracting States. This authority can be exercised, however, only to the extent necessary to restore those original objectives. This provision can be applied only to the benefit of taxpayers, i.e., only to increase thresholds, not to reduce them. In the U.S. Model, such a change in monetary thresholds can be accomplished by a mutual agreement by the competent authorities, and does not require diplomatic notes to be exchanged between the Contracting States. Relationship to Other Articles 　　This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if an entertainer or a sportsman who is resident in South Africa is a citizen of the United States, the United States may tax all of his income from performances in the United States without regard to the provisions of this Article, subject, however, to the special foreign tax credit provisions of paragraph 2 of Article 23 (Elimination of Double Taxation). In addition, benefits of this Article are subject to the provisions of Article 22 (Limitation on Benefits). 　　　　　　　　　　　　　　ARTICLE 18 　　　　　　　　　　　　Pensions and Annuities 　　This Article deals with the taxation of private (i.e., non-government service) pensions and annuities, social security benefits, alimony and child support payments, as well as with the tax treatment of contributions to, and earnings by, pension plans. Paragraph 1 - Distributions 　　Under paragraph 1, pension distributions (and other similar remuneration) in consideration of past employment from sources within one Contracting State and beneficially owned by a resident of the other Contracting State may be taxed by the source State to a limited extent. The State of residence of the beneficiary may also tax the distribution to the extent allowed by the laws of that State. The Treaty, like the 1996 U.S. Model, makes explicit the fact that the term "pension distributions and other similar remuneration" includes both periodic and single sum payments. 　　Where the U.S. is the source State, the tax on the distribution is limited to 15 percent of the gross amount of the distribution, as long as the distribution is not subject to the penalty for early withdrawal under section 72(t) of the Code. If the distribution is subject to the early withdrawal penalty, the reduced treaty tax rate does not apply and the normal Code tax rates apply. 　　Where South Africa is the source State, a pro rata amount of a pension distribution corresponding to the amount of the gross pension distribution from South African sources will be taxed to a beneficiary who is a U.S. resident. The portion of a pension distribution from an employer's pension plan for which South Africa is the source State is equal to the total pension distribution multiplied by a fraction, the numerator of which is the employee's days of service for the employer in South Africa and the denominator of which is the employee's total days of service for the employer. This rule applies only if the beneficial owner 　　(i) has been employed in South Africa for a period or periods aggregating two years or more during the ten year period immediately preceding the date on which the pension first became due; and 　　(ii) was employed in South Africa for a period or periods aggregating ten years or more. For example, assume that the pension was first due to a U.S. resident from a South African pension plan on July 1, 1997. From July 1, 1987 through June 30, 1992, the beneficiary was employed in the United States, and from July 1, 1992 through June 30, 1997, was employed in South Africa, retiring to the U.S. on July 1, 1997. Although the beneficiary satisfies the two out of the last ten years test, the aggregated ten years of work in South Africa test is not satisfied.In this example only the United States may tax the distributions. If, instead, the beneficiary had worked in the United States from July 1, 1977 through June 30, 1987, and in South Africa from July 1, 1987 through June 30, 1997, retiring in the United States on July 1, 1997, both portions of the test are satisfied. Thus, South Africa may tax half of each distribution to the beneficiary, because the beneficiary has worked in South Africa for ten out of his twenty years of service for the employer. In this example, the United States may also tax the entire distribution under the rules of the Internal Revenue Code. The beneficiary may claim a foreign tax credit for any tax paid to South Africa on the distribution. 　　For purposes of this rule, the phrase "the date on which the pension first became due"refers to the first date on which the participant or beneficiary received a pension payment or, if earlier, the first date on which the participant or beneficiary could have received a pension payment if the participant or beneficiary had requested to have payment made at that earlier time. The following examples illustrate the meaning of the phrase "the date on which the pension first became due." 　　Example (1) Individual A works for company B from 1987 to 1997. The company B pension plan provides that plan participants who work for the company for at least five years may elect to receive benefits on or after the first day of the month following the month they retire, provided they have reached age 60. In 1997, A attains age 60. He continues to work, however, until December 31, 1998, at which time he retires. The date on which A's pension first becomes due is January 1, 1999. 　　Example (2) The facts are the same as in Example (1), except that A makes an election under the company B plan to begin receiving benefits on January 1, 2000. As in Example (1), the date on which the pension first becomes due is January 1, 1999, and is not affected by A's voluntary election. The phrase ?pension distributions and other similar remuneration? is intended to　encompass payments made by private retirement plans and arrangements in consideration of past employment, as well as tier 2 railroad retirement benefits (See 45 U.S.C. 231 et seq.). In the United States, the plans encompassed by Paragraph 1 include, under current law: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), section 408(p) accounts, and other individual retirement accounts), non-discriminatory section 457 plans, section 403(a) qualified annuity plans, and section 403(b) plans. In South Africa, qualifying plans are occupational plans which include pension funds and provident funds. 　　The competent authorities may agree that distributions from plans not listed above, but meeting similar criteria, may also qualify for the benefits of Paragraph 1. These criteria are as follows: 　　(a) The plan must be written; 　　(b) In the case of an employer-maintained plan, the plan must be nondiscriminatory, i.e., it (alone or in combination with other comparable plans) must cover a wide range of employees, including rank and file employees, and actually provide significant benefits for the entire range of covered employees; 　　(c) In the case of an employer-maintained plan the plan must contain provisions that severely limit the employees? ability to use plan assets for purposes other than retirement, and in all cases be subject to tax provisions that discourage participants from using the assets for purposes other than retirement; and 　　(d) The plan must provide for payment of a reasonable level of benefits at death, a stated age, or an event related to work status, and otherwise require minimum distributions under rules designed to ensure that any death benefits provided to the participants? survivors are merely incidental to the retirement benefits provided to the participants. 　　Pensions in respect of government service are not covered by this paragraph. They are covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or by paragraph 2 of Article 19 (Government Service). Thus, Article 19 covers section 457, 401(a) and 403(b) plans established for government employees. If a pension in respect of government service is not covered by Article 19 solely because the service is rendered in connection with any trade or business carried on by either state, the pension is covered by this Article. Paragraph 2 - Social Security 　　The treatment of social security benefits is dealt with in paragraph 2. This paragraph provides that, notwithstanding the provisions of paragraph 1, payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State or to a citizen of the United States will be taxable only by the Contracting State making the payment. This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or government employees. The phrase "other similar public pensions" is intended to refer to United States tier 1 railroad retirement benefits. The reference to U.S. citizens is necessary to insure that a social security payment by South Africa to a U.S. citizen who is not resident in the United States will not be taxable by the United States. Paragraph 3 - Annuities 　　Under paragraph 3, annuities that are derived and beneficially owned by a resident of a Contracting State are taxable only in that State unless the annuity was purchased in the other Contracting State while such person was a resident of that other State, in which case the annuity may also be taxed in that other State. An annuity, as the term is used in this paragraph, means a stated sum paid periodically at stated times during life or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than for services rendered). An annuity received in consideration for services rendered would be treated as deferred compensation and generally taxable in accordance with Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services). Paragraphs 4 and 5 - Alimony and Child Support 　　Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support. Paragraph 4 provides that an alimony payment made to a payee who is a resident of one State by a resident of the other State is taxable only by the State of residence of the payor and only if the payor may deduct the payment in the State of residence. If the payment is not deductible by the payor in the State of residence, no tax is levied in either State. 　　Paragraph 5 provides that support payments on behalf of a minor child made by a resident of one State to a resident of the other State are not covered by paragraph 4. If such payments are not deductible to the payor, they are exempt from tax in both States. In the event that the payor is allowed a deduction for a child support payment in his State of residence, the payment would be taxable to the payee by that State under Article 21 (Other Income).