-9-
Subparagraphs 1(g)(i) and (ii) define the term "competent authority" for the United States
and South Africa, respectively. The U.S. competent authority is the Secretary of the Treasury or
his delegate. The Secretary of the Treasury has delegated the competent authority function to the
Commissioner of Internal Revenue, who in turn has delegated the authority to the Assistant
Commissioner (International). With respect to interpretative issues, the Assistant Commissioner
acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue
Service. The competent authority for South Africa is the Commissioner for Inland Revenue or his
authorized representative.
Subparagraph 1(h) defines the term "international traffic." The term means any transport
by a ship or aircraft except when the vessel is operated solely between places within a Contracting
State. This definition is applicable principally in the context of Article 8 (Shipping and Air
Transport). Unlike the definition in the OECD Model, this definition does not require the ship or
aircraft to be operated by a resident of a Contracting State. As a result, under paragraphs 2 and 3
of Article 8, income from the rental of ships, aircraft or containers is exempt from tax by the
source State whether it is earned by lessors that are operators of ships and aircraft or by lessors
that are not such operators (e.g., banks or container leasing companies), so long as the lessors are
residents of a Contracting State, provided that the ships, aircraft or containers are operated or
used in international traffic.
The exclusion from international traffic of transport solely between places within a
Contracting State means, for example, that carriage of goods or passengers solely between New
York and Chicago would not be treated as international traffic, whether carried by a U.S. or a
foreign carrier. Therefore, the substantive taxing rules of the Convention relating to the taxation
of income from transport, principally Article 8 (Shipping and Air Transport), would not apply to
income from such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of
South Africa (assuming that were possible under U.S. law), the United States would not be
required to exempt the income from that transport under Article 8. The income would, however,
be treated as business profits under Article 7 (Business Profits), and therefore would be taxable in
the United States only if attributable to a U.S. permanent establishment of the South African
carrier, and then only on a net basis. The gross basis U.S. tax imposed by section 887 would
never apply under the circumstances described. If, however, goods or passengers are carried by a
South African carrier from Cape Town to, for example, New York, and some of the goods or
passengers continue on to Chicago, the entire transport, including the internal U.S. portion, would
be international traffic. This would be true if the international carrier transferred the goods at the
U.S. port of entry from a ship to a land vehicle, from a ship to a lighter, or even if the overland
portion of the trip in the United States was handled by an independent carrier under contract with
the original international carrier, so long as both parts of the trip were reflected in original bills of
lading. For this reason, the Convention language differs from the OECD Model language. In the
definition of "international traffic," the OECD Model excludes transport when the “ship or aircraft
is operated” solely between places in the other Contracting State. The Convention excludes ship
or aircraft transport when “such transport” is solely between places in a Contracting State. The
Convention language is intended to make clear that, as in the above example, even if the goods