Experts hail withdrawal of ‘unworkable’ withholding tax

Budget 2016 finalAuthor: Amanda Visser (BDlive).

The withdrawal of a withholding tax on service payments to foreigners, decried by many as unworkable, has been widely welcomed.

The Treasury acknowledged that the tax had introduced “unforeseen issues, uncertainty on the application of domestic law and taxing rights under tax treaties”.

The withholding tax was introduced into legislation in 2013 but its operation was postponed on several occasions. It was due to come into effect in January next year but will now be withdrawn from legislation.

Webber Wentzel tax partner Elandre Brandt says there could have been more engagement before the legislation was actually promulgated, in which case it may never have seen the light of day.

“However, various submissions by interested parties have been taken into account by the Treasury and the operation of the withholding tax was first postponed to allow for the submissions to be considered, and then the legislation was scrapped. So, the right outcome has eventually been reached.”

He says one of the main aims with the withholding tax on services was to assist the South African Revenue Service (SARS) in detecting foreign service providers with a taxable presence in the country.

Werksmans tax director Ernest Mazansky says countries experience different challenges in relation to foreign payments, which cause tax leakage from their tax base.

“In SA and Africa generally, the big problem in relation to tax base erosion relates to payments to foreign service providers. This could relate to any form of services, including IT, construction, consulting, legal, advertising and administration services.”

Mr Mazansky says the underlying purpose of the withholding tax was never really to collect revenue. It was introduced as a mechanism to enable SARS to identify payments to foreign service providers, and a way in which it could legally raise assessments.

“In other words, it was more an information-gathering tool than a revenue-raising tool,” he says.

Ernst & Young tax director Charles Makola says once a country introduces a tax that is unlikely to generate revenue because of its double tax treaties, people start wondering why. It is generally uncommon to introduce a new tax simply for the purposes of gathering information.

Mr Brandt, who also chairs the international tax committee of the South African Institute of Tax Professionals (Sait), says SA’s broad treaty network deals with service fees only in very limited cases.

“The result is that taxing rights over service fees need to be determined under the ‘permanent establishment’ and ‘business profits’ articles of the treaties, which can be complicated to apply.”

If the foreign person does not have a permanent establishment, or taxable presence, in SA, then SA is denied taxing rights over the business profits of that foreign person or company. Business profits would include service fees, Mr Brandt says.

A regulation was published earlier this month that introduced reportable arrangement provisions. This applies to services that are, or are expected to be, rendered in SA, and the service fee paid to a foreign person or company amounts to R10m or more.

According to Mr Brandt the transaction must be reported within 45 days of the “trigger event” and failure to comply with the reportable arrangement provisions can result in significant penalties.

Mr Makola says the reporting requirements are framed very widely, which makes it difficult to assess whether a particular service is reportable.

“I appears that if a foreigner derives more than R10m from SA (for services rendered) and is present in SA for even a very limited period, the reporting will be triggered,” he says.

According to Mr Mazansky, it may be difficult but not impossible to collect the tax (on payments above the threshold) if the money has gone and the taxpayer is abroad.

The foreigner may still be doing work in SA and may have assets that can be attached. He may also be receiving ongoing fees for work done in SA and the payments from the South African clients can be attached.

“The nonresident could well be a reputable company that would never dream of seeking to ignore an assessment raised by a foreign jurisdiction, and would honour any obligations if they were truly liable for the tax,” Mr Mazansky says.

If all of the above fail, it is now possible for SARS to approach the tax authority in the nonresident’s country, and formally and legally request them to collect the tax as if the nonresident owed the money to the foreign tax authority, and to pay it over to SARS, he says.

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