International Tax – Reportable arrangement: non-resident service providers

transfer pricing 102The South African Revenue Service (SARS) published a Public Notice, Notice No. 140  in the Government Gazette (No 39650) on 3 February 2016, in terms of section 35(2) and 36(4)  the Tax Administration Act, 2011 (TAA). Among other things, the notice lists an additional reportable arrangement that was not included in previous notices.

The following arrangement is now a reportable arrangement:
An arrangement for the rendering of consultancy, construction, engineering, installation, logistical, managerial, supervisory, technical or training services to a person that is a:
South African resident; or
a non-resident having a permanent establishment in South Africa,
and, in terms of which arrangement:

    1. a non-resident was, is, or is anticipated to be physically present in South Africa in connection with or for purposes of rendering the services (not being an employee, agent or representative of the person to whom the services are rendered); and
    2. the expenditure incurred or to be incurred in respect of the services exceeds or is anticipated to exceed R10 million, and does not qualify as ‘remuneration’ for employees’ tax purposes.

The inclusion of such arrangements as reportable arrangements appears to be largely aimed at non-resident service providers who physically provide services in South Africa to residents (or permanent establishments of non-residents) via individual non-residents sent to South Africa.

For example, a foreign consulting firm could send their employees to South Africa to actually render the relevant consulting services in South Africa. Also, a multinational corporation having a resident subsidiary (or a permanent establishment) in South Africa could arrange for a foreign group company to provide services to the resident subsidiary (or permanent establishment) by sending non-resident employees or agents to South Africa (e.g. managers or experts).

Generally, a non-resident service provider would be liable to account for income tax in South Africa in respect of all income derived from a
South African source. Where an international tax treaty applies, the non-resident would generally be liable to account for income tax in South Africa only to the extent that it has created a permanent establishment in South Africa and the relevant income is attributable to such permanent establishment.

Where a non-resident service provider sends non-resident employees or agents to South Africa in connection with or for purposes of rendering services to South African residents (or permanent establishments of non-residents in
South Africa), the relevant income derived by the non-resident service provider is very likely to be taxable in South Africa (editorial comment: subject to the provisions of an applicable DTA).

In practice, the risk for SARS is that these non-resident service providers could fail to register as taxpayers in South Africa (whether as a permanent establishment or not), and not declare their income that is taxable in
South Africa. The fiscus may then be compromised as the local recipient of the services would likely claim a tax deduction for the expenditure incurred.

The non-resident service provider could potentially also become liable to register for value-added tax in South Africa to the extent that it conducts an enterprise in South Africa and makes taxable supplies of services.
Where such non-resident service providers maintain a light footprint in
South Africa, SARS may find it difficult to enforce compliance. With the inclusion of the additional reportable arrangement as a detection mechanism, SARS intends to put extra pressure on non-resident service providers to declare their South African income.

The question that arises is whether the reporting obligation is limited to the
non-resident service provider, or whether it extends to the local recipient of the services, as failure to report a reportable arrangement can result in harsh penalties.  Editorial Comment:  In terms of the TAA, the obligation to report falls on a “participant”.  A participant means, in relation to an arrangement, a promotor or the person who directly or indirectly will derive a tax benefit or financial benefit by virtue of the arrangement or any other person as referred to in the next paragraph.

In terms of section 37 of the TAA, any ‘participant’ is obliged to report the relevant arrangement. Subparagraph (c) of the definition of ‘participant’ in section 34 of the TAA specifically includes “any other person who is party to an ‘arrangement’ listed in a public notice referred to in section 35(2)”.

South African residents (or non-residents having a South African permanent establishment) who conclude contracts with non-resident service providers for the provision of services, will have to report the arrangement where the non-resident service provider will be sending non-resident employees, agents or representatives to South Africa in relation to the services, and the monetary threshold of R10 million non-remuneration income is to be exceeded.

Editorial Comment:  A recent amendment to the Income Tax Act provides that the withholding tax on service fees scheduled to apply from 1 January 2017 will no longer be implemented.
Cliffe Dekker Hofmeyr
ITA: sections 51A-H
TAA: sections 34 definition of participant, 35(2), 36(4) and 37

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