The proposed introduction of a 15% withholding tax on consultancy, management and technical fees for services rendered by a foreign consultant or company to a South African firm has been described as “unworkable”.
The tax was proposed in the Taxation Laws Amendment Bill at the end of last year and was aimed at protecting the tax base, as the fees generated local deductions and thereby gave rise to a potential erosion of the tax base, the Treasury said in its explanatory memorandum to the bill.
Internal data suggested the fees amounted to billions a year, much of it shifted to low-tax jurisdictions, it said.
BDO head of international tax Chris Smith said on Monday it was understandable the South African authorities would want a share of the money that foreign companies take out of the country from service fees, but the legislation had not provided for the right to tax service fees in many of its double-tax agreements, and they would not be allowed to levy the tax, which he called “unworkable”.
Criticism over practical problems with the implementation of the proposed tax led to it being deferred to January 1 2016 from the initial implementation date of next January to provide time for consultations and refinements.
The scope and rate of the tax would also be reviewed following criticism that it was too high and could wipe out profits made on supplying services to South Africa, making it unattractive to render them.
Werksmans Attorneys director Patrick McGurk said the concept of “source” has been subject to a large number of court cases over many years as the term had not been defined in the Income Tax Act. “We are dealing with a concept that lacks precise definition, especially in the cases of the source of services, thus inevitably leading to uncertainty.”
He said the source of income was generally used to determine where it was earned in terms of double-tax agreements between South Africa and its trading partners.
There might be a need to amend or clarify existing agreements should the tax be introduced, he said.
Mr Smith said the withholding tax would only apply if the services were rendered in South Africa.
“The difficulty is that many services that foreigners render are conducted from a distance.”
Werksmans tax director Ernest Mazansky said that posed a significant practical problem with the implementation of the tax. He said although the bill outlined who was exempt, its provisions presupposed that the service income was from a source in South Africa.
How would the payer of the fee know where the supplier did the work? he asked rhetorically.