Posted by: Chris Basson
There has been a lot of uncertainty among foreign investors as well as South African persons with regard to withholding taxes. These taxes are usually withheld and paid over to SARS when foreign persons receive investment proceeds from South Africa. The Explanatory Memorandum on the Taxation Laws Amendment Bill 2012 proposes some changes which might be of benefit to the uncertain souls among us.
Payments made by South African residents to offshore investors are potentially subject to various withholding taxes. Common cross-border payments which are subject to withholding taxes include dividends, interest and royalties. These withholding taxes are often reduced or eliminated by Double Tax Agreements (DTAs) between South Africa and offshore countries. The provisions of the Income Tax Act will apply unless a DTA or Tax Treaty states otherwise. The DTA therefore takes preference over the Income Tax Act. Each will be discussed separately, followed by Government’s proposal.
As of 1 April 2012, Dividends Tax in respect of cross-border dividends are generally subject to a 15 per cent rate (subject to treaty limits of 5 or 10 per cent). A company who declares and pays a dividend to a non-resident must generally withhold Dividends Tax unless regulated intermediaries are involved (who are instead required to withhold Dividends tax). However, to the extent that sums are owing, the ultimate liability rests with the beneficial owner. Payment of the Dividends Tax must be made at the close of the month following the month in which the dividends are paid.
Interest withholding tax
With effect from 1 July 2013, cross-border interest will be subject to withholding tax at the proposed rate of 10 per cent (subject to treaty limits). The person making this payment for the benefit of the non-resident is liable to withhold this tax. However, to the extent that sums are owed, the ultimate liability rests with the person to whom the amount of interest is paid or accrues. Payment of withholding tax on interest must be made at the close of the month following the month in which the interest is paid. Non-residents seeking tax treaty (or certain other forms of) relief must submit a declaration by the date of payment. If a declaration is submitted within a three-year period, the non-resident may seek a refund from SARS.
Withholding tax on royalties
Cross-border royalties are subject to a withholding tax of 12 per cent. The person making payment of the royalty to (or the recipient of the royalty on behalf of) the non-resident is liable to pay withholding tax. Payment must be made to SARS within 14 days or within a period that SARS may approve. The royalty withholding rules do not have a refund mechanism.
Proposal and reasons for change
As illustrated above, withholding taxes with regard to dividends, interest and royalties each have different rules relating to the rates, timing, refunds and other procedures. While some of these differences can be justified, many of these differences have arisen due to the dates in which these provisions were enacted. The result of this is a lack of coordination among these withholding taxes, thereby complicating administration and compliance. Greater uniformity is needed to reduce these burdens.
In order to remedy the lack of coordination among withholding tax regimes, it is now proposed that these withholding regimes be unified to the best extent possible. These changes will mainly require adjustments to the interest and royalty withholding regimes because the rules of the recently enacted Dividends Tax have been well-debated and settled. These changes will include a uniform withholding rate of 15 per cent. The proposed amendment will be effective for royalties that are paid or payable on or after 1 July 2013.
Proposed changes to interest withholding tax
The withholding tax rate will be increased from 10 to 15 per cent. As currently proposed the liability to withhold tax on interest will remain with the person making the payment to the non-resident. In addition, ultimate liability remains with the non-resident. However the mere accrual will no longer be the basis for withholding. In line with the new Dividends Tax, the trigger date for withholding will now be the date on which the sum is paid or becomes due and payable. The timing of the payment to SARS will remain the close of the month following the month in which the interest was paid. This is in line with the payment date of Dividends Tax.
Under current law, the overpayment of interest amounts (due to delayed declarations or otherwise) may be refunded from SARS only if the foreign payee lodges a refund claim with the payer (person paying the interest) within three years after the payment of interest. This refund process will be simplified and the refund claim will instead only involve SARS (i.e. the claim must be made solely to SARS within the three year period without regard to the payee).
Interest earned by foreign persons may fall within the normal tax rules or the interest withholding tax rules. As a general matter, foreign persons are exempt from income tax unless that person:
•Is a natural person who is physically present within South Africa during the relevant year of assessment for more than 183 days, or
•Is classified as being ordinarily resident in South Africa according to the South African case law, but subject to the provisions of any DTA, or
•A juristic person which was incorporated established or formed in South Africa or which has its place of effective management in South Africa.
The physical presence test will be satisfied when a natural person adheres to the following:
•Not ordinarily resident for the year of assessment.
•Present in the Republic for more than 91 days (in aggregate) during the current year of assessment.
•Present in the republic for more than 91 days (in aggregate) during each of the previous five years of assessments.
•Present in the republic for more than a total of 915 days in total during the previous five years of assessment.
If all the requirements are satisfied the person will be classified as a resident of the Republic.
In simple terms, foreign persons will be subject to normal tax on interest if those persons have a strong connection to South Africa. Otherwise normal tax does not apply. On the other hand of the spectrum, withholding tax potentially applies when this strong connection does not exist.
Proposed changes to Royalties withholding tax
The withholding tax rate will increase from 12 to 15 per cent. As currently proposed the initial liability to withhold tax on royalties will remain with the person making payment for the benefit of the foreign person. In addition, ultimate liability will lie with the beneficial owner. A mere accrual will no longer be the basis for withholding tax. This is in line with the new Dividends tax and the trigger date for withholding will now be the date on which a sum is paid or becomes due and payable.
The payment of withholding tax on royalties to SARS will not stay the same. The payment date will be at the close of the month following the month in which the royalty is paid. This timing rule also matches the rules relating to the withholding of dividends and interest. The royalty regime will now contain currency translation rules. The amount of royalties must be translated to the currency of the Republic at the spot rate on the earlier of the date of payment or when the amount becomes payable. Overpayment of the amounts of royalties may be refunded only if the payer (person paying the royalties to the foreign person) lodges a claim for a refund with SARS within a period of three years after the payment of the relevant royalties.
With regard to royalties earned by foreign persons who may fall within the normal tax rules or the royalty withholding tax rules, the same rules apply as was stated above in the interest section.
I think that these changes will definitely reduce and alleviate a lot of confusion and do away with unnecessary complex tax legislation which has been with us for some time now. Unifying and coordinating these three withholding taxes will make it much easier for companies who have foreign clients, as well as tax practitioners to provide advice on these matters. Let’s not forget that these changes will also lighten the administrative burden on SARS, which will decrease turnover time on requests and consequently make taxpayers less prone to frustration when corresponding with SARS. In my view it will be a win-win situation.
List of References
Stiglingh, M (2013). SILKE: South African Income Tax. Durban South Africa: Lexis Nexis. p56.
National Treasury. 2012. Explanatory Memorandum On The Taxation Laws Amendment Bill. Pretoria.