Budget 2016 – Withdrawal of withholding tax on service fees

Budget 2016 finalThe withholding tax on service fees provided for in s51A-s51H of the Income Tax Act was expected to commence on 1 January 2017.

In this regard, it was envisaged that the local recipient of services would generally have to withhold 15% of the fee payable to the non-resident service provider, (subject to the application of a relevant international tax treaty).

Section 51B of the Income Tax Act, which was meant to be effective from 1 January 2017, makes provision for a final withholding tax on services fees calculated at the rate of 15% of the amount of any service fee that is paid by any person to or for the benefit of any foreign person, to the extent that an amount is regarded as having been received by or accrued to that person from a source within South Africa.

The Budget proposes the withdrawal of the withholding tax on service fees from the Income Tax Act. The reason for the concession is that the introduction of the withholding tax on service fees has resulted in uncertainty on the application of domestic tax law and taxing rights under tax treaties. Accordingly, it is proposed that the withholding tax on service fees be included in the reportable arrangements provisions in the Tax Administration Act, No 28 of 2011 (TAA).

It is interesting to note that the proposal accords with Notice No 140 in Government Gazette 39650, published by SARS on 3 February 2016 in terms of s35(2) of the TAA (Notice), which lists an additional reportable arrangement that was not included in previous notices. The Notice is 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.

Foreign companies and collective investment schemes

Collective Investment Schemes (CIS) are regulated in terms of the Collective Investment Schemes Control Act, No 45 of 2002 and are schemes in terms of which two or more investors pool their resources by investing in a company or trust for their joint benefit while sharing the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme.

In terms of the definition of ‘person’ in s1 of the Income Tax Act, each portfolio in a CIS is defined as a separate person for tax purposes. As such, CISs may hold shares in other companies, including foreign companies. Section 9D of the Income Tax Act is the anti-avoidance provision aimed at preventing South African residents from excluding tainted forms of taxable income from the South African tax net through investment into controlled foreign companies (CFC). More specifically, s9D(2) of the Income Tax Act provides that an amount equal to the net income of a CFC, shall be included in the South African resident’s income in the proportion of such resident’s participation rights to the total participation rights in the company. As s9D of the Income Tax Act taxes South African owners of foreign-owned entities on amounts equal to those entities earned income, s9D results in adverse consequences for CISs that hold shares in foreign CISs.

As there is uncertainty as to whether it is the local fund or the investor in the local fund that should be considered to be the holder of the participation rights in the foreign collective investment scheme, it is proposed that CISs be excluded from applying s9D of the Income Tax Act to investments made in foreign companies.

 by Gigi Nyanin

 




South Africa signed two new double tax agreements with Kenya and Hong Kong

taxation 6Readers will note from SARS Watch that a new double taxation agreement between South Africa and Kenya was recently published in the Gazette. Subsequent to this, a further agreement, this time with Hong Kong, was published in the Gazette on 24 November 2015. Both of these agreements come into effect in South Africa as from 1 January 2016. In Kenya, the DTA also takes effect on 1 January 2016, whereas the agreement with Hong Kong will be effective in that jurisdiction from 1 April 2016.

The South African Revenue Service has been active in the treaty negotiation process over the past few years and the conclusion of agreements with these two countries is welcomed.

For South African residents doing business with Kenya, the agreement is particularly welcome. The 25% domestic withholding tax imposed by Kenya on fees payable to non-residents was a serious impediment to South Africa’s consultancy concerns doing business with Kenya. Under the new agreement, these fees will be taxable in Kenya only if they are derived through a permanent establishment of the South African resident in Kenya.

However, persons rendering consultancy services to either of these foreign jurisdictions should be aware that the agreements contain a ‘services permanent establishment’ provision, in terms of which a permanent establishment includes:

‘the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by an enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within the Contracting State for a period or periods exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned.’

The abolition of section 6quin of the Income Tax Act has imposed a duty on SARS to ensure that it aggressively protects its residents from taxation imposed by foreign jurisdictions in contravention of the terms of a double taxation agreement. Residents should be astute to ensure that they are familiar with the terms of the new agreements.

Corporate residence is subject to a tie-breaker provision in both agreements which states that where a person other than an individual is a resident of both contracting states, such person will be deemed a resident of the state in which its place of effective management is situated.

An element of debate is introduced in the Hong Kong agreement, which states that, in cases of doubt, the competent authorities must attempt to resolve the matter by way of mutual agreement, taking into account all relevant factors; in the absence of such agreement, the person will be denied benefit under the treaty (subject to limited exceptions).

Withholding tax rates are limited, as follows:

 

  Kenya Hong
    Kong
Dividends 10% 10%
Dividends to company holding >10% 5%
Interest 10% 10%
Royalties 10% 5%

International agreements are a catalyst for trade, and these new agreements should not prove an exception to this rule.

This article first appeared on pwc.co.za.




Interest(ing) withholding tax

taxation1Author: Michael Reifarth (Tax Executive at ENSafrica).

The Taxation Laws Amendment Act of 2015 (“Amendment Act”) was promulgated on 8 January 2016 and contains a number of legislative changes to the Income Tax Act, 58 of 1962 (“the Act”).

The Amendment Act contains some long-awaited amendments to the provisions that regulate the interest withholding tax (“IWT”). This article examines two of the more important changes that should be borne in mind by parties affected by the IWT.

Defining the concept of “interest”

Although the IWT only came into effect on 1 March 2015, various iterations of the draft legislation have been in circulation since 2010. The IWT provisions that came into effect on 1 March 2015 did not contain a definition of “interest” to which the IWT applies. The question arose whether the IWT is imposed on the payment of common law interest (generally consideration paid for the use of money) or whether the IWT is imposed on “interest” as defined in section 24J of the Act. In the absence of a definition, it seemed to apply to common law interests.

The promulgation of the Amendment Act has now clarified this point. The definition of “interest” for purposes of the IWT provisions has been defined as “interest” as contemplated in paragraph (a) or (b) of the definition of “interest” in section 24J(1) of the Act.

This means that the basis of the imposition of the IWT will be the following payments made from a South African source by any person to or for the benefit of a non-resident:

  • the gross amount of any interest or related finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement.
  • the amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents compensation for any amount to which the lender would, but for such lending arrangement, have been entitled.

Since the term “interest” is now defined for purposes of the IWT, the reach of the IWT provisions may be wider for certain taxpayers to the extent that the common law concept of interest was relied upon in determining IWT liabilities in the past.

Additional exemption from the IWT

In terms of the taxing provisions, the IWT is levied on interest (as discussed above) received or accrued from a South African source that is paid by any person to or for the benefit of any foreign person, subject to certain exemptions (our emphasis).

Interest is from a South African source if, inter alia, it is received or accrues in respect of the utilisation or application in South Africa by any person of any funds or credit obtained in terms of any form of interest-bearing arrangement.

The payment of interest by a non-resident who utilises or applies, in South Africa, any funds obtained in terms of an interest-bearing arrangement will, therefore, be from a South African source. It follows that payments of South African sourced interest by a non-resident in respect of a debt owing to another non-resident may be subject to the IWT. In many cases, the non-resident may be unaware of the South African withholding tax implications of utilising funds that are borrowed from another non-resident in South Africa.

The Amendment Act has now introduced an additional exemption from the IWT. In brief, the exemption will apply to any South African sourced interest paid by a non-resident to another non-resident unless –

  • the non-resident payor is a natural person who was physically present in South Africa for a period exceeding 183 days in aggregate during the 12-month period preceding the date on which the interest is paid; or
  • the debt claim in respect of which that interest is paid is effectively connected with a South African permanent establishment of the payor if the payor is registered as a taxpayer in terms of chapter 3 of the Tax Administration Act, 28 of 2011.

Unlike the introduction of the “interest” definition as discussed above, the exemption has come into effect retrospectively and is deemed to have come into operation on the date that the IWT came into operation (i.e. 1 March 2015).

Therefore, provided the exclusions to the new exemption do not apply, South African sourced interest paid to a non-resident in respect of a debt owed by another non-resident is exempt from the IWT with effect from 1 March 2015.

 

Michael Reifarth

tax | executive
mreifarth@ENSafrica.com
+27 83 288 1556




‘Interest’ for purposes of Withholding Tax on Interest (WTI)

Lisa Brunton (Cliffe Dekker Hofmeyr).

The Taxation Laws Amendment Bill 2015 (Bill) proposes the insertion of a definition for the term ‘interest’ in s50A of the Income Tax Act, No 58 of 1962 (Act) to clarify the meaning of interest for purposes of the WTI. ‘Interest’ is to be defined in s50A of the Act with reference to paragraphs (a) and (b) of the definition of ‘interest’ under s24J(1), meaning that for WTI purposes, ‘interest’ includes “the gross amount of any interest or related finance charges, discount or premium payable or receivable in terms of or in respect of a financial instrument;” or “the amount (or portion thereof) payable by the borrower to a lender in terms of a lending arrangement as represents compensation for any amount which the lender would, but for such lending arrangement, have been entitled”.

The Explanatory Memorandum to the Bill states that while the meaning of ‘interest’ is defined in terms of s24J of the Act, which definition is referenced in the hybrid instruments rules and source rules; uncertainty has prevailed regarding the meaning to be ascribed to ‘interest’ for purposes of the WTI.

‘Interest’ is defined in s24J(1) of the Act as the:

(a)gross amount of any interest or related finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement;

(b) amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents compensation for any amount to which the lender would, but for the lending arrangement, have been entitled; and

(c) absolute value of the difference between all amounts receivable and payable by a person in terms of a sale and leaseback arrangement as contemplated in s23G throughout the full term of such arrangement, to which such party is party, irrespective of whether such amount is:

(i) calculated with reference to a fixed rate of interest or a variable rate of interest; or

(ii) payable or receivable as a lump sum or in unequal instalments during the term of the financial arrangement.

A ‘lending arrangement’ in turn is defined in s24J of the Act as:

any arrangement or agreement in terms of which:

(a) a person (in this section referred to as the lender) lends any instrument to another person (in this section referred to as the borrower); and

(b) the borrower in return undertakes to return any instrument of the same kind and of the same or equivalent quantity and quality to the lender.

Section 23G of the Act is an anti-avoidance provision which effectively treats sale and leaseback arrangements involving payments to lessors or lessees that do not constitute income in their hands under the Act, as financing arrangements and denies any capital allowances that would otherwise be available in respect of the asset sold and leased back. Qualifying repurchase and resale agreements are effectively treated as loans and the differential between the sale price and resale price of the underlying asset constitutes interest for purposes of s24J of the Act.

As is apparent, ‘interest’ is exceedingly broadly defined under s24J of the Act, embracing interest on all forms of debt, payments economically equivalent to interest, and expenditure incurred in relation to raising finance.

The WTI was introduced into the Act in terms of s50A – H, and came into effect on 1 March 2015. In order for the WTI to be levied in terms of s50B of the Act, interest is required to be paid by any person to or for the benefit of any foreign person to the extent that such amount is regarded as having been received or accrued from a source within South Africa in terms of s9(2)(b) of the Act.

When the initial WTI legislation was released, the provisions contained a definition of interest which included, inter alia, interest as defined in s24J of the Act. However, no such definition found its way into the current incarnation of s50A, and while the Standing Committee on Finance reported that the WTI would apply to common law interest, this comment does not have the force of law.

With reference to the s24J definition of ‘interest’, it is noted that s50B of the Act refers to the source provisions contained in s9(2)(b) of the Act, which apply exclusively to interest as defined in s24J. On this basis, the interest subject to WTI could have been interest as defined in s24J. However, the s24J definition of ‘interest’ exceeds what is understood as common law interest. The definition includes any discount or premium in respect of a financial arrangement as well as compensation payable by a borrower to a lender in terms of any lending arrangement. In addition, as noted above, the provisions of s24J of the Act treat qualifying repurchase and resale agreements as loans and deem the differential between the sale price and resale price of the underlying asset to be interest.

As such, the former absence of a definition of ‘interest’ in s50A meant that the application of the WTI could conceivably exceed the ambit originally foreseen by the legislator. In addition to the foregoing uncertainty, another concern arises regarding the application of the WTI. The WTI is required to be levied on interest that “is paid by any person to or for the benefit of any foreign person to the extent that the amount is regarded as having been received or accrued from a source within the Republic in terms of s9(2)(b);” that is, interest incurred by a South African resident, unless that interest is attributable to a permanent establishment located outside South Africa; or interest received in respect of the utilisation or application in South Africa by any person of any funds or credit obtained in terms of any form of interest-bearing arrangement. This means that interest paid by a non-resident borrower to a foreign lender may be subject to the WTI should the non-resident borrower have utilised or applied the funding obtained from the foreign lender in South Africa. In consequence, it would be incumbent on a non-resident to withhold the tax on interest.

This potential inter-jurisdictional quagmire brings another issue to light: the definition of ‘interest’ in the double taxation agreements (DTAs) to which South Africa is party. Since the bulk of DTAs to which South Africa is party are formulated in accordance with the OECD Model Tax Convention on Income and on Capital (MC), the logical point of departure is Article 11 (Interest) of the MC:

The term ‘interest’ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds and debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of this Article.

The above constitutes a wholly autonomous definition of ‘interest’ which the Commentary on the MC states is preferable because it encompasses practically everything regarded as interest in the various states’ domestic laws, offers greater security because it is unaffected by changes in domestic laws, and references in the MC to domestic law should be avoided if at all possible. However, the Commentary goes on to provide that states are at liberty to include items covered by the domestic law definition of interest.

Certain of South Africa’s DTAs contain an ‘interest’ definition that is wholly autonomous and corresponds with the MC ‘interest’ definition (eg South Africa’s DTAs with France, the Netherlands and the United Kingdom (UK)). Other DTAs, however, extend the definition of ‘interest’ to include all other income treated as interest by the domestic tax law of the state in which such income arises (eg South Africa’s DTAs with Australia, Germany and the United States (US)).

In addition to the potential interpretational issues referred to above, many of South Africa’s DTAs deny the right to tax interest in the jurisdiction where it arises, effectively emasculating South Africa’s WTI (eg South Africa’s DTAs with France, the Netherlands, the UK and the US); alternatively they limit the rate at which such interest may be taxed at source (eg South Africa’s DTAs with Australia and Germany limit the rate at which interest may be taxed in the jurisdiction of source to 10%).

As such the WTI will apply predominantly when the non-resident interest recipient’s country of residence does not have a DTA with South Africa. Where a DTA does exist between South Africa and the non-resident’s country of residence, the DTA terms will have to be renegotiated or a protocol signed to take cognisance of the WTI. As is apparent from the DTAs referred to above, most of which are modelled on the MC, the rate at which withholding tax may be levied at source is limited. This does not bode well for South Africa. Given the WTI rate of 15%, DTAs to which South Africa is party, require renegotiation. Regrettably DTA amendments progress very slowly. Since the implementation of the WTI was motivated by the desire to protect South Africa’s tax base from erosion, one must question its ability to achieve such end given South Africa’s extensive DTA network.

At least the Bill provides clarity as to the meaning of interest’ for the WTI, but whether the WTI itself is capable of shoring up South Africa’s tax base against erosion remains unclear.

 




Snapshot of new withholding tax on interest (WTI) – Are you liable?

dividends 4Author: Ilsa Groenewald, Associate Director : Tax,  BDO Durban

Johannesburg, 18 May 2015 – High net worth individuals who hold local and foreign investments may

not be aware of the new withholding tax on interest (WTI) introduced by SARS.

WTI is a tax charged on interest paid on or after 1 March 2015 by any person to or for the benefit of a

foreigner from a source within South Africa.

In this new procedure the foreigner will be responsible for the tax, whilst the person making the

interest payment will be responsible for withholding the tax. The interest paid is taxed at a final tax

The return submitted to SARS is called the WTID (Withholding Tax on Interest Declaration) and WTI

payments can only be made via the SARS electronic e-filing system.

The WTI payment is due before the end of the month, after the month in which the interest was paid.

If the last day of the month is a public holiday or weekend, the payment must be made on the last

business day before. It is the responsibility of the withholding agent to submit the electronic payment

together with a WT002 return.

WTI submissions have to be made half-yearly. Submission for the first six months (1 March to 31 August

2015) are due on 31 October 2015 and for the second six months (1 September 2015 to 29 February

2016) by 31 May 2016.

Finally, a reconciliation submission of all WTI payments must be made for the year as well as an IT3(b)

certificate of Income from Investments, Property Rights and Royalties must be completed and given to

both the foreigner and SARS.

There are a few exemptions relevant to WTI and individuals are advised to consult their tax

practitioner for details of these. Full guidelines for the submission of WTI certificates were also

available on the SARS website.




Withholding taxes – Overview of current taxes

taxation 5Over the past few years we have seen the introduction of various withholding taxes to the South African tax system. We set out below a high-level summary of the various withholding taxes that are levied in terms of the Income Tax Act  No. 58 of 1962 (the Act), their rates and the withholding and reporting obligations. Apart from the dividends tax, these withholding taxes primarily apply to persons that constitute non-residents for South African tax purposes. However, tax residents should also take note since they could have a withholding obligation which may result in them having a secondary tax liability.

Withholding tax on disposal of immovable property by a non-resident
Since 1 September 2007, a withholding tax is levied on the disposal by a
non-resident of any immovable property in South Africa in terms of section 35A of the Act. This withholding tax is not a final tax but an advance payment of tax on the seller’s actual account of normal tax liability. The amount to be withheld is 5% of the selling price where the seller is a natural person, 7.5% where the seller is a company and 10% where the seller is a trust. The purchaser must withhold the tax and submit a return to the Commissioner within 14 days after the date on which the tax was withheld if the purchaser is a resident or within 28 days if the purchaser is a non-resident. Should the selling price be less than R2 million, no withholding tax is levied.

Withholding tax on foreign entertainers and sportspersons
A final withholding tax is levied on foreign entertainers and sportspersons in terms of section 47B of the Act at the rate of 15% on amounts received by or accrued to a non-resident in respect of any personal activity exercised in South Africa. The foreign entertainer or sportsperson is exempt from this tax if he/she is an employee of a resident employer or if he/she is physically present in South Africa for more than 183 full days in aggregate during any twelve-month period commencing or ending during the year of assessment in which the specified activity is exercised. The resident that pays the foreign entertainer or sportsperson has the withholding obligation and such amount must be paid to the South African Revenue Service (SARS) before the end of the month following the month during which the withholding tax was deducted or withheld. SARS has a specific unit dealing with non-resident entertainers and sportspersons.

Withholding tax on royalties
A final withholding tax on royalties is levied in terms of section 49B of the Act. Until 31 December 2014, it was levied at the rate of 12% of the amount of any royalty (as defined) paid by any person to a non-resident to the extent that it was sourced in South Africa. Section 9(2) of the Act sets out the various instances when royalties will be deemed to be derived from a source within South Africa. The withholding tax rate was increased to 15% with effect from 1 January 2015. The withholding obligation is on the person making payment of the royalty. The tax must be paid by the last day of the month following the month in which the royalty is paid.
Exemptions apply to certain non-residents. In order to qualify for exemption or a reduced rate of withholding tax in accordance with a double taxation agreement, the non-resident must submit a declaration as prescribed to the person making the payment by a specified date or by the date of payment. SARS recently made the Return for Withholding Tax on Royalties (WRT01) form available.

Dividends tax
Section 64E of the Act levies a dividends tax at the rate of 15% of the amount of any dividend paid by any company other than a headquarter company.  In the case of cash dividends, dividends tax is payable by the shareholder and withheld by the company. In the case of dividends in specie, the company is liable for the dividends tax. It is also levied on foreign dividends, which constitute cash dividends, if the shares in respect of which those dividends are paid are listed on the JSE Limited. The dividends tax is a final tax in terms of a double tax agreement.

The company that declares and pays the dividend or a regulated intermediary that pays a dividend declared by any other person has the withholding obligation. No withholding obligation will arise if, inter alia, a dividend is paid to a company that forms part of the same group of companies as defined in section 41 of the Act or if it is paid to a regulated intermediary. Exemptions exist which may apply in certain instances. For example, resident companies that are beneficial owners of the dividends are exempt from the dividends tax.

The dividends tax must be paid by the last day of the month following the month in which the dividend was paid by the person that has the withholding obligation. A return must be submitted in order to make payment. A return must also be submitted by a person that has received an exempt dividend. A beneficial owner claiming an exemption or a reduced rate of tax in terms of a double tax agreement must provide a declaration to that effect to the company or regulated intermediary paying the dividend as well as a written undertaking to inform the company should any circumstances affecting the exemption or reduction change.

 

Withholding tax on interest
A final withholding tax on interest entered into force on 1 March 2015. The withholding tax on interest is levied at the rate of 15% in terms of section 50B of the Act on any interest that is paid by any person to or for the benefit of any foreign person to the extent that the amount is sourced in South Africa. Section 9(2)(b) of the Act determines when interest will be deemed to be sourced in South Africa.

Exemptions exist which may apply to certain debt instruments or holders
The person paying the interest has to withhold and must submit a return and pay the tax by the last day of the month following the month in which the interest is paid. To claim exemption or a reduced rate of tax in terms of a double taxation agreement, a declaration has to be submitted in such form as prescribed by the Commissioner. If a reduced rate is claimed, a written undertaking must also be submitted to the person making payment that they will be informed of any change in circumstances affecting the application of the double taxation agreement.

Withholding tax on service fees
Section 51B of the Act levies a final withholding tax on services fees calculated at the rate of 15% of the amount of any service fee that is paid by any person to or for the benefit of any foreign person to the extent that an amount is regarded as having been received by or accrued to that person from a source within South Africa. ‘Service fees’ is a defined term. This withholding tax will only be effective from 1 January 2016. Exemptions may apply to certain non-residents or double taxation relief may reduce the rate of the withholding tax. The person making payment of such service fee to the non-resident must withhold the tax and submit a return and pay the tax to the Commissioner by the last day of the month following the month in which the service fee is paid. Again, a declaration needs to be submitted in order to claim exemption or a reduced rate of withholding tax in terms of a double taxation agreement. To our knowledge, such a declaration has not yet been made available by SARS.

Conclusion
It is important to consider the application of the above taxes to any payments made to non-residents and in the case of the dividends tax to residents. Failure to withhold or pay these taxes to SARS could result in the person that is required to withhold the tax being personally liable for the tax. In addition, penalties may be levied in certain instances for the failure to withhold or to correctly withhold.

 

ENSafrica
ITA: Sections 9(2), 35A, 41,47B, 49B, 50B, 51B and 64E




Are you liable for new Withholding Tax on interest (WTI)? Snapshot of new Withholding Tax

donations tax 2 (2)High net worth individuals who hold local and foreign investments may not be aware of the new withholding tax on interest (WTI) introduced by SARS.

WTI is a tax charged on interest paid on or after 1 March 2015 by any person to or for the benefit of a foreigner from a source within South Africa. Ilsa Groenewald, Associate Director for Tax at the Durban office of audit and accounting firm, BDO says “In this new procedure the foreigner will be responsible for the tax, whilst the person making the interest payment will be responsible for withholding the tax.” “The interest paid is taxed at a final tax rate of 15%.”

“The return submitted to SARS is called the WTID (Withholding Tax on Interest Declaration) and WTI payments can only be made via the SARS electronic e-filing system.”

“The WTI payment is due before the end of the month, after the month in which the interest was paid. If the last day of the month is a public holiday or weekend, the payment must be made on the last business day before. It is the responsibility of the withholding agent to submit the electronic payment together with a WT002 return.”

Groenewald says that WTI submissions have to be made half-yearly. Submission for the first six months (1 March to 31 August 2015) are due on 31 October 2015 and for the second six months (1 September 2015 to 29 February 2016) by 31 May 2016.

Finally, a reconciliation submission of all WTI payments must be made for the year as well as an IT3(b) certificate of Income from Investments, Property Rights and Royalties must be completed and given to both the foreigner and SARS.

Groenewald said that there are a few exemptions relevant to WTI and advised individuals to consult their tax practitioner for details of these. Full guidelines for the submission of WTI certificates were also available on the SARS website.

This article first appeared on bdo.co.za.




An Overview of South Africa's Withholding Tax Regime

transfer pricing 101Author: Mansoor Parker (ENSafrica)

Venture capital companies are a tax-favoured investment vehicle. The venture capital company (“VCC”) scheme, introduced in 2009, is a tax-based scheme designed to encourage individual and corporate investors to invest in a range of smaller, higher-risk trading companies by investing through the VCCs.

Background

Although South Africa has a well-developed private equity industry, its appetite for start-up, early stage and seed capital type transactions is low. To meet the challenge of access to venture capital for small and medium-sized enterprises, government introduced a tax incentive for individual investors, corporate investors and venture capital funds in qualifying small enterprises and start-ups. The tax incentive took effect from 1 July 2009.

Since its inception and despite amendments in 2011 to enhance its attractiveness, the uptake for this tax incentive has been very limited. In the 2014 National Budget Review, Government announced that it will propose one or more of the following amendments to the venture capital company regime:

  • making tax deductions permanent if investments in the VCC are held for a certain period of time;
  • allowing transferability of tax benefits when investors dispose of their VCC holdings;
  • increasing the total asset limit for qualifying investee companies (i.e. companies in which the VCC may invest) from R20 million to R50 million, and from R300 million to R500 million in the case of junior mining companies; and
  • waiving capital gains tax on the disposal of assets by the VCC, and expanding the permitted business forms.

The purpose of this series of articles is to examine the impact of the VCC tax incentives on the investors, the VCC itself and the qualifying investee companies. This article will give a general overview of the VCC scheme while subsequent articles will deal with each of the role players in increasing levels of detail.

What is a VCC?

An approved VCC is a company designed to provide individual and corporate investors with access to a range of trading companies which have the potential for growth. The VCC aims to make money by investing in these smaller trading companies. The VCC raises funds by issuing equity shares to investors and the money is then allocated to those businesses that the managers judge to have the best prospects.

Overview of the tax treatment

Upfront income tax relief:

An investor which subscribes for VCC shares receives an immediate tax deduction equal to 100% of the amount invested with no annual limit or lifetime limit. The relief is available provided that the investor subscribes for equity shares, as opposed to buying them second hand from other investors. There is no minimum holding period.

Taxable recoupment

The upfront income tax relief is temporary. According to the 2014 National Budget Review a proposal will be considered making the deduction permanent if the VCC shares are held for a certain period of time.

No dividends tax relief

Dividends on VCC shares are subject to the 15% dividends tax unless the investor qualifies for an existing dividend tax exemption. For instance, investors which are SA resident companies will enjoy the company-to-company dividend tax exemption.

No capital gains tax relief

CGT is payable when investors sell their VCC shares at the rate applicable to the relevant investor (13.3% for individual investors; 18.6% for corporate investors and effective 26.6%for investors which are trusts). However, there is tax relief for capital losses. Capital losses on the disposal of VCC shares can be set off against investors’ capital gains. It is not possible to set off capital losses against the investors’ income.

No reinvestment relief

It is not possible for an investor to defer the gain on another investment by applying the sale proceeds to subscribe for VCC shares. Thus, investors that sell their, say, Sasol or MTN shares in order to reinvest the proceeds in VCC shares will be subject to CGT on the sale of the Sasol or MTN shares. The after-tax proceeds from the sale of those shares will be invested in VCC shares.

The venture capital scheme is temporary

The VCC regime, introduced in 2009 is subject to a 12 year sunset period that ends on 30 June 2021. The upfront income tax relief will only apply to VCC shares acquired on or before 30 June 2021.




An Overview of South Africa’s Withholding Tax Regime

transfer pricing 101Author: Mansoor Parker (ENSafrica)

Venture capital companies are a tax-favoured investment vehicle. The venture capital company (“VCC”) scheme, introduced in 2009, is a tax-based scheme designed to encourage individual and corporate investors to invest in a range of smaller, higher-risk trading companies by investing through the VCCs.

Background

Although South Africa has a well-developed private equity industry, its appetite for start-up, early stage and seed capital type transactions is low. To meet the challenge of access to venture capital for small and medium-sized enterprises, government introduced a tax incentive for individual investors, corporate investors and venture capital funds in qualifying small enterprises and start-ups. The tax incentive took effect from 1 July 2009.

Since its inception and despite amendments in 2011 to enhance its attractiveness, the uptake for this tax incentive has been very limited. In the 2014 National Budget Review, Government announced that it will propose one or more of the following amendments to the venture capital company regime:

  • making tax deductions permanent if investments in the VCC are held for a certain period of time;
  • allowing transferability of tax benefits when investors dispose of their VCC holdings;
  • increasing the total asset limit for qualifying investee companies (i.e. companies in which the VCC may invest) from R20 million to R50 million, and from R300 million to R500 million in the case of junior mining companies; and
  • waiving capital gains tax on the disposal of assets by the VCC, and expanding the permitted business forms.

The purpose of this series of articles is to examine the impact of the VCC tax incentives on the investors, the VCC itself and the qualifying investee companies. This article will give a general overview of the VCC scheme while subsequent articles will deal with each of the role players in increasing levels of detail.

What is a VCC?

An approved VCC is a company designed to provide individual and corporate investors with access to a range of trading companies which have the potential for growth. The VCC aims to make money by investing in these smaller trading companies. The VCC raises funds by issuing equity shares to investors and the money is then allocated to those businesses that the managers judge to have the best prospects.

Overview of the tax treatment

Upfront income tax relief:

An investor which subscribes for VCC shares receives an immediate tax deduction equal to 100% of the amount invested with no annual limit or lifetime limit. The relief is available provided that the investor subscribes for equity shares, as opposed to buying them second hand from other investors. There is no minimum holding period.

Taxable recoupment

The upfront income tax relief is temporary. According to the 2014 National Budget Review a proposal will be considered making the deduction permanent if the VCC shares are held for a certain period of time.

No dividends tax relief

Dividends on VCC shares are subject to the 15% dividends tax unless the investor qualifies for an existing dividend tax exemption. For instance, investors which are SA resident companies will enjoy the company-to-company dividend tax exemption.

No capital gains tax relief

CGT is payable when investors sell their VCC shares at the rate applicable to the relevant investor (13.3% for individual investors; 18.6% for corporate investors and effective 26.6%for investors which are trusts). However, there is tax relief for capital losses. Capital losses on the disposal of VCC shares can be set off against investors’ capital gains. It is not possible to set off capital losses against the investors’ income.

No reinvestment relief

It is not possible for an investor to defer the gain on another investment by applying the sale proceeds to subscribe for VCC shares. Thus, investors that sell their, say, Sasol or MTN shares in order to reinvest the proceeds in VCC shares will be subject to CGT on the sale of the Sasol or MTN shares. The after-tax proceeds from the sale of those shares will be invested in VCC shares.

The venture capital scheme is temporary

The VCC regime, introduced in 2009 is subject to a 12 year sunset period that ends on 30 June 2021. The upfront income tax relief will only apply to VCC shares acquired on or before 30 June 2021.




Withholding Tax on Interest

shares trendsSARS recently issued a summary of the Withholding Tax on Interest (WTI) which mainly addresses practical issues relating to WTI. The WTI came into effect on 1 March 2015 (in respect of interest that is paid or that becomes due and payable from that date). We summarise the most salient points further on in this article. The summary is not intended to be comprehensive and does not deal with some of the complex technical issues contained in the WTI provisions.

The WTI is a final withholding tax charged at 15% on interest paid or that becomes due and payable (from 1 March 2015) by any person to or for the benefit of a foreigner, i.e. a non-resident from a source within South Africa. The foreigner is liable for the tax, but it must be withheld by the person making the interest payment to or for the benefit of the foreigner.

The WTI exempts certain receipts relating to the payer (the person liable for the interest); the instrument (the instrument giving rise to the interest); and the foreigner (the recipient of the interest).

Interest is exempt from WTI if it is paid to a foreigner by:

  • The RSA Government (national, provincial or local sphere);
  • Any bank, including the South African Reserve Bank (SARB), Development Bank of South Africa (DBSA) or the Industrial Development Corporation (IDC); or
  • A headquarter company relating to financial assistance where the headquarter company directly

Interest is exempt from WTI if it is paid to a foreigner for:

    • Listed debt, e.g. bonds listed on the Johannesburg Stock Exchange (JSE);
    • Interest payable to any foreigner that is a client, to whom a regulated person provides securities services, acts as an agent for another person about those services in which case it will include the agent or exclude the other person, if the contractual arrangement between the parties shows this to be the intention.

The WTI exemptions based on the payer and the instrument above require no declaration.

A Foreigner is exempt from WTI if:

  • It is a natural person who was in South Africa for a period of more than 183 days in total during the 12 months before the date when the interest is paid; or
  • The debt claim for which interest is paid is effectively connected with a permanent establishment of the foreigner who is registered as a taxpayer in South Africa.

The foreign recipient exemptions do not apply unless the WTI Declaration (‘WTID’) has been submitted to the payer of the interest before payment of the interest is made. The payer must keep the WTID for five years. As with Dividends Tax, SARS prescribed the form of this declaration and it is the responsibility of the withholding agent to ensure that the declaration made by the foreign person is in the form as prescribed.

A reduced rate of tax or exemption may apply under an applicable Agreement for the Avoidance of Double Taxation and Prevention of Fiscal Evasion (DTA). The DTA may reduce the rate South Africa is allowed to charge, or even deny South Africa the right to tax the interest payments. The reduced rates or exemptions under a DTA do not automatically apply and require the WTID to be submitted to the payer of the interest prior to payment of the interest.

WTI can only be paid to SARS electronically via eFiling.

A withholding agent must submit the form WT002, “Declaration of Withholding Tax on Interest”, to SARS, which is a summary of the total of interest payments made and tax withheld during a month. The WT002 and the payment must be submitted to SARS before the end of the month after the month in which the interest was paid.

The WT002 and the tax withheld must be submitted from the end of April 2015. If the last day of the month is a public holiday or weekend, the payment must be made on the last business day before the public holiday or weekend.

A reconciliation submission of all the WTI payments must be made for the year. An IT3(b) “Certificate of Income from Investments, Property Rights and Royalties” must be completed and submitted to the foreigner and SARS. Submission of the IT3(b)’s to SARS can be done using one of the Third Party Data Submission Platforms by following the guidelines for the submission of Third Party Data as set out in the Business Requirement Specification for the IT3 Data Submission. The reconciliation must be done half yearly (i) for the first six months of the year 1 March to 31 August – by 31 October; and (ii) for the second six months of the year 1 September to 28 February – by 31 May.

The first reporting period is due by the end of May 2016 for the 12 month period (year) ending in February 2016.