Interest paid to nonresidents is to be taxed
However, countries that have a double-taxation agreement with SA could slow down the whole process
IN THE Draft Taxation Laws Amendment Bill released for comment during May it was indicated that provisions would be introduced that interest paid by residents to non-residents would, in certain circumstances, become liable to tax in SA.
Initially, those proposals would have resulted in interest paid to nonresidents becoming liable to tax at the rate applicable to branches carrying on business in SA, namely, 33%. The rules were deficient in that they did not deal properly with the manner in which the tax would be collected or administered. In the response document published by the Treasury and the South African Revenue Service (SARS) on submissions received in response to the bill, it was indicated that the initial proposals would be replaced by the introduction of a comprehensive non-residents’ tax on interest.
During August the minister introduced the Taxation Laws Amendment Bill 2010 that contains enabling provisions to implement a withholding tax on interest in SA. Previously, SA levied a withholding tax on interest, which was repealed during 1988. The government has now taken the view that it is appropriate to reintroduce a withholding tax on interest paid by South African residents to nonresidents. The rules governing the imposition of the withholding tax on interest are contained at clause 58 of the 2010 Taxation Laws Amendment Bill, which proposes introducing sections 37I to M into the Income Tax Act, 1962.
Section 37I contains various definitions that will apply to the withholding tax rules.
“Interest” is defined in section 37I as consisting of interest as defined in section 24J(1) of the act, as well as deemed interest as contemplated in section 8E(2).
It has been proposed that a “listed debt instrument” means any debt instrument that is listed on a recognised exchange as defined in paragraph 1 of the eighth schedule to the act, which includes an exchange licensed under the Securities Services Act, 2004 or an exchange in a country other than SA.
Section 37J provides that the withholding tax on interest must be calculated at the rate of 10% of the amount of any interest received by or accrued to any foreign person that is not a controlled foreign company (CFC). “Foreign person” has, in turn, been defined as any person other than a resident as envisaged in section 1 of the act. It has been provided that any foreign person that is not a CFC that receives any interest, or to which any interest accrues, will be liable to the withholding tax on interest.
The proposals contain a number of exemptions that will apply, thereby reducing the scope of application of the withholding tax on interest.
It has been proposed at section 37K that the following amounts of interest will be exempt from the withholding tax on interest:
Received by or accrued to any foreign person during any year of assessment:
In respect of any government debt instrument;
In respect of any listed debt instrument;
In respect of any debt owed by any bank or the Reserve Bank;
In respect of any bill of exchange, letter of credit on similar instrument to the extent that the interest is payable in respect of the purchase price of goods imported into SA, and if an authorised dealer as envisaged under the exchange control regulations has certified on the instrument that a bill of lading or other document covering the importation of the goods has been exhibited to it;
In respect of any other debt owed by a foreign person unless the foreign person consists of a natural person who is physically present in the country for a period exceeding 183 days in aggregate during that year, or at any time during that year, carried on business through a permanent establishment in the country; or
If that interest is paid or payable by a headquarter company and in respect of financial assistance that is not subject to section 31, as a result of the application of section 31(4) of the act.
A foreign person will not be subject to the withholding tax on interest when the recipient is a natural person who was physically present in SA for a period exceeding 183 days or at any time carried on business through a permanent establishment in the country.
Section 37L creates the legal obligation whereby any person making payments of interest to the benefit of a foreign person must withhold an amount equal to 10% of the amount of interest due to that foreign person. Once the withholding tax on interest comes into force the amount withheld must be paid over to SARS within 14 days after the end of the month during which the amount is withheld.
When the foreign person resides in a country with which SA has concluded a double taxation agreement, and that treaty provides for the reduction in the rate of the withholding tax on interest, a declaration in the form prescribed by the Commissioner must be submitted to the person paying the interest reflecting the rate of tax applicable.
The Taxation Laws Amendment Bill provides that the withholding tax on interest will come into operation on January 1 2013 and will apply in respect of any interest that accrues on or after January 1.
Therefore, where interest is payable by a South African company to its holding company, withholding tax on interest will be payable at the rate of 10%, unless the rate of tax is reduced by virtue of the provisions of a double-tax agreement concluded with the state in which the parent company resides.
At present, interest received by domestic trusts may be awarded to non-resident beneficiaries without such interest attracting tax in SA. Once the withholding tax on interest takes effect the trust paying interest to non-resident beneficiaries will be required to pay over the withholding tax on interest on such awards, subject to the applicability of a double-taxation agreement.
The Treasury has indicated that SA will renegotiate certain double-tax treaties to ensure that the country can levy the withholding tax on interest.
This will take time, as has been borne out by the process in moving from the secondary tax on companies to the dividends tax, which has been delayed, partly, because of the process required to give effect to changes to double taxation agreements to allow for the introduction of the dividends tax system.
It is, therefore, debatable whether SA will be ready to implement the withholding tax on interest on January 1 2013, taking account of the lengthy processes required to amend the treaties concluded by SA and its various trading partners.
Dr Beric Croome is a tax executive at ENS.