In­ter­est paid to non­res­i­dents is to be taxed

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

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.

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