WITHHOLDING TAXES Deadline confusion looms

A new withholding tax on interest payments could be implemented on March 1 rather than the original deadline of January 1, according to the Taxation Laws Amendment Bill. The bill was passed by the national council of provinces on November 27, but has not been signed into law by President Jacob Zuma.

The tax will largely affect individuals and organisations outside the country. A South African who pays interest to any foreign person (where the amount was received from a source within SA) will have to withhold tax at a rate of 15%.

Riza Moosa, head of banking and finance at Norton Rose Fulbright, says this means foreign lenders to SA borrowers will face a reduction of their interest receipts because tax will be withheld by the borrower.

“Generally, comprehensive loan agreements provide for reductions to be grossed up to place the lender in the same position it would have been in had the deduction not been made,” he says. “The economic effect is that the borrower has to pay more to put the lender in the same position.”

Moosa says the extension will give local borrowers with foreign debt time to discuss alternative structuring opportunities with their lawyers, to mitigate the effect of this tax.

Graeme Palmer, a director in the commercial department of Garlicke & Bousfield Inc, warns that although the bill is not yet law, the January 1 deadline might still apply, which could cause great confusion. He also says some aspects of the new rules aren’t as clear-cut as they might be. In a note he writes that interest has not been defined in the new law.

“It is therefore unclear whether the definition of interest in the Income Tax Act or the common law definition will apply.”

He adds that there are a number of exemptions from the withholding tax, for example, any interest paid to a foreign person by government, any bank, or a headquarter company granting financial assistance to a subsidiary. He warns that careful consideration must be given to these exemptions to examine whether they apply.

Even though national treasury and the SA Revenue Service need to work out the details of the new withholding tax, the type of tax is nothing new. Various withholding taxes have been introduced over the years to make it easier for tax authorities to collect taxes from foreign residents and more are Withholding taxes on royalties of 15% (up from 12% on January 1) Withholding tax on foreign entertainers and sportspersons of 15% Withholding tax on the disposal of immovable property of between 5%, 7% and 10% for a foreign individual, company and trust respectively

Dividend withholding tax of 15% Withholding tax on interest (effective from March 1 2015) Withholding tax on service fees (effective from January 1 2016) likely to come. On the other hand, certain double tax agreements with other countries could reduce some rates to 0%.

Annet Wanyana Oguttu, a professor of tax law at Unisa, writes on the SA Institute of Tax Professionals’ website that legislators have come up with a number of withholding taxes to ensure collection of taxes from nonresidents. This will be especially so in cases where the nonresident’s country of residence does not have a double tax treaty with SA.

“Where a double tax treaty is in place, the optimal effectiveness of SA’s withholding tax regime will have to be backed up by double tax treaty reforms, through the renegotiation of older treaties or by signing protocols to take into consideration the withholding taxes that are now in place,” she says.

Tax treaties based on the OECD model set a limit on the rates of withholding taxes that may be levied and countries often try to negotiate favourable rates. However, most of SA’s treaties do not present favourable withholding tax rates for SA, she says. This is so even for the taxes that have been in place for a while.

Now that the domestic withholding tax rate is generally set at 15%, it is imperative that SA negotiate better rates, she adds.

Foreign investors prefer to base investments in jurisdictions with low withholding tax rates. Thus in treaty negotiations, efforts should be made to ensure a balanced approach that does not stifle foreign investment and at the same time preserves SA’s tax base, Oguttu says. Ruan Jooste

jooster@fm.co.za