In the Draft Taxation Laws Amendment Bill (¡§DTLAB¡¨) released for comment during May 2010, it was indicated that provisions would be introduced such that interest paid by residents to non-residents would, in certain circumstances, become liable to tax in South Africa. Initially, those proposals would have resulted in interest paid to non-residents becoming liable to tax, generally, at the rate applicable to branches carrying on business in South Africa, namely, 33%. The rules were deficient in that they did not properly deal with the manner in which the tax would be collected or administered. In the Response Document published by National Treasury and the South African Revenue Service (¡§SARS¡¨) on submissions received in response to the DTLAB, it was indicated that the initial proposals would be replaced by the introduction of a comprehensive non-residents tax on interest.
During August 2010, the Minister introduced the Taxation Laws Amendment Bill, 2010 (¡§2010 TLAB¡¨) which contains enabling provisions to implement a withholding tax on interest in South Africa. Previously, South Africa levied a withholding tax on interest, which was repealed during the course of 1988. Government has now taken the view that it is appropriate to re-introduce a withholding tax on interest paid by South African residents to non-residents. The rules governing the imposition of the withholding tax on interest are contained at clause 58 of the 2010 TLAB, which proposes introducing sections 37I to M into the Income Tax Act, Act 58 of 1962, as amended (¡§the Act¡¨).
Section 37I contains various definitions which will apply to the withholding tax rules.
"Interest" is defined in section 37I as comprising 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 the Republic, which is similar to an exchange contemplated in paragraph (a) of the definition of ¡§recognised exchange¡¨ contained in paragraph 1 of the Eighth Schedule to the Act, which has been recognised by the Minister for purposes of the Eighth Schedule.
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.
As is to be expected, the proposals contain a number of exemptions which 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 ¡V
- 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 South African Reserve Bank
- in respect of any Bill of Exchange, letter of credit or similar instrument to the extent that the interest is payable in respect of the purchase price of goods imported into South Africa 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 comprises 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.
Furthermore, interest payable under section 27(6) of the Securities Services Act, 36 of 2004, to any foreign person that is a ¡§client¡¨ as defined in section 1 of that Act, is also exempt from the withholding tax on interest. In addition, any amount of interest which is received by or accrued to a non-resident by a portfolio of collective investment schemes in securities will be exempt from the withholding tax on interest.
It must be noted that interest received by or accrued to a foreign person will not be exempt from withholding tax if the amount is advanced in the course of any arrangement, transaction, operation or scheme to which the foreign person and any other person are parties and, in terms of which, the bank advances any amount to that other person as a result of the amount advanced by the foreign person to the bank.
A foreign person will not be subject to the withholding tax on interest where the recipient is a natural person who was physically present in South Africa for a period exceeding 183 days or at any time carried on business through a permanent establishment in the country. This is on the basis that such persons will pay normal tax at the rates applicable to those persons and not the withholding tax on interest.
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 the Commissioner: SARS within 14 days after the end of the month during which the amount is withheld. Clearly, where the interest payable to the foreign person is exempt under section 37K(10), no tax is required to be withheld. Furthermore, where a person receiving interest confirms that they are a natural person, physically present in South Africa for a period exceeding 183 days in the year, or carried on business through a permanent establishment in South Africa and submits a declaration to the person paying that interest, no withholding tax is required to be withheld on the interest paid.
Where the foreign person resides in a country with which South Africa has concluded a double taxation agreement ("DTA"), 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.
Section 37M authorises the Commissioner to estimate any amount of withholding tax on interest that has not been paid over in full. Where the person paying the interest to the foreign person fails to pay the withholding tax over to the Commissioner within the time period prescribed, interest must be paid by that person on the balance of the amount outstanding at the rate prescribed in the Act.
Furthermore, the Commissioner is entitled to rely on all provisions contained in the Act relating to the assessment and recovery of tax and administrative penalties in the event of any default or omission to the extent that they apply to the collection and recovery of the withholding tax on interest.
It is important to note that any person that controls or is regularly involved in the management of the overall financial affairs of an unlisted company that is required to pay over the withholding tax on interest and fails to do so, that is, a shareholder or director of the company, is personally liable for any amount due to the Commissioner under the withholding tax provisions. The right to recover the tax from such persons applies also to any additional tax, penalties or interest for which the company may be liable on the non-payment of the withholding tax on interest. Thus, SARS may seek to recover the non-deduction of the withholding tax on interest from persons involved in the management of the financial affairs of unlisted companies, similar to the current provisions contained in the Act regulating the recovery of Pay-as-You-Earn and similar to those rules contained in the Value-Added Tax Act No. 89 of 1991, as amended, allowing the Commissioner to recover VAT from such persons for the failure to pay over VAT to SARS.
The 2010 TLAB provides that the withholding tax on interest will come into operation on 1 January 2013 and will apply in respect of any interest that accrues on or after 1 January 2013.
Thus, 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 DTA concluded with the State in which the parent company resides.
Currently, interest received by domestic trusts may be awarded to non-resident beneficiaries without such interest attracting tax in South Africa. 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 DTA.
It is important, therefore, that businesses are aware that the withholding tax on interest will take effect from 1 January 2013 and that loan agreements are reviewed to establish whether the interest rate payable will be increased as a result of the withholding tax being introduced. It may also be desirable for foreign persons to route funding into South Africa via States which have concluded DTAs with South Africa, which either reduces the rate of the withholding tax or precludes South Africa from subjecting interest to tax on the basis that the interest will be taxed in the country in which the recipient resides. National Treasury has indicated that South Africa will renegotiate certain DTAs to ensure that South Africa 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 DTAs to allow for the introduction of the dividends tax in South Africa.
It is, therefore, debatable whether South Africa will be ready to implement the withholding tax on interest on 1 January 2013, taking account of the lengthy processes required to amend DTAs concluded by South Africa and its various trading partners.