The 2010 Draft Taxation Laws Amendment Bill, released earlier this year, proposed that interest earned by non-residents, in future, would only be exempt in certain limited instances and section 10(1)(h) of the Income Tax Act No. 58 of 1962 (the "Act"), which allows for a deduction of any interest received by a non-resident, would effectively be replaced. However, the Taxation Laws Amendment Bill, 2010 (the "Bill"), introduced to the National Assembly on 24 August 2010, contains provisions for the introduction of a withholding tax on interest, as opposed to the restricted interest exemption.
This amendment will however only be effective from 1 January 2013 and apply in respect of any interest that accrues on or after that date. The South African Revenue Service has commented on this delayed introduction, stating that it requires time to renegotiate double tax agreements ("DTA"). DTA’s concluded between South Africa and a foreign jurisdiction, may allow for a reduced withholding tax rate on interest. Specific reference is made in the Bill, to the fact that the withholding tax rate may be reduced, should the person to whom the interest is paid, be able to provide a declaration to the person making the payment, stating that such interest is subject to a reduced rate by virtue of the application of any DTA.
Should the Bill be enacted, section 37J of the Act, will impose a withholding tax on interest, calculated at the rate of 10% on the amount of any interest that is received by, or accrues to any non-resident, which is not a controlled foreign company, subject to certain exemptions in section 37K.
In terms of section 37K, an exemption from the withholding tax on interest will apply to interest received by a non-resident company, in respect of:
- any government debt instrument held by that non-resident;
- any listed debt instrument held by the non-resident;
- any debt owed by any bank, the South African Reserve Bank or any other non-resident to that resident;
- any other debt owed by a non-resident, unless the non-resident is a natural person who was physically present in the Republic for a period exceeding 183 days during that year; or carried on business through a permanent establishment situated in South Africa; and
- essentially any interest arising from the import or export of goods.
The extent of these exemptions would need further consideration in future, for instance, the exemption in respect of "any other debt" owed by a non-resident, raises the question as to what would constitute "any other debt" since the term "debt" is not defined in section 37I. The provision contains a definition of "debt instrument", which is any loan, advance, debt, bond, debenture, bill, promissory note, banker’s acceptance, negotiable certificate of deposit or similar instrument. However, the specific provision refers to "any other debt". In terms of the ordinary meaning of debt, Black’s Law Dictionary defines the term to include, inter alia: "Liability on a claim; a specific sum of money due by agreement or otherwise, a non-monetary thing that one person owes another ...".Therefore, in terms of this definition, it appears that a debt can even be owed in terms of a non-monetary item.
Furthermore, at this stage, it is unclear whether section 10(1)(h) of the Act will continue to apply once the withholding tax on interest is introduced.
The obligation to withhold is imposed on the person making the payment, that is, the resident, in terms of section 37L. The amount so withheld, must be paid to the Commissioner within 14 days after the end of the month during which the amount is withheld.
Therefore, even though this is essentially a tax levied on the interest income received by non-residents, the resident company effecting interest payments, will be the person burdened with this obligation. It is important to note, that should the Commissioner satisfy himself that any amount of withholding tax due by an unlisted company, has not been paid, he may estimate the unpaid amount and issue an assessment. The shareholders and directors of such company, who made the interest payment without withholding the prescribed amount, may in such cases become personally liable for the amount due to the Commissioner.