The withholding tax on service fees provided for in s51A-s51H of the Income Tax Act was expected to commence on 1 January 2017.
In this regard, it was envisaged that the local recipient of services would generally have to withhold 15% of the fee payable to the non-resident service provider, (subject to the application of a relevant international tax treaty).
Section 51B of the Income Tax Act, which was meant to be effective from 1 January 2017, makes provision for a final withholding tax on services fees calculated at the rate of 15% of the amount of any service fee that is paid by any person to or for the benefit of any foreign person, to the extent that an amount is regarded as having been received by or accrued to that person from a source within South Africa.
The Budget proposes the withdrawal of the withholding tax on service fees from the Income Tax Act. The reason for the concession is that the introduction of the withholding tax on service fees has resulted in uncertainty on the application of domestic tax law and taxing rights under tax treaties. Accordingly, it is proposed that the withholding tax on service fees be included in the reportable arrangements provisions in the Tax Administration Act, No 28 of 2011 (TAA).
It is interesting to note that the proposal accords with Notice No 140 in Government Gazette 39650, published by SARS on 3 February 2016 in terms of s35(2) of the TAA (Notice), which lists an additional reportable arrangement that was not included in previous notices. The Notice is largely aimed at non-resident service providers who physically provide services in South Africa to residents, (or permanent establishments of non-residents) via individual non-residents sent to South Africa.
Foreign companies and collective investment schemes
Collective Investment Schemes (CIS) are regulated in terms of the Collective Investment Schemes Control Act, No 45 of 2002 and are schemes in terms of which two or more investors pool their resources by investing in a company or trust for their joint benefit while sharing the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme.
In terms of the definition of ‘person’ in s1 of the Income Tax Act, each portfolio in a CIS is defined as a separate person for tax purposes. As such, CISs may hold shares in other companies, including foreign companies.
Section 9D of the Income Tax Act is the anti-avoidance provision aimed at preventing South African residents from excluding tainted forms of taxable income from the South African tax net through investment into controlled foreign companies (CFC). More specifically, s9D(2) of the Income Tax Act provides that an amount equal to the net income of a CFC, shall be included in the South African resident’s income in the proportion of such resident’s participation rights to the total participation rights in the company.
As s9D of the Income Tax Act taxes South African owners of foreign-owned entities on amounts equal to those entities earned income, s9D results in adverse consequences for CISs that hold shares in foreign CISs.
As there is uncertainty as to whether it is the local fund or the investor in the local fund that should be considered to be the holder of the participation rights in the foreign collective investment scheme, it is proposed that CISs be excluded from applying s9D of the Income Tax Act to investments made in foreign companies.