Proposed changes to foreign interest exemption (section 10(1)(h))
21 August 2012
Posted by: SAIT Technical
By Magda Snyckers and Michael Reifarth (ENS Tax Ensight)
The draft Taxation Laws Amendment Bill, 2012 (the "Draft Bill”) which was released by National Treasury on 6 July 2012 proposes to amend, inter alia, the interest exemption contained in section 10(1)(h) of the Income Tax Act No 58 of 1962 ("Tax Act”) as from 1 January 2013, as well as the interest withholding tax provisions which will come into effect on 1 January 2013.
The proposed amendments will likely have an effect on the taxation of interest payments made from 1 January 2013 in respect of certain debt instruments / notes issued by resident issuers to non-resident holders.
Currently section 10(1)(h) of the Tax Act exempts from income tax an amount of South African sourced interest received by or accrued to a non-resident during any year of assessment provided such non-resident did not spend more than 183 days in aggregate in South Africa (where the non-resident is a natural person) or carried on business through a permanent establishment in South Africa at any time during that year. In terms of the proposed amendments, the exemption will only apply to interest income which is not subject to the interest withholding tax. The amendment to section 10(1)(h) will apply to any interest which is paid or becomes payable on or after 1 January 2013 (irrespective whether such interest may have accrued to the taxpayer before that date).
The effect of the above amendment is that if the interest received by or accrued to a non-resident is subject to the withholding tax it will be exempt from income tax. Conversely, if the interest is exempt from the withholding tax it will be subject to income tax.
As such, should an amount of South African sourced interest paid to a foreign person be exempt from the interest withholding tax (eg certain interest payments made in respect of listed debt or in respect of any debt owed by any bank), then such interest income will not be exempt from South African income tax. A liability for income tax could then arise the hands of the non-resident holder, subject to a reduction of the South African income tax liability under an applicable double taxation treaty.
Market participants should ensure that the tax disclosure section of any note offer document accurately reflects these changes should they take effect. Parties should seek advice as to whether or not the proposed tax changes should be reflected in the risk disclosure section of the offer document.
As set out above, we note that the Draft Bill is currently in draft format and may be amended prior to coming into effect.
Please click on this link to view the Draft Bill as published on National Treasury's website.