Rationalisation of Withholding Taxes on Payments Made to Foreign Persons
24 April 2013
Posted by: Author: Chris Basson
Source: Chris Basson
There has been a lot of uncertainty
among foreign investors as well as South African persons with regard to
withholding taxes. These taxes are usually withheld and paid over to SARS when
foreign persons receive investment proceeds from South Africa. The Explanatory
Memorandum on the Taxation Laws Amendment Bill 2012 proposes some changes which
might be of benefit to the uncertain souls among us.
Payments made by South African
residents to offshore investors are potentially subject to various withholding
taxes. Common cross-border payments which are subject to withholding taxes
include dividends, interest and royalties. These withholding taxes are often
reduced or eliminated by Double Tax Agreements (DTAs) between South Africa and
offshore countries. The provisions of the Income Tax Act will apply unless a
DTA or Tax Treaty states otherwise. The DTA therefore takes preference
over the Income Tax Act. Each will be discussed separately, followed by
As of 1 April 2012, Dividends Tax in
respect of cross-border dividends are generally subject to a 15 per cent rate
(subject to treaty limits of 5 or 10 per cent). A company who declares and pays
a dividend to a non-resident must generally withhold Dividends Tax unless
regulated intermediaries are involved (who are instead required to withhold
Dividends tax). However, to the extent that sums are owing, the ultimate
liability rests with the beneficial owner. Payment of the Dividends Tax must be
made at the close of the month following the month in which the dividends are
Interest withholding tax
With effect from 1 July 2013,
cross-border interest will be subject to withholding tax at the proposed rate
of 10 per cent (subject to treaty limits). The person making this payment for
the benefit of the non-resident is liable to withhold this tax. However, to the
extent that sums are owed, the ultimate liability rests with the person to whom
the amount of interest is paid or accrues. Payment of withholding tax on
interest must be made at the close of the month following the month in which
the interest is paid. Non-residents seeking tax treaty (or certain other forms
of) relief must submit a declaration by the date of payment. If a declaration
is submitted within a three-year period, the non-resident may seek a refund
Withholding tax on royalties
Cross-border royalties are subject to a
withholding tax of 12 per cent. The person making payment of the royalty to (or
the recipient of the royalty on behalf of) the non-resident is liable to pay
withholding tax. Payment must be made to SARS within 14 days or within a period
that SARS may approve. The royalty withholding rules do not have a refund
Proposal and reasons for change
As illustrated above, withholding taxes
with regard to dividends, interest and royalties each have different rules
relating to the rates, timing, refunds and other procedures. While some of
these differences can be justified, many of these differences have arisen due
to the dates in which these provisions were enacted. The result of this is a
lack of coordination among these withholding taxes, thereby complicating
administration and compliance. Greater uniformity is needed to reduce these
In order to remedy the lack of coordination
among withholding tax regimes, it is now proposed that these withholding
regimes be unified to the best extent possible. These changes will mainly
require adjustments to the interest and royalty withholding regimes because the
rules of the recently enacted Dividends Tax have been well-debated and settled.
These changes will include a uniform withholding rate of 15 per cent. The
proposed amendment will be effective for royalties that are paid or payable on
or after 1 July 2013.
Proposed changes to interest
The withholding tax rate will be
increased from 10 to 15 per cent. As currently proposed the liability to
withhold tax on interest will remain with the person making the payment to the
non-resident. In addition, ultimate liability remains with the non-resident.
However the mere accrual will no longer be the basis for withholding. In line
with the new Dividends Tax, the trigger date for withholding will now be the
date on which the sum is paid or becomes due and payable. The timing of the
payment to SARS will remain the close of the month following the month in which
the interest was paid. This is in line with the payment date of Dividends Tax.
Under current law, the overpayment of
interest amounts (due to delayed declarations or otherwise) may be refunded
from SARS only if the foreign payee lodges a refund claim with the payer
(person paying the interest) within three years after the payment of interest.
This refund process will be simplified and the refund claim will instead only involve
SARS (i.e. the claim must be made solely to SARS within the three year period
without regard to the payee).
Interest earned by foreign persons may
fall within the normal tax rules or the interest withholding tax rules. As a
general matter, foreign persons are exempt from income tax unless that person:
Is a natural person who is physically present within South Africa
during the relevant year of assessment for more than 183 days, or
Is classified as being ordinarily resident in South Africa
according to the South African case law, but subject to the provisions of
any DTA, or
A juristic person which was incorporated established or formed in
South Africa or which has its place of effective management in South
The physical presence test will be satisfied
when a natural person adheres to the following:
Not ordinarily resident for the year of assessment.
Present in the Republic for more than 91 days (in aggregate) during
the current year of assessment.
Present in the republic for more than 91 days (in aggregate) during
each of the previous five years of assessments.
Present in the republic for more than a total of 915 days in total
during the previous five years of assessment.
If all the requirements are satisfied
the person will be classified as a resident of the Republic.
In simple terms, foreign persons will
be subject to normal tax on interest if those persons have a strong connection
to South Africa. Otherwise normal tax does not apply. On the other hand of the
spectrum, withholding tax potentially applies when this strong connection does
Proposed changes to Royalties
The withholding tax rate will increase
from 12 to 15 per cent. As currently proposed the initial liability to withhold
tax on royalties will remain with the person making payment for the benefit of
the foreign person. In addition, ultimate liability will lie with the
beneficial owner. A mere accrual will no longer be the basis for withholding
tax. This is in line with the new Dividends tax and the trigger date for
withholding will now be the date on which a sum is paid or becomes due and
The payment of withholding tax on
royalties to SARS will not stay the same. The payment date will be at the close
of the month following the month in which the royalty is paid. This timing rule
also matches the rules relating to the withholding of dividends and interest.
The royalty regime will now contain currency translation rules. The amount of
royalties must be translated to the currency of the Republic at the spot rate
on the earlier of the date of payment or when the amount becomes payable.
Overpayment of the amounts of royalties may be refunded only if the payer
(person paying the royalties to the foreign person) lodges a claim for a refund
with SARS within a period of three years after the payment of the relevant
With regard to royalties earned by
foreign persons who may fall within the normal tax rules or the royalty
withholding tax rules, the same rules apply as was stated above in the interest
I think that these changes will
definitely reduce and alleviate a lot of confusion and do away with unnecessary
complex tax legislation which has been with us for some time now. Unifying and
coordinating these three withholding taxes will make it much easier for
companies who have foreign clients, as well as tax practitioners to provide
advice on these matters. Let’s not forget that these changes will also lighten
the administrative burden on SARS, which will decrease turnover time on
requests and consequently make taxpayers less prone to frustration when
corresponding with SARS. In my view it will be a win-win situation.
List of References
Stiglingh, M (2013). SILKE:
South African Income Tax. Durban
South Africa: Lexis Nexis. p56.
National Treasury. 2012. Explanatory Memorandum On The Taxation
Laws Amendment Bill. Pretoria.