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An overview of South Africa's withholding tax regime

07 April 2014   (0 Comments)
Posted by: Author: Annet Wanyana Oguttu
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Author: Annet Wanyana Oguttu (University of South Africa)

The various types of withholding tax applicable in South Africa are discussed in depth by Annet Wanyana Oguttu

It is often difficult for tax authorities to collect income tax on the earnings derived by residents of other countries from business carried out in the source country. To enable the collection of taxes from such non-residents, governments often impose withholding taxes on payments to non-residents. Normally a resident taxpayer is appointed as the non-resident’s agent, and is obligated to withhold a certain percentage of tax from payments made to the non-resident and must pay it over to the tax authorities. If the resident agent does not comply with this duty or if he or she withholds an incorrect amount of tax, personal liability can be imposed on the resident agent.

Over the last few years, the number of withholding taxes that South Africa levies has increased. An effort has been made to ensure uniformity in the rates of withholding tax rates levied and also to ensure a fairly similar structure regarding the working of these withholding taxes. The following are the withholding taxes levied in South Africa.

Withholding tax on royalties

South Africa has been levying a withholding tax on royalties for a number of years now. This withholding tax was previously levied under the then section 35(1) of the Income Tax Act which provided for a final withholding tax on royalties at 12 per cent. Section 35(1) was repealed by section 80 of the Taxation Laws Amendment 22 of 2012, which inserted section 49B in the Income Tax Act to deal with the levying of a final withholding tax on royalties at a rate of 15 per cent on the amount of any royalty paid by any person, to or for the benefit of any foreign person to the extent that the amount is regarded as having been received by or accrued to that foreign person from a source within the Republic in terms of section 9(2)(c), (d), (e) or (f) of the Income Tax Act.

Section 49C states that the foreign person, to whom a royalty is paid, is the one liable for the withholding tax on the royalties. However under section 49D there are exemptions from the withholding tax on royalties in the case of:

  • A natural foreign person who was physically present in the Republic for a period exceeding 183 days in aggregate during the 12 month period preceding the date on which the royalty is paid;
  • A natural foreign person who at any time during the 12 month period preceding the date on which the royalty is paid carried on business through a permanent establishment in the Republic;
  • A royalty paid to a headquarter company for the granting of the use of, the right of use of or permission to use intellectual property.

Section 49E provides that any person making a royalty payment to or for the benefit of a foreign person must withhold the amount of tax due unless the foreign person has by the date determined by the person making the payment or if no such date has been determined, by the date of payment of the royalty; submitted to that person a declaration in a form prescribed by the Commissioner that the amount is exempt from withholding tax on royalties or that the royalty is subject to a reduced rate of tax as a result of an applicable double tax treaty.

In terms of section 49F(1) the foreign person must pay the amount of the withholding tax due by the last day of the month following the month during which the royalty is paid. If the tax is withheld by any other person in terms of section 49E, that person must pay the tax to the Commissioner by the last day of the month following the month during which the royalty is paid.

Section 49G clearly states that if an amount is withheld from a payment of a royalty under circumstances where the foreign person has not submitted a declaration to the person paying the royalty by the date of payment, and then a declaration is submitted to the Commissioner within three years after the payment of the royalty, so much of the amount that would have not been withheld had the declaration be submitted, is refundable by the Commissioner to the person to which the royalty was paid.

Withholding tax on foreign entertainers and sportspersons

In the Explanatory Memorandum to the 2005 Revenue Laws Amendment Bill, SARS recognised that it is difficult to collect income tax on the earnings received by foreign entertainers and sportspersons from activities that they perform in South Africa since they are present in South Africa for a short period of time, which impacts on SARS ability to collect tax. The Revenue Laws Amendment Act 31 of 2005 inserted Part 111A into the Income Tax Act which levies a final withholding tax at a flat rate of 15 per cent on the amount received by or accrued to a non-resident entertainer or sportsperson. Section 47A defines an ‘entertainer or sportsperson’ to include any person who:

  • Performs any activity as a theatre, motion picture, radio or television artiste or a musician;
  • Takes part in any type of sport; or
  • Takes part in any other activity which is usually regarded as of an entertainment character.
tax does not apply to a non-resident person who is employed by a resident employer and is physically present in South Africa for more than 183 days in aggregate during any 12-month period in which the activity is exercised. In terms of section 47C, the non-resident entertainer or sportsperson is the one liable for payment of the tax and must within 30 days or such further time approved by the Commissioner, pay to the Commissioner the amount of tax leviable and submit a tax return.

In terms of section 47D, where a resident is liable to pay to the non-resident entertainer or sportsperson any amount in respect of any activity exercised by that non-resident in the Republic, that resident must deduct and withhold from such payment the amount of tax for which the non-resident is liable, and pay it over to the Commissioner before the end of the month following the month during which the amount was deduced or withheld. If the amount deducted or withheld by a resident is denominated in foreign currency, the amount must be translated to the currency of the republic at the spot rate on the date the amount is deducted or withheld. In terms of section 47K, any resident who is primarily responsible for organising or facilitating a specified activity in the Republic and who will be rewarded directly or indirectly for such responsibilities must notify the Commissioner of such specified activities within 14 days after the agreement relating to such responsibility.

Withholding tax on the disposal of immovable property

The withholding tax on the disposal of immobile property was inserted in the Income Tax Act by the Taxation Laws Amendment Act 8 of 2007. In terms of section 35A of the Income Tax Act, any person who purchases immovable property which is disposed of by a non-resident in the Republic must withhold from the amount that person must pay to the non-resident a withholding tax equal to:

  • 5 per cent if the non-resident is an individual;
  • 7.5 per cent if the non-resident is a company; and
  • 10 per cent if the non-resident is a trust In terms of section 35A(2), the seller may apply to the Commissioner for a directive that no amount or a reduced amount be withheld having regard to:
  • Any security furnished for the payment of any tax due on the disposal of the immovable property by the seller;
  • The extent of the seller’s assets in the Republic;
  • Whether that seller is subject to tax in respect of the disposal of the immovable property;
  • Whether the actual liability of that seller for tax in respect of the immovable property is less than the amount required to be withheld.

In terms of section 35A(4), the amount withheld from payment to the seller must be paid to the Commissioner within 14 days if the purchaser is a resident and within 28 days if the purchaser is a non-resident. If the amount withheld is payable in foreign currency it must be translated in the currency of the Republic at the spot rate on the day that it must be paid to the Commissioner. If the purchaser fails to pay the amount to the Commissioner within the time specified, the purchaser is liable for interest and a penalty. In terms of section 35A(7), the purchaser is personally liable for the amount that must be withheld only if the purchaser knows or should have known that the seller is not a resident. However this does not apply if an estate agent or conveyancer assists in the disposal of the immovable property and fails to notify the purchaser that seller is a non-resident. In that case, the estate agent or the conveyancer is jointly and severally liable for the payment of the amount which the purchaser is required to withhold.

"Now that the domestic withholding tax rate is generally uniformed at 15 per cent, it is imperative that our treaty negotiators re-negotiate and negotiate better rates for South Africa” 

Under section 35A(13), this withholding tax does not apply:

  • If the amount payable by the purchaser to the seller does not in aggregate exceed R2 million;
  • In respect of any deposit paid by the purchaser for securing the disposal of the immovable property that serves as security, until the agreement for the disposal is entered into.
Dividend withholding tax

From years of assessment commencing 1 April 2012 a dividend withholding tax was introduced in South Africa levied at a rate of 15 per cent. In terms of section 64D to 64N of the Income Tax Act, the dividend withholding tax is levied on shareholders in respect of dividends paid by any company other than a headquarter company. The shareholder is referred to in the dividends tax provisions as the ‘beneficial owner’ - the person entitled to the benefit of the dividend attaching to a share.

The dividends tax is payable by South African resident companies or by non-resident companies listed on a South African exchange. The dividend withholding tax replaces "Secondary Tax on Companies” which was levied at company level. In terms of section 64K(1), the liability for the dividends tax falls upon the beneficial owner (shareholder) who must pay the tax by the last day of the month following the month during which the dividend is paid by the company. The duty to withhold dividends tax is however imposed at the corporate level. Where the company distributes an asset in specie, the amount of dividends withheld is the market value of the asset distributed.

Although the obligation to withhold dividends tax falls on the company declaring the dividend, the company paying the dividend is exempted from withholding the tax in three circumstances:

  • If the person to whom the dividend payment is made has furnished the distributing company with a declaration from the beneficial owner that the dividend is exempt from the dividends tax or is subject to a lower rate in terms of applicable double tax treaty. The declaration must be made by a date determine by the company or, if the company did not determine a date, by the date of payment of the dividend. The declaration must be accompanied by a written undertaking to inform the company in writing should the person cease to be the beneficial owner. Both the declaration and the written undertaking must be in the prescribed form (section 64G(2)(a)).
  • If the beneficial owner forms part of the same group of companies as the company paying the dividend (section 64(G)(2)(b)).
  • If the payment is made to a regulated intermediary. Normally the dividend would be paid to a regulated intermediary, in the case of uncertificated shares (paperless shares of a listed company), whereby the intermediary on-distributes it to the ultimate beneficial owner. In that case, the obligation on the company paying the dividend to withhold tax is effectively eliminated and instead, the intermediary assumes the liability to withhold the dividends tax on dividends received and on-distributed to the beneficial owner. An intermediary could for example be
    a stockbroker, a nominee company, an insurer or a fund manager (section 64(G)(2)(c)).

A regulated intermediary is exempted from withholding the tax in the following circumstances:

  • Where the payment of the dividend is made to another regulated intermediary;
  • If the regulated intermediary is also exempted from withholding dividends tax upon timely receipt of a written declaration that the beneficial owner is entitled to exemption or tax treaty relief.

In terms of section 64K(2)(a) a company declaring a dividend or a regulated intermediary who is obliged to withhold the tax, must pay it over to SARS by the last day of the month following the month during which the dividend is paid. Section 64K(3) provides that where a company or intermediary fails to withhold the tax, or withholds the tax but fails to pay it to SARS, it becomes liable for payment of the tax as if it were a tax due by itself. Such a company or intermediary will be relieved of this liability only if the tax is paid by another person (for example, the beneficial owner).

The following recipient entities are exempted from dividends withholding tax:

  • A company which is a resident;
  • The Government, a provincial administration or a municipality;
  • A public benefit organisation approved by the Commissioner in terms of section 30(3) (could be local or foreign, but must be approved);
  • A trust contemplated in section 37A (i.e. rehabilitation trust);
  • An institution, board or body contemplated in section 10(1)(cA) (e.g. Water Board, Tribal Authority
    etc.);
  • A fund contemplated in section 10(1)(d)(i) or (ii) (i.e. Pension/Provident/RA/Benefit Fund);
  • A person contemplated in section 10(1)(t) (ex. CSIR, Sanral, Armscor etc.);
  • A shareholder in a registered micro business, as defined in the Sixth Schedule, paying that dividend, to the extent that the aggregate amount of dividends paid by that registered micro business to its shareholders during the year of assessment in which that dividend is paid does not exceed R200 000;
  • A non-resident beneficial owner where the dividend was declared by a non-resident company in respect of shares listed on the JSE (64F(j)).

Withholding tax on interest

The Taxation Laws Amendment Act 31 of 2013 amended the Income Tax At by the insertion of Part IV B in Chapter II of Act 58 of 1962, to deal with withholding tax on interest. Section 50B provides for the levying a final withholding tax on interest, at a rate of 15 per cent on the amount of any interest paid by any person to or for the benefit of any foreign person to the extent that the amount is regarded as having been received or accrued from a source within the Republic in terms of section 9(2)(b). Interest is deemed to be paid on the earlier of the dates on which the interest is paid or becomes due and payable. Interest for South African tax purposes, is defined in section 24J of the Income Tax Act. Then section 8E(2) deals with deemed interest, in that a dividend declared on a hybrid equity instrument is deemed to be interest accrued to the recipient from a source within the Republic.

Section 50C provides that a foreign person who receives a payment of interest is the one liable for the withholding tax on interest. Where any amount of withholding tax on interest is withheld and paid to the revenue authorities, that amount of withholding tax on interest must be regarded as an amount that is paid in respect of that foreign person’s tax liability. Where a person who pays interest to a foreign person has withheld the tax payable, that person is deemed to have paid the amount so withheld to that foreign person.

There are however certain exemptions from the withholding tax on interest as set out in section 50D. This covers:

  • Any amount of interest paid to any foreign person by:
    • the government of the Republic in the national, provincial or local sphere;
    • any bank, the South African Reserve Bank, the Development Bank of Southern Africa or the Industrial Development Corporation;
    • any a headquarter company in respect of the granting of financial assistance as defined in section 31(1) to which section 31 does not apply as a result of the exclusions contained in section 31(5) (a).
  • Any amount of interest paid to any foreign person in respect of any listed debt;
  • Any amount of interest payable as contemplated in section 21(6) of the Financial Markets Act to any foreign person that is a client as defined in section 1 of that Act. However in terms of section 50D(2), interest paid to a foreign person in respect of any amount advanced by the foreign person to a bank is not exempt from the withholding tax on interest 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 on the strength of the amount advanced by the foreign person to the bank.
  • Under section 50D(3) a foreign natural person who was physically present in the Republic for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the interest is paid is exempt from the withholding tax on interest.
  • A debt claim in respect of which interest paid is effectively connected with a permanent establishment of a foreign person in the Republic if that foreign person is registered as a taxpayer in terms of Chapter 3 of the Tax Administration Act is exempt from the withholding tax on interest.

Section 50E provides that a person must not withhold any amount of interest:

  • If the amount is exempt from the withholding tax on interest in terms of section 50D;
  • If the foreign person has submitted to the person making the payment a declaration in a form prescribed by the Commissioner that the foreign person is exempt from the withholding tax on interest or if the interest is subject to that reduced rate of tax as a result of an applicable double tax treaty.
Section 50F which deals with the payment and recovery of tax provides that the foreign person is the one liable for the withholding tax on interest and must pay the tax by the last day of the month following the month during which the interest is paid. Any person that withholds any withholding tax on interest must submit a return and pay the tax to the Commissioner by the last day of the month following the month during which the interest is paid.

Section 50G which deals with the refund of withholding tax on interest provides that, if an amount is withheld from a payment of interest to a non-resident in circumstances where the non-resident has not submitted to the person paying that interest by the date of the payment of that interest; a declaration to the effect that the amount is exempt from tax or that it is subject to a reduced rate in terms of a double tax treaty and then such declaration is submitted to the Commissioner within three years after the payment of the withholding tax on interest, so much of that amount as would not have been withheld had that declaration been submitted is refundable by the Commissioner to the person to which the interest was paid.

Section 50H provides that if an amount withheld by a person is denominated in any currency other than the currency of the Republic, the amount so withheld must, for the purposes of determining the amount to be paid to the Commissioner be translated to the currency of the Republic at the spot rate on the date on which the amount was so withheld.

In terms of section 50H(2) the levying of withholding tax on interest comes into operation on 1 January 2015 and applies in respect of interest that is paid or that becomes due and payable on or after that date.

Withholding tax on service fees

The Taxation Laws Amendment Act 31 of 2013 amended the Income Tax Act by the insertion of Part IV C in Chapter II of Act 58 of 1962, to deal with withholding tax on service fees. In terms of section 51A of the Income Tax Act, ‘service fees’ means any amount that is received or accrued in respect of technical services, managerial services and consultancy services, but does not include services incidental to the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or the rendering of or the undertaking to render any assistance or service in connection with the application or utilisation of such knowledge or information.

Section 51B provides for the levying of a final withholding tax on service fees, at a rate of 15 per cent on 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 the amount is regarded as having been received by or accrued to that foreign person from a source within the Republic.

In terms of section 51B(2), a service fees is deemed to be paid on the earlier of the date on which the service fee is paid or becomes due and payable. Where a person making payment of a service fee to or for the benefit of a foreign person has withheld an amount of withholding tax on service fees, that person must be deemed to have paid the amount so withheld to that foreign person.

Section 51C provides that a foreign person to which a service fee is paid is the one liable for the withholding tax on service fees. Any amount of withholding tax on service fees that is withheld and paid to the revenue authority is a payment made on behalf of the foreign person to which the service fee is paid in respect of that foreign person’s liability.

In terms of section 51D, a foreign person is exempt from the withholding tax on service fees if:

  • The foreign person is a natural person who was physically present in the Republic for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the service fee is paid;
  • The service in respect of which that service fee is paid is effectively connected with a permanent establishment of that foreign person in the Republic if that foreign person is registered as a taxpayer in terms of Chapter 3 of the Tax Administration Act; or
  • The service fee constitutes remuneration paid by an employer to an employee. For the purposes of this provision the terms ‘employee’, ‘employer’ and ‘remuneration’ carry the same meaning as in paragraph 1 of the Fourth Schedule to the Income Tax Act.
Section 51E which deals with the withholding of the tax provides that:

  • Any person making payment of any service fee to or for the benefit of a foreign person must withhold an amount at the rate specified above from that payment.
  • A person must not withhold any amount from an payment of service fees if the foreign person has by a date determined by the person making the payment; or by the date of the payment, submitted to the person making the payment a declaration in a form prescribed by the Commissioner that the foreign person is exempt from the withholding tax on service fees or that service fee is subject to a reduced rate of tax as a result an applicable double tax treaty.
Section 51F which deals with the payment and recovery of tax, provides that if a foreign person is liable for a withholding tax on service fees that person must pay that amount of withholding tax by the last day of the month following the month during which the service fee is paid. Any person that withholds any withholding tax on service fees must submit a return and pay the tax to the Commissioner by the last day of the fee is paid. Section 51G which deals with the refund of withholding tax on service fees provides that if an amount is withheld from a payment of a service fee to a non-resident in circumstances where the non-resident has not submitted to the person paying that service fee by the date of the payment of that interest; a declaration to the effect that the amount is exempt from tax or that it is subject to a reduced rate in terms of a double tax treaty and then a declaration is submitted to the Commissioner within three years after the payment of the service fee, so much of that amount as would not have been withheld had that declaration been submitted is refundable by the Commissioner to the person to which the service fee was paid.

Section 51H provides that if an amount withheld by a person is denominated in any currency other than the currency of the Republic, the amount so withheld must be translated to the currency of the Republic at the spot rate on the date on which the amount was so withheld.

Section 51H(2) provides that the withholding tax on service fees comes into operation on 1 January 2016 and applies in respect of service fees that are paid or become due and payable on or after that date.

Concluding remarks

The above analysis shows that the legislators have come up with a number of withholding taxes to ensure collection of taxes from non-residents. This will be especially so in cases where the non-resident’s country of residence does not have a double tax treaty with South Africa. Where a double tax treaty is in place, the optimal effectiveness of South Africa’s withholding tax regime will have to be backed up double tax treaty reforms, through the re-negotiation of older treaties or signing protocols to take into consideration the withholding taxes that are now in place. Tax treaties based on the OECD Model Tax Convention set a limit on the rates of withholding taxes that may be levied by source

countries. Treaty partners often try to negotiate favorable rates for their counties. However, most of South Africa’s treaties (generally based on the OECD Model Tax Convention), do not present favorable withholding taxes rates for South Africa. This is so even for the withholding taxes that have been in place for a while now. For example, the withholding tax on royalties (previously per cent); the one on the disposal of immovable property in South Africa by non residents and the one on income received by or accruing to foreign entertainers and sportsmen. Now that the domestic withholding tax rate is generally uniformed at 15 per cent, it is imperative that our treaty negotiators re-negotiate and negotiate better rates for South Africa.

It should however be noted that high withholding taxes can be a deterrent to foreign investment. Foreign investors prefer to base investments in jurisdictions with low withholding tax rates. Thus in treaty negotiations, effort should be made to ensure a balanced approach that does not stifle foreign investment and at the same time preserves South Africa’s tax base.

This article first appeared on the March/April edition of Tax Talk.


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