Meaning of “due and payable” for purposes of the interest withholding tax provisions
12 January 2015
Posted by: Author: Robyn Berger (KPMG)
Author: Robyn Berger (KPMG)
As of 1 March 2015, interest payable by South African residents to or for the benefit of foreign persons may be subject to Interest Withholding Tax (IWT) at a rate of 15%. Exempt from IWT will be interest payable by, amongst others, the government of South Africa (in the national, provincial and local sphere), any bank, the South African Reserve Bank, the Development Bank of South Africa and the Industrial Development Corporation. Interest payable on so-called ‘listed debt’ is also exempt from IWT regardless of the nature of the person paying the interest. In addition, the IWT provisions make allowance for a reduction in the rate of IWT where the provisions of a Double Taxation Agreement so provide.
The IWT provisions will be applicable to interest that is paid or becomes due and payable on or after 1 March 2015.
The meaning of the words "due and payable” is not defined in the legislation and is not entirely clear. It differs from earlier drafts of the IWT provisions which provided for the imposition of IWT on interest ‘received by or accrued to any foreign person’.
It is indicated in the explanatory memorandum to the new legislation as well as in other documents prepared by the drafters that the change in wording means that IWT will not necessarily be imposed upon accrual of interest (ie the date when the recipient acquires an unconditional right to the interest).
Furthermore, there is strong persuasive judicial precedent which indicates that an amount will only become ‘due and payable’ at the time at which payment of the amount is stipulated by the parties.
The difference between when an amount of interest is "incurred or accrues” relative to when the amount is "due and payable” may be illustrated by a vanilla bullet loan arrangement in terms of which interest is calculated at a fixed rate over the period of the loan but is only payable at the end of the term. From an income tax perspective, the interest on the loan will be deemed to have been incurred or to accrue on a yield to maturity basis over the term of the loan. The interest is however only "due and payable” at the end of the term of the loan (assuming that the words "due and payable” means at the time at which payment of the amount is stipulated by the parties).
Taxpayers that have incurred / accrued interest on loans within the IWT net but are not required to make payment of these accrued amounts until after the 1 March 2015 effective date could therefore face a significant IWT charge on the date stipulated for payment. A change in the terms of the loan or restructuring of the debt may be warranted. Any such changes would however need to be implemented prior to 1 March 2015 and would need to be made with due cognisance to the anti-avoidance provisions contained in the Income Tax Act.
This article first appeared on kpmg.com.