Feedback on withholding tax on service fees workshop
02 April 2015
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT)
On 26 March 2015, National Treasury hosted a workshop on the withholding tax on service fees. The purpose of the workshop was to determine if the tax should be implemented as initially planned or whether better alternatives are available. SAIT attended the workshop and is provide this feedback to its members.
The withholding tax on service fees was first announced in the 2013 Budget Speech and was scheduled to become effective from 1 March 2014. By way of section 99(1) of the Taxation Laws Amendment Act (No. 31 of 2013) ("TLAA”), the effective date was delayed to 1 January 2016 to allow for further public consultation.
The withholding tax on service fees is aimed at identifying and collecting revenue from non-resident taxpayers who provide services of a technical, managerial or consultative basis from a South African source. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2013, cites the following reasons for the introduction of the withholding tax on services fees:
- Unlike most developing countries, South Africa does not have a withholding tax on management or technical fees. Like interest and royalties, these fees generate local deductions, thereby giving rise to potential base erosion. Internal data suggests that these fees amount to billions per annum, much of which is shifted to low-tax jurisdictions. Hence, some form of protection in the form of withholding is needed to protect the tax base as has already been enacted for cross-border interest and royalties.
- Concerns exist that many foreign entities with permanent establishments are not properly filing their tax returns while acting as the basis for exemption from withholding taxes. Lack of proper registration means that certain foreign entities are improperly avoiding South African tax altogether.
National Treasury has additionally made it clear that the withholding tax on service fees is not intended to be a revenue raiser but merely as a tool to identify and collect information from non-resident taxpayers to prevent avoidance and evasion. According to the National Treasury, there was a significant increase on outbound service fees to low tax jurisdictions since the introduction of the withholding tax on interest and the increased withholding tax rate on royalties. Treasury reiterated that countries like New Zealand, Australia and Malaysia have a similar withholding tax.
In basic terms, the withholding tax on service fees will be levied at 15 per cent if paid for the benefit of a non-resident to the extent that the service is regarded as arising from a South African source. The withholding tax is a final tax with legislative exclusions for amounts mainly subject to normal tax (e.g. PAYE) as well as exclusions stemming from tax treaties.
A. National Treasury opening remarks
National Treasury acknowledged that it is struggling with information gathering to identify permanent establishments. The purpose of the withholding tax was to overcome these information gathering concerns. However, the administrative complexity of the new withholding tax was turning out to be more trouble than expected. Total revenue expected was admittedly small given that the withholding tax was only being applies to South African source service income.
B. Industry concerns
Industry was concerned that the new tax would most likely lead to an automatic gross-up of the 15 per cent charge to avoid risk. South African payors often do not have the wherewithal to determine the source of the foreign payee’s activities. While the physical location of some services is obvious, others can be mixed. This location is often outside the South African payor’s control. In some cases, a composite basket of services can be provided with actual days and relative values being impossible to determine for the South African payor.
Many industry representatives favoured reliance on improved information measures being imposed on the authorised dealers given that the outward flow of funds is already in their domain. However, National Treasury and SARS expressed concern that Reserve Bank data isn’t always reliable in terms of characterisations given that the Reserve Bank focus is on amounts as opposed to character (i.e. service transactions are often incorrectly reported as purchases or other expenses to the authorised dealers without a quality review).
C. National Treasury alternatives
National Treasury suggested two primary alternatives to the existing withholding proposal:
- The Australian Rulings Approach: Under this approach, taxpayers would obtain a waiver from the withholding tax upon receipt of a SARS ruling that an exception applies. Concerns were raised by industry that current resources within SARS would mean that rulings relief would be slow and cumbersome. It was further noted that the Australian withholding regime was limited mainly to construction in order to limit the number of services within the ambit of withholding. It was uncertain whether South African withholding could be limited to particular service lines (e.g. what is management consulting?)
- Reporting approach: National Treasury appeared t favour a "reportable arrangements” approach if the service fees exceed a predetermined threshold. Violations would be subject to the reportable arrangements penalty. Industry contended that these penalties are probably too high (i.e. these penalties can be up to R3.6 million if the arrangement is not reported within 12 months). It was suggested that a separate penalty table be introduced that would allow SARS to apply its discretion when imposing the penalties, but National Treasury was resistant to a discretionary approach.
Outcome of the workshop
National Treasury seemed to be leaning heavily against the proposed withholding tax on services. The reportable arrangements approach seemed to be the tentative flavour of the day. It is suggested that National Treasury be given further information on the matter given the overall need for factual information in this area.