SARS is stemming the flow of outbound service fees
20 January 2016
Posted by: Author: Mohamed Hassam
Author: Mohamed Hassam (EY)
increase in non-goods transactions have not gone unnoticed.
SARS has new tools to monitor this.
A key priority for the Davis
Tax Committee, appointed by former Finance Minister Pravin Gordhan in 2013, was
to formulate South Africa’s response to Base Erosions and Profit Shifting
Among the myriad of issues
considered by the committee, perhaps the most startling was the substantial
outbound payments for non-goods transactions. It accounted for nearly 50 per
cent of all payments since the end of the global financial crisis. In noting
its concern the Committee stated state:
"…it seems peculiar that [after the financial
crises in 2008] legal, accounting and management consulting services increased
by nearly …32.6 per cent... and engineering and technical services by … 39.5
per cent. … Consumption increases during the aftermath of a global financial
crisis seem odd in the wake of sluggish economic activity…”.
"The magnitude and prevalence of cross-border
non-goods transactions are clear. It poses a serious threat to the fiscus
insofar as tax revenue, and is an indication that illicit tax base migration
through avoidance schemes and practices could be taking place.”
Considering this outflow of
cash, it is not surprising that there has been a concerted effort on the part
of the South African Revenue Service (SARS) to close the gap between base
erosion and profits shifting practices and legitimate intra-group services.
This article takes a look at
the various measures introduced over the past three years to stem the tide of
outbound service fees from South Africa.
Services withholding tax:
The services withholding tax
was introduced in the Taxation Laws Amendment Act of 2013 and is due to come
into effect on 1 January 2017. The withholding tax will be applicable to
service fees sourced in South Africa at a rate of 15 per cent.
Service fees are defined as
fees for services of a technical, managerial and consulting nature and will be
regarded as being from a South African source when the services are rendered in
Curiously, this means that
the withholding tax will be imposed despite the existence of a number of Double
Tax Agreements (DTAs) that effectively take away South Africa’s right to tax in
the absence of a permanent establishment. Accordingly on the face of it, it
would seem that the services withholding tax will serve a dual purpose of:
- revenue collection in
respect of service fees paid to non-treaty countries; or in lesser instances,
countries with a technical fee article in the treaty; and
- act as the opening
gambit for the information gathering process, which
has subsequently been augmented with the filing and reportable arrangements requirements
In June 2014, SARS issued a notice
that required every non-resident juristic person to furnish an income tax
return if it, among others, derived "service income” from a source within South
Africa. The obligation to file exists even where a DTA provides protection to a
non-resident, in which case a nil return has to be filed.
The 2015 notice extends the
filing threshold by requiring non-residents who receive any "income” (including
service fees) sourced in South Africa to file a return. However, income is specifically
defined in the Income Act (58 of 1962). Service fees that are not taxable in
South Africa as a result of the application of a DTA will arguably not
However, some argue that
taxpayers should file an income tax return irrespective of whether or not South
Africa ultimately imposes a tax on the income. In that case, the filling is
likely to only yield information that may be used in other areas.
In March 2014, SARS issued a
draft public notice in respect of six arrangements it intended to add to a list
of reportable arrangements. This included fees of a technical, managerial and
consultancy nature paid by a resident to non-residents that exceeded R5m.
Although the services
arrangement was ultimately removed when the notice was finalised, SARS issued a
subsequent draft Public Notice on Reportable Arrangements on 19 June 2015,
specifically dealing with inbound services.
The notice proposed that the
following inbound technical, managerial or consultancy services (the terms are
not defined) must be reported to SARS within 45 days after becoming a
- If the non-resident,
its employees, agents, or representatives are or will be physically present in South Africa
rendering such services;
- The expenditure in
relation to the rendering of the services will exceed or exceeds R10m in the
Failure to report may lead to
penalties ranging from R600 000 to R3.6 million, depending on whether the
person is a participant or the promoter to the arrangement, or the quantum of
the tax benefit.
Reported information is
generally used as a forewarning to assess whether the foreign service provider
has a tax presence in South Africa (permanent establishment), and to gather
information on Pay as You Earn (PAYE) and Value Added Tax (VAT) compliance. Past
experience has indicated an increase in SARS audits of reportable
It is evident that SARS has
set out to tackle inbound services with vigour and has been equipped with the
necessary tools to effectively bridge the information gap between BEPS
practices and legitimate intra-group services.
This is likely to result in an increase in the income tax, PAYE and VAT
audits relating to inbound services.
If not properly managed,
these measures are likely to catch the unaware, and will test legitimate global
intra-group service business models.
A word on the decision in AB LLC
and BD Holdings LLC
It is vital to consider the judgement
handed down by the Tax Court in AB LLC
and BD Holdings LLC v Commissioner of the South African Revenue Services (13276)
considering the tax consequences on inbound services.
In this case the court held that a
service permanent establishment as contemplated in Article 5(2)(k) of the South
Africa/United States DTA may exist even where the requirements of Article 5(1)
are not present i.e. there is no need to establish the existence of a "fixed place of business through which the
business of an enterprise is wholly or partly carried on”.
Although this interpretation
adopted by the court has been subject to much debate, it does seem to be in
line with international precedent. In this regard the Indian Income Tax Appeal
Tribunal in Linklaters LLP v Income Tax Officer-International
Taxation, Ward 1(1)(2), Mumbai ITA Nos 4896/Mum/03,
5085/Mum/03 similarly concluded that, while articles 5(2)(a) to
(i) of the India-United Kingdom DTA were merely illustrative of the basic rule
in Article 5(1), Article 5(2)(k) was an extension of the basic rule and,
therefore, constituted a freestanding category of permanent establishment (See
Schwarz - UN Model Services Permanent Establishment: What you do – not where
you do it, Kluwer Tax Blog 12 August 2015).
Accordingly, foreign service providers
rendering services in South Africa must ensure that adequate structures and
tracking systems for employees are in place in order to avoid triggering a
South African tax liability.
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This article first appeared on the January/February 2016 edition on Tax Talk.