South African companies doing business in Africa should be aware of the fact that this may result in considerable tax costs for the South African company. This could especially be the case where an SA company provides services,either management or technical services,to its African group companies.Under the South African tax rules, the company should charge its group companies a market-related fee for those services. In many cases, the services are provided electronically or by phone;in other words, the services are physically provided from South Africa and that is where the problems come in.
Most African countries have withholding taxes on fees paid from their country ranging from 10–24% on the gross amount of the payments and most South African tax payers simply claim the full withholding tax against their SA income tax liability. However, this is not correct.
The South African recipient of technical and management fees should include the gross amount of the fees in their income (that is, before deduction of the withholding taxes), which could potentially lead to double tax. To avoid, SA legislation provides that a tax credit may be claimed for the withholding taxes paid on the fees, provided the source of the fee income is outside South Africa. In order for the fees to be considered foreign source, the services underlying those fees should physically be rendered outside its borders. Therefore, if the services are provided from South Africa, it will in principle not be possible to claim a credit for the withholding taxes. However, the taxes may be deducted as a cost.
The situation becomes more complicated if services are provided both inside and outside South Africa and one fee is charged for both. How would you then attribute the fee between South African and foreign source? Do you use time spent in and outside the country or dominant sources of income as an allocation key? There is no hard and fast rule to deal with those questions. Each situation should be looked at separately to determine the right key.
Where South Africa has concluded a tax treaty with the African country, help may be at hand. In some treaties, there is a deeming provision which states that service fees are deemed to arise in the country where the payer is residing. This deeming provision would override the SA domestic legislation as a result of which service fees paid from a treaty country with such a provision will always qualify as foreign source income with the possibility to claim a tax credit.
It should be noted that since SARS released its Interpretation Note on the subject in 2009, tax credit calculations of South African tax payers have become more of a focus area for them. It would therefore be worthwhile (to avoid interest and penalties) to have a close look at the methodologies used to calculate your tax credits.
Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.