New Taxes - Withholding taxes on interest and royalties for non-residents
DEDUCTIONS in terms of the new withholding taxes on interest and royalties for non-residents will become the responsibility of the entity making those payments, but the ultimate responsibility for ensuring that capital reaches the South African Revenue Service (SARS) lies with the person being paid, BDO South Africa tax director David Warneke says.
David Warneke, Tax Director BDO South Africa
The new Withholding Tax on Interest and Withholding Tax on Royalties that apply when interest or royalties are paid to or for the benefit of non-South African residents, become effective July 1, 2013.
Withholding taxes are not new to South Africa. The country operated with the Non-Residents Shareholders Tax between 1962 and 1995, the Non-Residents Tax on Interest from 1967 to 1997 and since 1962, a tax on royalties.
Globally withholding taxes, also called retention taxes, are used as an administrative mechanism to trap the relevant tax before the non-resident escapes the taxman's grasp. The amendments to South Africa's laws closes the near-blanket exemption for local interest earned by non-residents subject to exceptions in limited instances.
Currently Brazil does not have a dividends tax and has withholding taxes of 15-25% on interest and royalties. The figures for Russia are 15%, 20% and 20%; for India zero, 5-20% and 10% and China 10% across the board.
Once the laws come into being, non-residents who spend up to183 days in the country or do not have a permanent establishment, such as a branch in South Africa, will become liable for tax on interest or royalties. Both taxes have been set at a 15% rate, subject to double taxation rates, to fall in line with the withholding tax on dividends that came into effect on April 1, 2012 and they will apply to interest or royalties that either accrue, are paid or becomes due and payable on or after July 1, 2013.
Specifically, interest accrued before that date, but only paid out from July next year will attract the new tax. Currently royalties accrue a 12% tax rate.
Warneke says the withholding tax on interest will become applicable when interest is paid to or for the benefit of anon-resident. This means when interest is paid to a South African resident as a collection agency for a non-resident creditor, the tax will apply.
He says non-residents who are physically present in South Africa or who had carried on business through a permanent establishment in the country for more than 183 days in the aggregate 12 months before the interest or royalties were paid, would be exempt from the taxes.
"This would mean SARS could levy Income Tax rather than the withholding tax. If the withholding tax is applicable, then income tax falls away and visa versa," he says.
There would also be exemptions to the new laws depending on how the interest had been earned. Inter alia any interest paid in respect of any government debt instrument, any listed debt instrument, any debt owed by any bank, the South African Reserve Bank and any interest arising from the import of goods would be exempt.
Payments to SARS would have to be made by the last day of the month following when the interest or royalty payment had been paid.
Warneke says that refunds would be entertained if the recipient could not present the relevant declaration forms to the payer in time.
However, he warned that there were elements of the new laws that would have to be tested in the courts for clarity. Beneficial ownership was likely to cause concerns, given there was not even international consensus defining that issue.
For example interest could be paid to a South African trust with non-resident beneficiaries, posing the question as to who the beneficial owner was. One solution may be establishing whether or not the trust had discretion in its payments or whether it was bound to pay only the non-resident.
Another issue would be what portion of a repayment constituted the interest. A R100 million loan may incur annual payments of R25 million and a logical understanding may be that R20 million went to paying the interest and the balance to capital.
However, Warneke argues that it may be possible to treat the whole amount as a repayment of capital payments if that was defined in the loan terms. The law did not clearly define the issue.
For further information contact:
Meg Enerson, Marketing and Business Development, BDO Durban
Tel: (031) 514 7035.
E-mail: [email protected]
Shirley Williams, Shirley Williams Communication
Tel: 083 303 1663 or (031) 564 7700