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The taxation system used in South Africa is a residence based system for people who are ordinarily resident in the republic, this means that South African residents will be taxed on their world-wide income. On the other hand non-residents are only taxed on receipts that are derived from sources within the republic. Certain provisions of the income tax act will only apply to residents and others will only apply to non-residents, withholding taxes are examples of provisions that only apply to non-residents. It is crucial for a person who is making any payments to a non-resident to consider whether or not they have to withhold a portion of the payment. The person who fails to withhold taxes from a payment to a non-resident will be held personally liable for those taxes. Non-residents may be liable to withholding taxes on royalties, interests, foreign entertainers and sportspersons. ”Withholding taxes with respect to non-residents provide the South African Revenue Service ("SARS") with a collection mechanism, saving SARS the trouble of chasing after foreigners who do not pay their South African taxes” (Bouwer, 2007:1). A person can be ordinarily residents to the republic or he/she can be a resident if they meet the requirements of the physical presence test. Often two countries will have tax treaties in place such as Double tax agreements which seek to mitigate the risk of taxing the same income twice while making sure that potential conflicts about a tax issue are resolved effectively. Non-residents will however pay normal tax at the same rate as residents and will also be entitled to the same deductions from income just as residents.
2. History of Withholding Tax
A withholding tax on dividends payable to shareholders who do not reside within the republic was imposed called Non-Resident Shareholders’ Tax, it was later abolished when a secondary tax on companies (STC) was introduced, and STC has now been replaced by a new dividends tax. Previously, in terms of the secondary tax on companies, a resident company (that is a company that is incorporated within the republic or has its place of effective management within the republic) was subject to an additional taxation of 10% of its declared dividends over and above the 28% taxation rate on income taxes. STC was a tax that was levied on the company that was declaring and then paying the dividend and had no effect on the person who received the dividend, for non-residents this meant that they were not taxed on dividends received from a resident company. The new dividends tax is a tax that is now levied on the individual that is entitled to the benefit of the dividend, in other words, the person who receives the dividend will be the one who is liable for the taxation of that dividend rather than the person who has paid the dividend. The provisions of the new dividends withholding tax will be discussed further in this paper.
Prior to 30 June 2013, s 35 provided for the taxation on royalties and similar payments that were paid by a resident for the use or permission or right to use any intellectual property generated within the republic to a non-resident. Also included was the conveying of information or knowledge or the rendering of services in connection to any scientific, technical, industrial or commercial knowledge. A withholding tax on royalties has been levied for a number of years under then section 35(1) of the Income Tax Act, a final withholding tax was levied at 12% under this section. Normal tax will not be payable in terms of theses royalties as the withholding tax of 12% was a final tax, meaning there was no need to submit an annual tax return if the royalties were the only income that was received by the non- resident in that year of assessment.
Until 2005, there was a bit of uncertainty as to whether or not the withholding tax was a final tax or if adjustments had to be made on assessments. This uncertainty was removed by the repeal in 2005, supported by the fact that the taxes withheld under this section (s35) are exempt from normal tax in terms of the income tax act (s 10(1)(l)) (Honiball & Olivier, 2011:367). Section 23I with an effective date of 1 January 2009 was introduced in an attempt to curtail tax arbitrage through the use of intellectual property. Section 23I prevents the deduction of royalty expenditure incurred for the use, permission to use or right to use intellectual property that was deemed to be “tainted”, only a third of the royalty expenditure is deductible in terms of section 23I(3) where the royalty is subject to a withholding tax of at least 10% under section 35. The resident, in his capacity as an agent to the non-resident should withhold the tax on royalties and then pay the withholding tax to the Commissioner within 14 days after the end of the month during which the liability was incurred or the payment was received by the non-resident
Prior to 1 July 2013, South Africa did not impose withholding tax on interest that was paid to a foreign investor. Interest received by non-residents was mostly exempt from taxation in South Africa under section 10(1)(h). However the new the amendments to the taxation laws bill of 2010 was amended to provide that not all interest received by a non-resident be exempt from taxation, interest will only be exempt if it was received for a specific investment. “This exemption was effectively backdated for certain taxpayers when introduced in that it was legislated by Act No 32 of 2004 and is applicable in respect of any year of assessment ending on or after 1 January 2005, but in respect of certain funds, it is deemed to have come into operation on 1 January 2001 and is applicable in respect of any year of assessment commencing on or after that date.” (Honiball & Olivier, 2011:446). A interest withholding tax system was introduces that is effective from the first of October 2013 for non-residents and will substantially curtail the application of the above mentioned interest exemption. The requirements of the new withholding tax on interest paid to persons who are not ordinarily resident in the republic will be discussed later in this paper.
3. Current Withholding Tax Imposed on Payments to Non-Residents
Under the Income Tax Law of South Africa a withholding tax is currently imposed in the following instances, there are withholding taxes imposed on Royalties and other similar income (this can be income for the use of a specific asset or the use of a patent or trademark). There are withholding taxes imposed on the Sale of Immovable property in South Africa by a non-resident (Immovable property such as land and buildings). There are withholding taxes on non-resident entertainers and sportsmen. There are withholding taxes on interest received by a non-resident from a source that is within the republic. There are withholding taxes on service fees.
3.1 Withholding tax on Royalties and similar payments
With an effective date of 1 July 2013 a new withholding tax on royalties and similar payments to non-residents was introduced, section 35 has been effectively replaced by subsections 49A-49G in the income tax act of South Africa. Section 49B (1)(a) provides that a withholding tax rate of 12% should be levied on any royalties and others amounts that are described in ss 9(2)(c)-(f) that is received by or accrues to a non-resident up to and including the 31st of December 2014. The deemed date of these royalties or similar payments will be the earlier of the date of actual payment or the date when the amount is due and payable. The withholding tax on royalties and similar payments at the rate of 12% is a final tax and these amounts will not be subject to further taxation under the income tax act. Though this amount will not be taxed under normal tax, the withheld amount will be deemed to have been paid to the non-resident and this amount will be included in his gross income, the amount will then be exempt from income and thus not taxed under the normal income tax.
“Section 35(1) was replaced by section 80 of the Taxation Laws Amendments 22 of 2012, which inserted section 49B in the Income Tax Act to deal with the levying of a final withholding tax on royalties at a rate of 15% on the amount paid by any person, to or for the benefit of any foreign person.” (Oguttu, 2014:1). S 35 is only applicable if it is paid for the use of an asset referred to in s 35 and if there is an amount that is paid to a non-resident for the use of any other asset, this amount will not constitute a royalty for the purposes of withholding tax on royalties. Certain persons are exempt from withholding tax on royalties, under section 49D persons who are exempt are; (i) a natural foreign person that was physically present in the republic for a period that is more than 183 days during the 12 months before the royalty was received or accrued, (ii) a foreign person who has carried on business through a permanent establishment in the Republic during the 12 months before the royalty is received or accrues, (iii) if the royalty was paid by a headquarter company and s 31 does not apply due to the exclusions in ss 31(5)(c) or (d) (which requires the headquarter company to hold at least 10% of the equity share capital of the foreign company). The benefits of these exemptions to the republic is that it first of all encourages natural foreign persons to spend more days in the republic in order to meet the 183 days that are required for the exemption and also encourages foreign persons to carrying on business through a permanent establishment in the republic.
3.2 Withholding tax on Interest
With an effective date from 1 January 2015, a new withholding tax on interest paid by a resident to a foreign person. The withholding tax on interest received by or accrued to a foreign person will be levied at a rate of 15% as described in s 9(2)(b) of the income tax act. There are certain exemptions in terms of the imposition of withholding tax on interest. “Specifically exempt is interest that is paid to foreign persons by the South African government, any bank, the South African Reserve Bank, Development Bank of Southern Africa, Industrial Development Corporation or a headquarter company.” (McFadden, 2013:1). Other instances where interest paid to a foreign person and will be exempt from withholding tax is when the interest is paid in respect of any listed debt or interest paid as contemplated in the Financial Markets Act to any foreign person that is a client, there will not be an exemption for interest paid due to ‘back-to-back’ loans with a bank. Just like the exemption on royalties paid to a non-resident, there will be an exemption in terms of section 50D(3)(a) if the foreign person is a natural person who is physically present in the Republic for more than 183 days during the 12 months before the date on which the interest is paid..