With effect from January 1 2017, proposed legislation
relating to a possible South African withholding tax on service
fees was formally deleted and a long period of uncertainty
around this issue finally came to an end.
Proposals for a withholding tax on service fees were first
raised in 2013, with the release of provisions dealing with the
imposition and collection of the tax. The term 'service fees'
was defined to mean amounts received or accrued in respect of
technical, managerial and consultancy services. The withholding
tax rate was to be 15% on any qualifying fee paid to or for the
benefit of any foreign person.
Notable exemptions from the proposed withholding tax
- Payments made to non-resident individuals
who were physically present in South Africa for a period
exceeding 183 days during the 12-month period preceding
payment of the service fee;
- Fees effectively connected to a South
African permanent establishment; and
- Fees that constituted remuneration paid by
an employer to an employee.
The proposed withholding tax was met with significant
resistance. The National Treasury indicated that the
withholding tax had not been designed primarily to boost tax
revenues but rather to identify non-residents who might be
avoiding tax liabilities (i.e. those who potentially had a
taxable presence in South Africa). The prevailing sentiment was
that the application of the legislation would raise significant
practical issues and that it was unlikely to achieve its stated
objective or even collect much revenue, given that tax treaties
in place would override its application in most instances.
Following extensive lobbying, the effective date of the
relevant provisions was postponed firstly to 2016, and then to
2017 before finally being repealed altogether.
In its place, the revenue authorities have adopted a
different approach in order to achieve their original
objective. As of February 3 2016, an arrangement for the
rendering of consultancy, construction, engineering,
installation, logistical, managerial, supervisory, technical or
training services to a South African resident (or permanent
establishment) is reportable to the revenue authorities. The
obligation to report arises when a non-resident (or a
representative thereof) is physically present in South Africa
for the purposes of rendering the relevant services and the
fees incurred or to be incurred exceed or are anticipated to
exceed ZAR 10 million ($747,000) in aggregate. Failure to
report the arrangement within 45 business days of the
arrangement becoming reportable can lead to a fine on any party
to the arrangement.
For South African taxpayers involved in paying these fees,
the relatively vague language used in the notice has created
some uncertainty. More detailed guidance may be necessary, for
example, on exactly when a service fee arrangement becomes
reportable where it is not known at the outset how long the
services will continue or what the total amount of fees will
be. Gauging whether reporting is accurate and timely may
therefore prove difficult. For the authorities, the reporting
mechanism should provide useful information. Time will tell
whether the stated objective will be met.
Sean Gilmour (firstname.lastname@example.org),