South Africa: The spectre of withholding tax on service fees finally laid to rest
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa: The spectre of withholding tax on service fees finally laid to rest

gilmour.jpg

Sean Gilmour

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 included:

  • 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the effective date of the relevant provisions was postponed firstly to 2016, and then to 2017 before finally being repealed altogether.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 (sean.gilmour@webberwentzel.com), Johannesburg

Webber Wentzel

Website: www.webberwentzel.com

more across site & bottom lb ros

More from across our site

KPMG Netherlands’ former head of assurance also received a permanent bar and $150,000 fine; in other news, asset management firm BlackRock lost a $13.5bn UK tax appeal
The new, fully integrated office will also offer M&A, dispute resolution, IP and corporate tax services
The new guidance concerns a recent 1% excise tax on the repurchases of corporate stock for both US and certain foreign companies
Interpath has hired a managing partner from rival accounting firm BDO to lead the new operation
Survey results of over 28,000 in-house lawyers reveal that American in-house counsel place a higher value on the reputation of external advisers than their peers elsewhere
In an exclusive interview with ITR, Andrew Leigh also endorsed new legislation designed to prevent multinationals using complex corporate structures to reduce taxes
Nick Crama and Parwesh Bissumbhar, senior director and manager respectively at Alvarez & Marsal, outline practical advice for real estate managers to comply with DAC6 regulations
The finalists for the 13th annual awards revealed
Survey results of over 25,000 in-house lawyers show competitive pricing and transparency in billing practices can help firms win clients
The new tech partnership will assist clients worldwide with pillar two; in other news, UK accountancy firm MHA completes a regional merger
Gift this article