South Africa: The spectre of withholding tax on service fees finally laid to rest
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the effective date of the relevant provisions was postponed firstly to 2016, and then to 2017 before finally being repealed altogether.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 (firstname.lastname@example.org), Johannesburg