All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

South Africa: Interest withholding tax update

dachs.jpg

Peter Dachs

In terms of the interest withholding tax (IWT) legislation which will become effective on January 1 2015 the term 'interest' is not defined. SARS has indicated that interest to which the IWT will apply is common law interest. However, 'interest' is defined in the Income Tax Act in section 24J. In addition, section 50B of the Income Tax Act (the IWT taxing provision) refers to section 9(2)(b) of the Income Tax Act. Section 9(2)(b) of the Income Tax Act applies exclusively to interest as defined in section 24J. On this basis, is 'interest' subject to the IWT 'interest' as defined in section 24J?

The scope of the 'interest' definition contained in section 24J of the Income Tax Act extends beyond common law interest and includes:

  • any discount or premium in respect of a financial arrangement;

  • any compensation payable by a borrower to a lender in terms of any lending arrangement; and

  • the differential between the sale price and resale price of the underlying asset in relation to qualifying repurchase and resale agreements;

It seems that interest subject to the IWT is not 'interest' as defined in section 24J. If this were not the case then, for example, "manufactured interest" payments would be subject to the IWT. However, manufactured interest payments are not covered by the exemption from normal tax contained in section 10(1)(h) and therefore if such payments were also subject to the IWT then the recipient would suffer both normal tax and IWT.

The IWT provisions apply to South African-sourced interest which is paid to or for the benefit of a foreign person by any person.

Interest paid by a non-resident borrower to a non-resident lender will be from a South African source where the non-resident borrower has used or applied funding obtained from the non-resident lender in South Africa.

This may result in a withholding obligation being placed on a non-resident. Failure to comply with the IWT provisions could lead to an IWT liability and, inter alia, the imposition of penalties and interest on unpaid taxes.

In addition, non-residents may also have to register as South African taxpayers to submit IWT returns to the extent that the administrative provisions pertaining to the IWT are similar to those of the dividends tax. We await further updates from the South African Revenue Service (SARS) in this regard.

The counter-argument is that in terms of section 50B the IWT is levied in respect of any interest that is paid by any "person" to or for the benefit of any "foreign person". A distinction is therefore drawn between a "person" and a "foreign person". The definition of 'foreign person' means any person that is not a resident.

Peter Dachs (pdachs@ensafrica.com)

ENSafrica – Taxand Africa

Tel: +27 21 410 2500

Website: www.ensafrica.com

More from across our site

ITR is delighted to reveal all the shortlisted firms, teams and practitioners – winners will be announced on August 25
Multinational enterprises run the risk of hefty penalties if the company in question fails to register for VAT when providing electronic services in South Africa.
Tax directors have urged companies to ensure they have robust tax risk management controls when outsourcing tax functions.
Japan reports a windfall from all types of taxes after the government revised its stimulus package. This could lead to greater corporate tax incentives for businesses.
Sources at Netflix, the European Commission and elsewhere consider the impact of incoming legislation to regulate tax advice in the EU – if it ever comes to pass.
This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree