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.
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