WITHHOLDING TAX ON INTEREST
AND ROYALTIES
DAVID WARNEKE
November 2012
WTI: Where we are…section 10(1)(h)
In an attempt to attract and retain foreign
investment South Africa has historically not
levied tax on interest paid to non residents.
Section 10(1)(h) currently provides an
exemption from income tax for interest
earned by non-residents unless:
• the non-resident is a natural person
physically present in South Africa for 183
days or more in a year of assessment; or
• The non-resident carries on business in SA at
any time during the year of assessment
through a permanent establishment.
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Where we are going… section 37I – 37N
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•
A withholding tax on interest paid to non-residents
will become effective from 1 July 2013 (revised date
per the 2012 TLAA).
•
The interest must be paid to or for the benefit of any
foreign person.
•
Examples: 1. Interest is paid to a SA resident as
collection agent for the creditor, who is a nonresident. WTI applies.
•
2. Interest is paid to a non-resident but the
beneficial owner of the interest is a SA resident. WTI
applies.
•
The tax applies to the extent that the amount is
received or accrued from a SA source in terms of
S9(2)(b) (SA debtor unless interest attributable to a
non-SA permanent establishment OR utilisation or
application of funds in SA).
Where we are going… section 37I – 37N
•
In order to bring all withholding taxes in line the withholding tax on interest
will be introduced at a rate of 15%.
•
The withholding tax will be a final tax.
It will apply in respect of:
(a) Interest that accrues OR
(b) Interest that is paid or becomes due and payable,
on or after 1 July 2013.
Therefore:
If interest is paid on or after 1 July 2013 WTI will apply (even in respect of interest
that accrued prior to that date).
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Whose responsibility is it?
The person making the
interest payment for the
benefit of a foreign
recipient is liable to
withhold this tax from the
amount of interest paid
(s37L)
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To the extent that amounts
of withholding tax are
owing to SARS the ultimate
liability for the tax rests
with the person to whom
the interest is paid. (s37JA)
Note that as clarified in the
Taxation Laws Amendment
Act of 2012, the withholding
tax liability is triggered on
the earlier of interest being
paid or becoming due and
payable(and not merely on
the accrual) of the interest
(s37J).
Non residents who are exempt from the
withholding tax on interest … 37K(3)
•
Any non-resident natural person who is physically
present in the Republic for a period exceeding 183
days in aggregate in the 12 months preceding the
date on which the interest is ‘paid’;
•
Any non-resident who at any time during the 12
month period preceding the date on which the
interest was ‘paid’, carried on business through a
permanent establishment in the Republic.
The WTI will not apply to the above non-residents as
South African normal tax will, in these cases, be levied
on their income in preference to the WTI. If WTI
applies, normal tax will not also apply and vice versa.
Per 2012 TLAA the payment of interest to CFC’s WILL
trigger WHTI, however the interest will be excluded
from the CFC’s income calculation i.t.o 9D
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Interest that is exempt from the withholding tax ..
37K(1)
Interest received by or accrued to any non-resident in
respect of:
•
Any government debt instrument;
•
Any listed debt instrument;
•
Any debt owed by any bank (as defined) note: exclusion
of back-to-back arrangements , the South African Reserve
Bank , the DBSA or the IDC;
•
The purchase price of goods imported into the Republic
provided an authorised dealer (for exchange control
purposes) has certified on the bill of exchange or letter of
credit that a bill of lading or other document covering the
importation of the goods has been exhibited to it;
•
Interest payable in terms of section 27(6) of the Security
Services Act to a foreign client;
•
A collective investment scheme (other than in a
collective investment scheme in property);
•
Interest payable by a headquarter company (provided
that the transfer pricing exclusions in s31(5) applies to
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the interest.
The exemption for interest paid by a bank to a
non-resident will not apply where.. 37K(2)
The exemption provided for interest paid or payable by a bank will not apply
to ‘back-to-back’ arrangements.
For example, no exemption will apply to interest payments made by a
domestic bank to a non-resident where a deposit at the bank made by that
non-resident has been used as security for a loan to a resident.
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Administrative issues.. 37L(2)
A person making an interest payment
to a non-resident is obliged to withhold
and pay to SARS 15% of the interest
payment UNLESS:
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-
The interest IS exempt in terms of
section 37K(1); OR
-
The person making the interest
payment is, by the date of
payment, in possession of a
declaration from the foreign
person to or for whose benefit the
payment is to be made stating that
they are exempt from the tax in
terms of section 37K(3).
Reduction of the withholdings tax rate where a
double taxation agreement applies s37L(3)
The rate of withholding tax may be
reduced if, by the date of the payment
of the amount of interest, the person
making the interest payment is in
possession of a declaration submitted
by the foreign person to or for whose
benefit the payment is to be made,
stating that a reduced rate of tax
applies due to the application of a
double tax agreement.
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The trigger for withholding and the obligation to
make payment to SARS s37M
The trigger date for the withholding of the tax is the date that the
interest is paid or becomes due and payable.
Any person withholding any withholding tax on interest is obliged to pay
the tax to the Commissioner by the last day of the month following the
month during which the interest is paid.
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The refund mechanism… 37N
A non-resident who has not submitted one of the two relevant declaration
forms to the payer of the interest on a timeous basis, has three years from
the date of payment of the interest in which to submit the declaration
form directly to SARS in order to claim the overpaid withholding tax from
SARS.
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Double Taxation Agreements
The rate of withholding tax on interest may be reduced by the application
of a DTA, depending on which state the ‘beneficial owner’ is resident in:
Country
DTA Rate for Interest
United Kingdom
0%
USA
0%
Germany
10%
Mauritius
0%
Australia
10%
China
10%
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Beneficial ownership
The term ‘beneficial owner’ is not defined for purposes of the WTI. For purposes
of Dividends Tax it is defined as the person entitled to the benefit of the
dividend.
• DTA’s rely on the concept of beneficial ownership to provide relief.
• There is lack of consensus internationally regarding the meaning of ‘beneficial
ownership’.
• In the Canadian case of Prevost (The Queen v Prevost Car Inc 2009 FCA 57) it
was held that the beneficial owner of a dividend is the person who receives
dividends for his or her own use and enjoyment and assumes the risk and
control of the dividend he or she received. The person who is the beneficial
owner of the dividend is the person who enjoys and assumes all the attributes
of ownership.
• If interest is paid to a SA resident trust with a non-resident beneficiary, who is
the beneficial owner of the interest?
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Some issues
1. The wording of s37JA vs DTA’s:
Say SA Co pays interest to Forco 1 but the beneficial owner of the interest is
Forco 2. Forco 2 is liable to income tax on the interest in its country of
residence.
S37JA states that ‘a foreign person to which an amount of interest is paid is
liable for the WTI’. However DTA’s rely on the concept of beneficial ownership.
Forco 2 can’t claim DTA relief as in terms of S37JA the WTI was imposed on
Forco 1. Forco 1 can’t claim DTA relief as it is not the beneficial owner of the
interest.
2. How much of what is paid consists of interest?
Assume:
• A loan of R100 m
• Annual repayments of R25m
• S24J interest to date of first repayment R20 m.
How much of the repayment of R25 m is interest?
3. When is interest ‘due and payable’? Consider interest received by discretionary
and vesting trusts and crediting of interest to loan accounts.
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Sections 8E – Hybrid Equity Instruments
s8E is an anti-avoidance section aimed at combatting schemes in
which what are in substance loans are labeled as shares.
EXAMPLE: If instead of granting a loan the lender is issued
preference shares by the borrower then (in the absence of s8E) the
lender receives exempt dividends instead of taxable interest.
The effect of s8E is to reclassify these dividends to interest income
/ income (in the hands of the recipient only). The dividends will not
be subject to DWT or WTI under these circumstances.
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Sections 8E – Hybrid Equity Instruments
In order for s8E to apply there must be a ‘hybrid equity instrument’ which is
Any share other than an equity share where:
The 3 year Rule applies:
- The issuer of the share is obliged to redeem the share within 3 year of
issue; or
- The share may, at the option of the holder, be redeemed in whole or
part within 3 years of issue; or
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Sections 8E – Hybrid Equity Instruments
In order for s8E to apply there must be a ‘hybrid equity instrument’ which is
Any equity share where:
The 3 year Rule applies:
- The issuer of the share is obliged to redeem the share within 3 year of
issue; or
- The share may, at the option of the holder, be redeemed in whole or
part within 3 years of issue; OR
- At the time of issue it is likely that the issuer will terminate within 3
years
AND
The share does not rank pari passu iro participation in dividends with the
other ordinary shares (or with at least one other class where more than one
class); or
where the dividend payable on a share is calculated with respect to:
- a specified rate of interest or the time value of money
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Sections 8E – Hybrid Equity Instruments
In order for s8E to apply there must be a ‘hybrid equity instrument’ which is
Any preference share where:
The share is secured by a ‘financial instrument’ (as defined: the arrangement
must be interest-bearing or determined wrt a rate of interest); or
Is subject to an arrangement in terms of which a ‘financial instrument’ may
not be disposed of
UNLESS THAT SHARE WAS ISSUED FOR A ‘QUALIFYING PURPOSE’
A ‘qualifying purpose’ is in essence the acquisition of an equity share in an
‘operating company’.
Note that the reclassification from dividend to income occurs where any
dividend or foreign dividend is received in respect of a share that was a
hybrid equity instrument at any time during that year of assessment.
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Sections 8EA – Dividends on 3rd party backed
shares
s8EA is in essence an extension of S8E and applies where shares in respect
of which the return (dividends or returns of capital) are guaranteed by a
party other than the issuer. Such shares are more closely linked to debt
than to equity as the shareholder does not expose itself to meaningful risk
in the company (due to the third party guarantee).
Where section 8EA applies the dividends paid on such shares are
reclassified to income in the hands of the recipient only. Dividends are not
subject to DWT or WTI under these circumstances.
Section 8EA applies to any dividend received in a year of assessment in
relation to a share which was at any time during that year a third party
backed share.
Original
provision effective from 1 October 2012
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Sections 8EA – Dividends on 3rd party backed
shares
A 3rd Party Backed Share is defined as:
- Any non-equity share or equity share if the dividend is based on a rate of interest
- in respect of which an enforcement right is exercisable by the holder or an
enforcement obligation is enforceable
- As a result of any amount of any specified dividend, foreign dividend, return of
capital or foreign return of capital not being received by or accruing to the
person entitled thereto.
Enforcement obligation
Means an obligation, whether fixed or
contingent, of any person other than the
issuer of the share to:
(a) Acquire the share from the holder;
(b) Make any payment in respect of the
share in terms of a guarantee,
indemnity or similar arrangement; or
(c) Procure, facilitate or assist with (a) or
(b)
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Enforcement right
Means any right, whether fixed or
contingent, of the holder of the share (or
connected person) to require any person
other than the issuer to:
(a) Acquire the share from the holder;
(b) Make any payment in respect of the
share in terms of a guarantee,
indemnity or similar arrangement; or
(c) Procure, facilitate or assist with (a) or
(b)
Sections 8EA – Dividends on 3rd party backed
shares
The Operating Company Exclusion
A dividend in respect of a 3rd Party Backed share can escape s8EA treatment
(i.e. will not be reclassified to income) if it was issued for a ‘qualifying
purpose’ i.e. the acquisition of an equity share in an operating company, in
that in these circumstances one disregards enforcement rights or enforcement
obligations exercisable / enforceable against certain persons e.g. companies
that form part of the same group as the operating company or that are part of
the same group of companies as the issuer.
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WITHHOLDING TAX ON ROYALTIES
Where we are…section 35
Royalties paid to a person who is not a
resident nor a CFC are currently subject to
a withholdings tax levied at 12%.
There is an exclusion that applies if such
amount is effectively connected with a SA
permanent establishment
Section 35 provides that
• The person making payment of the royalty
to the non-resident is liable to pay the
withholding tax;
• Payment must be made to SARS within 14
days of the end of the month in which
liability was incurred / payment received
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Where we are going… section 49A – 49G
• Section 35 of the Act will be repealed in
respect of amounts received or accrued on or
after 1 July 2013 and will be replaced with
sections 49A – 49G.
•
The new provisions will apply in respect of:
Royalties that are paid OR
Royalties that become due and payable,
on or after 1 July 2013, but only to the extent that the
royalties were not subject to tax in terms of S35.
• Therefore, if a royalty accrues and is paid
prior to 1 July 2013, s35 will apply.
• If a royalty accrues prior to 1 July 2013 but is
paid thereafter, the new provisions will apply.
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Where we are going… section 49A – 49G
• In order to bring all withholding taxes in line the withholding tax on royalties
will be increased to a rate of 15%.
• As is currently the position, the withholding tax on royalties will be a final tax.
• The changes are intended to align the withholding tax on royalties with the
withholding tax on interest and dividends in terms of the administration of
these taxes.
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What is a Royalty?
‘Royalty’ means any amount that is received or
accrues in respect of –
(a) The use or right of use of or permission to use any
intellectual property as defined in section 23I (patents,
trademarks, designs, copyrights or similar property or
knowledge connected to use of above) or
(b) The imparting of or the undertaking to impart any
scientific, technical, industrial or commercial knowledge
or information, or the rendering of or the undertaking to
render any assistance or service in connection with the
application or utilisation of such knowledge or
information.
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To whom the provisions apply
The withholding tax on royalties will apply to any royalty paid to or for the benefit
of a non resident person to the extent that the amount is regarded as having
been received by or accrued to that foreign person from a source within South
Africa.
Examples: 1. A royalty is paid to a SA resident as collection agent for the creditor,
who is a non-resident. WTR applies.
2. A royalty is paid to a non-resident but the beneficial owner of the royalty is a SA
resident. WTR applies.
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When is a royalty from a SA source… section 9
A royalty is from a SA source if:
-
The royalty is incurred by a person that is a resident, including amounts incurred by a
resident that relate to the imparting of scientific, technical, industrial or commercial
knowledge (unless that royalty is attributable to a PE outside South Africa) or
-
The royalty is received or accrued in respect of the use or right of use or permission to
use IP in South Africa or in respect of the imparting of scientific, technical, industrial or
commercial knowledge for use in South Africa.
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Whose responsibility is it?
The person making the
royalty payment for the
benefit of a foreign person
is liable to withhold this
tax from the amount of
the royalty paid (s49E).
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To the extent that amounts
of withholding tax are
owing to SARS the ultimate
liability for the tax rests
with the person to whom
the royalty is paid (s49C).
The withholding tax liability
is triggered on the earlier of
the royalty being paid or
becoming due and
payable(and not merely on
the accrual) of the royalty
(s49B).
Withholding tax exemption… 49D
The following persons are exempt from the WHT:
Any non-resident natural person who is physically
present in the Republic for a period exceeding 183
days in aggregate during the 12 months preceding
the date on which the royalty is ‘paid’;
• Any non-resident who at any time during the 12
month period preceding the date on which the
royalty was ‘paid’, carried on business through a
permanent establishment in the Republic.
The WTR will not apply to the above nonresidents as South African normal tax will be
levied on the royalties in preference to the WTR.
If WTR applies, normal tax will not also apply
and vice versa.
• Royalties payable by a headquarter company
(provided that the transfer pricing exclusions in
s31(5) apply to the royalties).
Per 2012 TLAA the payment of royalties to CFC’s will
trigger WTR, however the royalties will be excluded
from the net income calculation of the CFC i.t.o 9D
•
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Administrative issues.. 49E
A person making a royalty payment to a non-resident is obliged to withhold and
pay to SARS 15% of the royalty payment UNLESS:
-
The person making the royalty payment is, by the date of payment, in
possession of a declaration from the person to or for whose benefit the royalty
is paid stating that they are exempt from the tax in terms of section 49D.
The rate of withholding tax may be reduced where:
-
the person making the royalty payment is, by the date of payment, in
possession of a declaration submitted by the person to or for whose benefit
the royalty is paid stating that a reduced rate of tax applies due to the
application of a double tax agreement.
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The payment and recovery of the tax.. 49F
The trigger date for the withholding of the tax is the date that the
royalty is paid or becomes due and payable.
Any person withholding the withholding tax on royalties is obliged to pay
the tax to the Commissioner by the last day of the month following the
month during which the royalty is paid or when it became due and payable.
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The refund mechanism… 49G
A non-resident who has not submitted the one of the two relevant
declaration forms to the payer of the royalty on a timeous basis, has three
years from the date of payment of the royalty in which to submit the
declaration form directly to SARS in order to claim the overpaid
withholding tax from SARS.
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Double Taxation Agreements
The rate of the WTR may be reduced by the application of a DTA,
depending on which state the ‘beneficial owner’ is resident in (see earlier
slide on ‘beneficial ownership’)
Country
DTA Rate for Royalties
United Kingdom
0%
USA
0%
Germany
0%
Mauritius
0%
Australia
5%
China
10%
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Some issues
1. The wording of S49C vs wording of DTA’s:
Say SA Co pays a royalty to Forco 1 but the beneficial owner of the royalty is
Forco 2. S49C states that ‘a foreign person to which a royalty is paid is liable
for the WTR’. However DTA’s rely on the concept of beneficial ownership.
Forco 2 can’t claim DTA relief as in terms of S49C the WTR was imposed on
Forco 1. Forco 1 can’t claim DTA relief as it is not the beneficial owner of the
royalty.
2. Beneficial ownership: Say a royalty is paid to a SA resident trust with a nonresident beneficiary. Who is the beneficial owner of the royalty?
3. When is the royalty ‘due and payable’? Consider royalties received by
discretionary and vesting trusts and crediting of royalties to loan accounts.
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Questions??
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contained herein is reliable and of the highest quality and standard we
cannot be held liable for any mistakes, representations or omissions, or
any loss or damage due to the use of such information. We cannot
provide any warranty or guarantee of any nature, express or implied in
respect of the information contained herein, or the opinions of the
presenter.
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