Withholding tax

All users of offshore services need to be aware of this new tax and must alert their suppliers in good time.

Withholding tax
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In the 2013 Draft Taxation Laws Amendment Bill, recently released by the National Treasury, there is a proposal regarding withholding taxes to be paid by South African taxpayers. Currently, withholding taxes is not really a big issue on the South African tax scene. This is not true for the rest of Africa, though.

So what exactly are these suggested taxes?

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Withholding taxes are withheld by a resident company within a country upon ‘royalties’ or ‘commercial royalties’, which are paid by the resident company to a second (usually South African) company in another jurisdiction. For example, let’s assume that a company operates cross-border, from South Africa into another country, and its activities in this other country are of short duration (there is no permanent establishment).

When the SA company issues an invoice to the company in the other jurisdiction, such company – the payer – has to withhold tax by law. If the SA company is working with a low margin of profit, thiscan wreak havoc on its bottom line, because the other company has no choice but to hold back a percentage of the invoiced amount and pay it to the tax authority in the other country as withholding tax.

Luckily, withholding tax is only charged on service-related fees. Goods are not subject to these taxes.The South African tax authorities are now proposing that SA tax statutes be amended to include provision for SA companies to similarly withhold taxes from fees charged by companies in other jurisdictions in a manner similar to that of most of the African tax jurisdictions. The rate of withholding tax is proposed to be 15%, which is high.

If, for instance, a US specialist software supplier supplies software to an SA company, the latter will be bound to withhold tax from the invoiced amount. I strongly urge all users of offshore services to be aware of this new tax and to alert their suppliers in good time. Perhaps one method of mitigating the effect of the withholding tax on services is to insist that such service costs be built into the cost of goods if goods are also supplied.

Not good for business
It should also be remembered that double tax anti-avoidance treaties between countries contain clauses that limit the effect of withholding taxes in that the rates of such withholding taxes are reduced by treaty. This gives rise to a phenomenon known as ‘treaty shopping’, where offshore suppliers endeavour to route services through countries that have beneficial rates of withholding taxes due to their double tax treaty networks.

It seems a pity that South Africa seems to be considering this tax, as it will add to the cost of doing service-related business with offshore suppliers and the result may be that some industries will reconsider their use of South Africa as a base of operations.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.