The Taxation Laws Amendment Act of 2015 ("Amendment Act") was promulgated on 8 January 2016 and contains a number of legislative changes to the Income Tax Act, 58 of 1962 ("the Act").
The Amendment Act contains some long awaited amendments to the provisions which regulate the interest withholding tax ("IWT"). This article examines two of the more important changes which should be borne in mind by parties affected by the IWT.
Defining the concept of "interest"
Although the IWT only came into effect on 1 March 2015, various iterations of the draft legislation have been in circulation since 2010. The IWT provisions which came into effect on 1 March 2015 did not contain a definition of "interest" to which the IWT applies. The question arose whether the IWT is imposed on the payment of common law interest (generally consideration paid for the use of money), or whether the IWT is imposed on "interest" as defined in section 24J of the Act. In the absence of a definition it seemed to apply to common law interests.
The promulgation of the Amendment Act has now clarified this point. The definition of "interest" for purposes of the IWT provisions has been defined as "interest" as contemplated in paragraph (a) or (b) of the definition of "interest" in section 24J(1) of the Act.
This means that the basis of the imposition of the IWT will be the following payments made from a South African source by any person to or for the benefit of a non-resident:
- The gross amount of any interest or related finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement.
- The amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents compensation for any amount to which the lender would, but for such lending arrangement, have been entitled.
Since the term "interest" is now defined for purposes of the IWT, the reach of the IWT provisions may be wider for certain taxpayers to the extent that the common law concept of interest was relied upon in determining IWT liabilities in the past.
Additional exemption from the IWT
In terms of the taxing provisions, the IWT is levied on interest (as discussed above) received or accrued from a South African source that is paid by any person to or for the benefit of any foreign person, subject to certain exemptions (our emphasis).
Interest is from a South African source if, inter alia, it is received or accrues in respect of the utilisation or application in South Africa by any person of any funds or credit obtained in terms of any form of interest-bearing arrangement.
The payment of interest by a non-resident who utilises or applies, in South Africa, any funds obtained in terms of an interest-bearing arrangement will therefore be from a South African source. It follows that payments of South African sourced interest by a non-resident in respect of a debt owing to another non-resident may be subject to the IWT. In many cases, the non-resident may be unaware of the South African withholding tax implications of utilising funds which are borrowed from another non-resident in South Africa.
The Amendment Act has now introduced an additional exemption from the IWT. In brief, the exemption will apply to any South African sourced interest paid by a non-resident to another non-resident unless –
- the non-resident payor is a natural person who was physically present in South Africa for a period exceeding 183 days in aggregate during the 12-month period preceding the date on which the interest is paid; or
- the debt claim in respect of which that interest is paid is effectively connected with a South African permanent establishment of the payor if the payor is registered as a taxpayer in terms of Chapter 3 of the Tax Administration Act, 28 of 2011.
Unlike the introduction of the "interest" definition as discussed above, the exemption has come into effect retrospectively and is deemed to have come into operation on the date that the IWT came into operation (i.e. 1 March 2015).
Therefore, provided the exclusions to the new exemption do not apply, South African sourced interest paid to a non-resident in respect of a debt owed by another non-resident is exempt from the IWT with effect from 1 March 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.