Most Read Contributor in South Africa, November 2016
In just over 3 months' time, the interest withholding tax
("IWT") will come into effect - more
than four years after the initial release of legislation governing
the IWT provisions. The provisions appear to be fairly
straightforward and the parties likely to be affected by the IWT
should by now be prepared for the impact which the IWT will have.
However, there are aspects of the law which might not have been
fully considered to date. A few of these aspects are explored
The starting point is the taxing provision contained in section
50B of the Income Tax Act No. 58 of 1962 ("Act"). In
order for the IWT to apply, there must be interest
which is from a South
Africansource in terms of section 9(2)(b)
of the Act which is paid by any person to or for
the benefit of any foreign person (our emphasis).
What exactly is "interest" for purposes of the
By way of background, the definition of
"interest" contained in the initial
legislation released in respect of the IWT included interest as
defined in section 24J of the Act as well as deemed interest as
contemplated in section 8E. These references were subsequently
In terms of current legislation which will become effective on 1
January 2015, the term "interest" is not
defined. This is surprising since one would expect the
provisions to contain a definition of the very element which they
seek to tax.
In the report of the Standing Committee on Finance dated 11
September 2013, it was indicated that the IWT provisions will apply
to common law interest and that "as a
general rule of interpretation, in the absence of a specific
definition or cross reference to section 24J, the common law
definition will apply". This comment itself is
not binding on the South African Revenue Service,
nor is it law.
We note that "interest" is defined in the Act in
section 24J. In addition, section 50B of the Act refers to section
9(2)(b) of the Act. Section 9(2)(b) of the Act applies exclusively
to interest as defined in section 24J. On this basis, the interest
subject to the IWT may be interest as defined in section 24J.
The issue is that the scope of the "interest"
definition contained in section 24J of the Act extends
beyond common law interest. In particular, the definition
specifically includes any discount or premium in
respect of a financial arrangement as well as
compensation payable by a borrower to a lender in
terms of any lending arrangement. In addition, the provisions of
section 24J of the Act deem repurchase agreements and resale
agreements to be interest bearing. Qualifying
repurchase and resale agreements are
effectively treated as loans and the differential between the sale
price and resale price of the underlying asset constitutes interest
for purposes of section 24J of the Act.
Therefore, given the lack of the definition of
"interest" in the IWT provisions, the scope of
the IWT provisions could extend wider than the
legislator may have anticipated – ie to payments made in
respect of financial arrangements entered into at a discount or a
premium, lending arrangements, as well as repurchase and resale
Can the IWT apply to non-residents?
The IWT provisions apply to South African sourced
interest which is paid to or for the benefit of a foreign
person by any person.
The statutory source provisions in section 9(2)(b) of the Act
deem interest as defined in section 24J to be from a South African
source where that interest is, inter alia, received 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 paid by a non-resident borrower to
a non-resident lender may be subject to the IWT
where the non-resident borrower has utilised or applied in South
Africa, the funding obtained from the non-resident lender. This
will result in a withholding obligation being
placed on a non-resident. The impact of transactions such as these
entered into between non-resident counterparties may not have been
considered from a South African withholding tax perspective.
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, although details pertaining to the administrative
requirements relating to the IWT have not been released, the impact
of the above will likely result in non-residents having to
register as South African taxpayers in order to submit IWT
returns to the extent that the administrative provisions pertaining
to the IWT are similar to those of the dividends tax. This
may increase the tax compliance burden on
non-residents. For example, a non-resident may be required
to register as a taxpayer in order to submit an IWT return in
instances where the non-resident in question is not required to
make payment of any IWT.
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.
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