South Africa: The Introduction Of Withholding Tax On Interest - When Is Interest Due And Payable?

Last Updated: 23 February 2015
Article by Nicolette Smit and Chris de Bruyn

Most Read Contributor in South Africa, September 2018

With effect from 1 March 2015, withholding tax on interest will be levied at a rate of 15% in respect of interest that is paid by any person to or for the benefit of any foreign person, to the extent that the interest is regarded as having been received or accrued from a South African source. For purposes of the withholding tax, interest will be deemed to be paid on the earlier of the date on which the interest is paid or becomes due and payable

The phrase 'due and payable' is not defined in the Income Tax Act 58 of 1962 ("the Act") nor does the Explanatory Memorandum issued by the South African Revenue Service ("SARS") in respect of the Taxation Laws Amendment Bill of 2013 (which was promulgated as the Taxation Laws Amendment Act, 43 of 2014) provide any guidance in respect of the phrase 'due and payable'. 

For many years, there was a misconception that the phrase 'accrued to' was akin to 'due and payable' but the Supreme Court of Appeal (then the Appellate Division) decided in CIR v People's Stores (Walvis Bay) (Pty) Ltd (1990 (2) SA 353 (A)) that the phrase 'accrued to' meant 'entitled to' and not 'due and payable'.

In considering the meaning of 'due and payable', Olivier JA stated the following in Singh v C: SARS (2003 (4) SA 520 (SCA)):

"The ordinary meaning of 'due' is that there must be a liquidated money obligation presently claimable by the creditor for which an action could presently be brought against the debtor. Stated another way, the debt must be one in respect of which the debtor is under an obligation to pay immediately."

Olivier JA continued to state that:

"The word 'payable' can have at least two different meanings, viz '...(a) that which is due or must be paid, or (b) that which may be paid or may have to be paid.  The sense of (a) is a present liability - due and payable,  (b) a future or contingent liability"

Therefore, an amount may be due under a contract but may not be payable, as that amount may only be payable when the time for payment arrives. For an amount to be 'due and payable', it means that essentially the creditor must have the right to claim payment of that amount immediately and must be able to bring an action for payment of the amount if the debtor does not comply with his obligation to pay.

Accordingly, where a South African resident makes payment in respect of interest-bearing arrangements to non-resident creditors, the withholding tax will be levied on interest that is paid or becomes 'due and payable' on or after 1 March 2015 at a rate of 15%, subject to relief which may be afforded in terms of the applicable exemptions contained in the Act or a reduction in the withholding tax rate based on an applicable double taxation agreement. This would be the case even if the interest accrued (but remained outstanding) prior to 1 March 2015, if the terms are such that the interest was not due and payable prior to that date. It would therefore be advisable to evaluate the terms of existing interest-bearing arrangements which will continue through 1 March 2015 to determine the interest withholding tax implications thereof as from 1 March 2015, and to notify the non-resident creditor of this development. 

Where the non-resident creditor is exempt from withholding tax on interest or the non-resident creditor qualifies for a reduction in the withholding tax rate based on an applicable double taxation agreement ("DTA"), such non-resident must submit to the person making the payment a declaration in such form as may be prescribed by SARS. In addition to such declaration, the non-resident creditor also needs to submit a written undertaking in such form as may be prescribed by SARS to inform the person making the payment should the circumstances affecting the application of the DTA change. This declaration and written undertaking should be provided by a date determined by the person making the payment or if no such date is determined, then by the date of payment. It should thus be ensured that these requirements are complied with timeously, as otherwise the resident making payment of the interest must pay the withholding tax over to SARS. The non-resident must then submit the pertinent declaration to SARS within 3 years after payment of the interest in respect of which the declaration is made, in which case the relevant withholding tax will be refunded by SARS directly to the non-resident.

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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