Most Read Contributor in South Africa, September 2016
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 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
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).