Withholding taxes: a costly administrative burden?

Fiona Zerbst, FAnews Online Editor

South Africa has had the distinction of being one of the few African countries that doesn’t impose a requirement to deduct tax on payments to non-residents, but a withholding tax on cross-border service fees will be introduced from 1 March 2014. Governmen

This announcement has been made against the backdrop of the introduction of a withholding tax on dividend and interest payments and an increase in the rate of withholding tax on royalties.

The question is, why are we departing from international norms in this regard? There are two possible reasons – one, the fact that it’s ‘easy money’ for government; and two, government intends aligning all withholding taxes (including the dividends tax and withholding tax on interest) so the rates are aligned – the proposed rate is 15%.

And while this may put off new investors who are considering investing in South Africa, the possible adverse economic impact is twofold. “We can’t really say exactly how South African businesses will be affected, but the real cost of implementation will affect profit margins,” says Jelle Keijmel, a senior manager in PwC’s international tax team.

A withholding tax should be an advance payment of tax on profits but, in practice, a withholding tax is inadvertently imposed on turnover at percentages that range from 5% to 20%, which effectively erodes the profit margins made by businesses. To safeguard their margins, non-resident service providers tend to price-in the effect of this tax, which ultimately increases the cost of doing business for local businesses with a potential ripple effect on the prices of goods and services across the nation.

An administrative burden

Until recently, South Africa only imposed a withholding tax on royalty payments and certain disposals by non-residents, as well as on payments to entertainers and sportspeople who visit the country. But times are changing. In fact, withholding taxes are common in developed countries, with the amount withheld and paid taking the form of pre-payment of income tax – it’s refundable if it exceeds the income-tax liability that’s determined when annual tax returns are filed.

As an international concept, a number of countries require tax to be deducted in advance on payments to non-residents, such as dividend, interest, royalty and rent. This is simple for governments to administer.

If you are used to obtaining services from abroad, be prepared for an administrative burden – you’ll be obliged to deduct the tax, remit the tax to SARS and ensure proof of the tax is obtained from SARS and sent to the service provider. “Although guidelines on compliance with the administration of the tax are yet to be released, this unrewarded obligation will require a fair amount of investment (both time and infrastructure) and recurring man hours from taxpayers,” says Brandt.

“Service payments which tend to be more frequent will no doubt require significant man hours in terms of administration as well as upgrades to existing accounting systems.”

Editor’s thoughts:
At the very least, aligning and co-ordinating these withholding taxes, will assist companies who have foreign clients and service providers, and tax practitioners will be able to advise their clients in terms of logistics. What do you think of the withholding taxes – are they likely to drive away foreign investment? Comment below or email fiona@fanews.co.za.