Withholding Tax On Interest

Withholding tax on interest became a resident chapter of the Income Tax on 1 March 2015 and it relates to interest that is paid or becomes due and payable on or after that date, by any person to or for the benefit of a foreign person including individuals, companies, etc. from a source within South Africa. Sections 50A to 50H under Part IVB of the Income Tax Act deal with withholding tax on interest.

Withholding tax on interest is a certainty and taxpayers ought to acquaint themselves with how this tax newcomer applies in our environment.

A simple practical illustration of such application is when a foreign non-resident company, with no permanent establishment in the Republic, invests in a local entity and becomes its shareholder, and subsequently loans funds to the resident company. In all probability, the lender would require interest on the advanced loan to its subsidiary. This interest will be subject to withholding tax on interest. The non-resident does not necessarily need to be a corporate entity, it could be a non-resident individual, trust etc.

Ensuing from the above occurrence, the aspect to consider is the “thin capitalisation”, or the “transfer pricing”, as contained in the provisions of Section 31 of the Income Tax Act. The cited section deals with the application of the arm’s length basis in the context of determining whether a taxpayer is thinly capitalised and, if so, calculating taxable income without claiming a deduction for the expenditure incurred on the excessive portion of finance. Taxpayers are financed generally in two ways, which are through the use of equity capital and debt. The returns on equity capital and debt capital are treated in different ways for income tax purposes.

With such composite options available to taxpayers and the intricacies faced in ensuring compliance with tax laws, it is advisable that taxpayers seek assistance from experienced tax professionals, when dealing with withholding tax on interest.

Interest

Interest is defined in Section 50A, as contemplated in paragraph (a) or (b) of the definition of interest in Section 24J (1) of the Act, and it includes the gross amount of any interest or similar finance charges, discount or premium in respect of a financial arrangement and any amount payable by a borrower to a lender in terms of a lending arrangement as represents compensation for any amount to which the lender would have been entitled, but for the lending arrangement.

Section 9 (2) (b) of the Income Tax Act specifies the source of income, being the Republic, if that income constitutes interest.

Levy of withholding tax on interest

Section 50B of the Income Tax Act stipulates that withholding tax is levied at the rate of 15 per cent of any interest paid by any person to or for the benefit of any ‘foreign person’ to the extent that is it is regarded as being from a source in the Republic. The interest is deemed to have been paid on the earlier of the date on which the interest is paid, or becomes due and payable.

The withholding tax on interest is a final tax, meaning that taxpayers need not to submit annual returns of income if the interest is the only income received by the foreign person. The withholding tax on interest is shown separately from the normal tax liability as withholding tax.

Liability for withholding tax on interest

If interest has been received by, or accrued to, a foreign person, from a source within the Republic, then that foreign person is liable for the withholding tax on interest. When an amount of withholding tax on interest was withheld, as contemplated in Section 50E (1) and paid, as contemplated in Section 50F (2), that amount must be regarded as an amount paid in respect of that foreign person’s liability for withholding tax on interest.

Exemptions from withholding tax on interest

Interest from a source within the Republic received by, or accrued to a foreign person is exempt from the withholding tax on interest in the following instances:

  • If paid by the government of the Republic in the national, provincial, or local sphere, or by any bank, the South African Reserve Bank, the Development Bank of Southern Africa, or the Industrial Development Corporation;
  • If paid by a headquarter company in respect of the granting of financial assistance as defined in Section 31(1), the aforementioned provision does not apply as a result of the exclusion contained in Section 31(5)(a) as stated in both sections in the Act.
  • If paid in respect of a listed debt, defined as any debt listed on recognised exchange as defined in para 1 of the Eighth Schedule;
  • If payable as envisaged in s 21(6) of the Financial Markets Act 19 of 2012 to any foreign person who is defined as a client in terms of Section 1 of that Act;
  • If the interest paid to a foreign person in respect of a debt owed by another foreign person unless:
  1. The other foreign person is a natural person who was physically present in the Republic for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the interest was paid, and;
  2. The debt in respect of which that interest was paid is effectively connected with a permanent establishment of that other foreign person in the Republic if that other foreign person is registered as a taxpayer in terms of the requirements of Chapter 3 of the Tax Administration Act;
  • If the interest is paid to:
  1. the African Development Bank established on 10 September 1964;
  2. the World Bank established on 27 December 1945, including the International Bank for Reconstruction and Development and International Development Association;
  3. the International Monetary Fund established on 27 December 1945;
  4. the African Import and Export Bank established on 8 May 1993;
  5. the European Investment Bank established on 1 January 1958 under the Treaty of Rome; or
  6. the New Development Bank established on 15 July 2014.
  • If the Interest is paid to a foreign person in respect of any amount advanced by that foreign person to a bank, the interest is not exempt from the withholding tax on interest if it is advanced in the course of any arrangement, transaction, operation or scheme to which the foreign person and any other person are parties and in terms of which the bank advanced any amount to that other person on the strength of the amount advanced by the foreign person to the bank.
  • Interest paid to a foreign person is exempt from withholding tax on interest if:
  1. That foreign person is a natural person who was physically present in the Republic for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the interest was paid, or:
  2. The debt in respect of which that interest was paid is effectively connected with a permanent establishment of that other foreign person in the Republic if that other foreign person is registered as a taxpayer in terms of the requirements of Chapter 3 of the Tax Administration Act;

Payment and recovery of withholding tax on interest

Any person who makes payment of any amount of interest to or for the benefit of a foreign person, must withhold an amount of withholding tax on interest, calculated at a rate of 15 per cent, from that payment. A person must not withhold any amount from the payment, to the extent that the interest is exempt from withholding tax on interest, or if the foreign person to or for the benefit of which that payment is made, submits to the person making the payment, a declaration in such form, as prescribed by the Commissioner, that the interest is exempt from withholding tax, due to the operation of an existing double taxation agreement.

If a foreign person is liable for the withholding tax on interest in respect of an amount paid to or for his benefit, he must pay the tax and submit a return by the last day of the month following the month of such payment, unless the tax has been paid by another person.

Any person withholding the tax must submit a return and pay the tax to the Commissioner by the last day of the month following the month in which the interest is paid. Where a person withholds the tax in respect of interest due and payable but not actually paid, he is required to submit a return by the last day of the month following the month during which the interest became due and payable.

Refund of withholding tax on interest

Where the withholding tax is withheld because the necessary declaration was not made timeously by the non-resident, it must be refunded by the Commissioner if the declaration is submitted within three years after the date of payment of the interest. Section 50G(1) provides that where:

  • an amount is withheld from a payment of interest,
  • a declaration of exemption or of a reduction in the rate of tax (as provided for in s 50E(2)(b) or (3)) is not submitted to the payer by the date of payment of the interest, but
  • such a declaration is submitted to the Commissioner within three years after the payment of the interest covered by that declaration,

then so much of the amount that would not have been withheld had the declaration been timeously submitted, is refundable by the Commissioner to the payer.

Where withholding tax is paid in respect of interest that became due and payable and the amount of interest subsequently becomes irrecoverable, so much of that amount as would not have been paid had the interest not become due and payable, is refundable by the Commissioner to the person who paid the tax.

These provisions apply ‘notwithstanding Chapter 13 of the Tax Administration Act’. The refunding of amounts paid by a taxpayer to SARS is provided for partly in the Income Tax Act and partly in Chapter 13 of the Tax Administration Act.

Currency of payments made to SARS

If an amount of tax, which is withheld by a person in respect of the withholding tax on interest, is denominated in a foreign currency, the amount to be withheld and paid to the Commissioner must be translated to the currency of the Republic at the spot rate prevailing at the date on which the amount was so withheld.

Applied perspective

We, as tax consultants, specialising in niche complex tax matters, offer comprehensive opinions and advice on withholding tax on interest, as well as filing of the required returns at SARS.

contact@taxconsulting.co.za