Experts question raising of withholding tax

The importance of double tax treaties was put centre stage with the surprise announcement of higher withholding tax rates across the board by Finance Minister Pravin Gordhan in this year’s budget.

Some tax experts have questioned the wisdom of increasing the rates, even though SA has double tax treaties with most of its major trading partners, given that SA needs foreign direct investment. Tax treaties generally determine the amount of tax that a country can apply to a foreign taxpayer.

Mr Gordhan said on Wednesday the withholding tax on dividends, expected for some time to be 10%, would be 15% once the dividend tax replaced the secondary tax on companies. The rate at which tax will be withheld on royalties will rise from 12% to 15%, and interest earned by foreigners will be taxed at a withholding rate of 15% when it is introduced next year, and not at 10% as everybody thought.

A tax director at a leading Auditing Firm, said this increased the importance of treaties to foreign investors in SA, as many treaties would reduce the withholding tax on dividends to 5%, and on interest and royalties to 0%, provided the requirements of the treaties are met.

It seems SA is not far out of step with the rate at which it wants to withhold taxes on dividends, interest and royalties, but the wisdom of the move is nonetheless in question. A tax director at a Tax Firm, said there was no real concern that SA was following the African model, where taxes are not only withheld on dividends, interest and royalties, but also on management fees and other services.

The South African tax system is similar to those in the UK and Australia, where residents are taxed on their worldwide income and nonresidents only on South African-sourced income. Many African countries take a different view and withhold taxes even on foreign-sourced income, arguing that a deduction was claimed in their country even if the source of the income was not from the country. “We have never done that, but if we do we should be worried,” he said.

He was somewhat surprised by the decision to lower the tax rate on nonresident companies from 33% to 28%, and said many investors, when considering whether to establish a subsidiary or a branch in SA, would not have a difficult choice if tax was the only issue. A subsidiary will have an effective tax rate of 38,8% (should there be no double tax agreement) if it declares dividends, whereas there is no other tax payable when branch profits are remitted abroad.

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