How Interest Withholding Tax affects you and your company.
As of 1 March 2015, interest payable by South African residents to or for the benefit of foreign persons may be subject to Interest Withholding Tax (IWT) at a rate of 15%.
What does this mean?
The IWT provisions will be applicable to interest that is paid or becomes due and payable on or after 1 March 2015.
Exempt from Withholding tax on interest (s50D) will be:
(a) interest paid to any foreign person:
(aa) the government -in the national, provincial or local;
(bb) any bank, the South African Reserve Bank, the Development Bank of Southern Africa or the Industrial Development Corporation; or
(cc) a headquarter company in respect of the granting of financial assistance to which s 31 does not apply as a result of the exclusions in s 31(5)(a); or
(ii) in respect of any listed debt; or
(b) interest payable as contemplated in s 21 (6) of the Financial Markets Act to any foreign person that is a client as defined in section 1 of that Act (Note 1).
Foreign natural person who was physically present in the RSA for more than 183 days in aggregate during the 12 months preceding the date of payment of the interest.
Interest on a debt claim that is effectively connected with a permanent establishment of a foreign person in the RSA IF that foreign person is registered as a taxpayer in terms of chapter 3 of the TAA.
In addition, the IWT provisions make allowance for a reduction in the rate of IWT where the provisions of a Double Taxation Agreement so provide.
How does this affect my company?
IWT will not necessarily be imposed upon accrual of interest (i.e. the date when the recipient acquires an unconditional right to the interest).
Furthermore, there is strong persuasive judicial precedent which indicates that an amount will only become ‘due and payable’ at the time at which payment of the amount is stipulated by the parties.
In our view, interest will only be ‘due and payable’ on the date at which the parties contractually agree that payment is due. This date can and frequently is a later date than the date on which the interest is deemed to have been incurred for income tax purposes. Where an amount of interest is incurred during a particular year of assessment but only becomes due and payable in a subsequent year of assessment, the interest will only be subject to IWT in that later year of assessment.
In other words: the year of assessment which the deduction is claimed for income tax purposes, may NOT be the same as the year of assessment the IWT becomes payable. IWT is therefore imposed when there is a cash outflow (repayment of loan and accumulated interest) or payment due in terms of loan agreement to or for the benefit of foreign persons (except where an exemption is available).
The following ‘terms’ are important to take note off:
Liability: foreign recipient of the interest
Withholding obligation: SA person paying the interest
Due date: end of the month following the month in which the interest is paid or becomes due and payable
A declaration (Withholding Tax on Interest Declaration (WTID) form) of reduced rates must be completed by the foreign person, before a payment of interest is made to SARS.
The WTID form must be kept for five years, by the payor, as you may be asked to send it to SARS. As with Dividends Tax, SARS only prescribes the form of this declaration, and the withholding agent needs to issue it on their letterhead to clients.
SARS have also issued a BRS that provides guidance on updating the IT3(b) to accommodate for withholding tax on interest.
The form to be submitted together with the payment of the withholding tax on interest, the WT002 form, was rolled out on eFiling on 22 May 2015. It can be found on your SARS eFiling profile under the ‘RETURNS’ tab, under the ‘Non-Core Taxes’ tab.
For further details on Withholding Tax on Interest (WTI), refer to SARS website.