By Ide Louw
South Africa introduced the dividends tax on 1 April 2012. The withholding tax regime was widened, with the introduction of interest withholding tax (15%) from 1 July 2013, whilst the withholding tax on royalties regime was to be overhauled, and the rate of tax would also increase from 12% to 15% also effective 1 July 2013.
The Minister of Finance announced in the 2013/14 Budget Speech that the effective date for the new interest and royalty withholding tax regimes will be delayed until 1 March 2014. The 2012 draft Taxation Laws Amendment Bill contained certain provisions whereby a deduction in respect of cross-border interest and royalty payments were deferred until the date of payment. These provisions did not form part of the final 2012 Taxation Laws Amendment Bill when it was introduced in parliament for promulgation, and as expected, the provisions were deferred for introduction in 2013 / 14.
South Africa will also introduce a new withholding tax on services from 1 March 2014. It is expected that this tax will be levied at a rate of 15%, with relief provided where a double tax treaty is available.
It is interesting to note that South Africa's double tax treaties provide for a withholding tax to be imposed by the source country in limited instances (for instance, the double tax treaty with India and the double tax treaty with Botswana contain such provisions). Accordingly, South Africa will generally not have the right to impose a withholding tax on cross-border services where a double tax treaty does not provide for such taxation. The reason for this is that the non-resident may be provided with relief under the double tax treaty if it does not have a permanent establishment in South Africa.
Gateway to Africa
A new cash management gateway regime for African and offshore operations is proposed in the 2013/14 Budget. The new regime should not be confused with the headquarter company regime which was introduced on 1 January 2011, as it serves a different purpose.
In terms of the proposal, a JSE listed company will be entitled to incorporate a South African subsidiary (as intermediate holding company) to hold African and offshore operations. Although the intermediate holding company is a South African tax resident, it will not be regarded as a resident for exchange control purposes, hence does not need approval to invest offshore. Other conditions for the new regime will be as follows –
- Transfers from the parent company would be limited to R750 million, but additional amounts may be applied for
- Cash pooling, which is generally restricted for exchange control purposes will be allowed – hence, the intermediate holding company may operate as cash management centre
- The intermediate holding company can raise capital offshore, but South African guarantees are not allowed
- The intermediate holding company may elect their functional currencies and may operate foreign currency accounts. It is also considered that these companies may use a foreign functional currency, hence not being subject to South Africa’s foreign exchange gains and loss rules.