By Jolani Proxenos, BDO South Africa
Over the last few years, increasingly more South African companies are considering to expand their businesses into Africa. However, the effects of withholding tax (‘WHT’) on the profit of the company is not usually one of the things thought of, until it is too late!
WHT is a tax levied on the payer of an item of income and could, if not properly planned, have a significant impact on company profit levels.
The following example illustrates how quickly WHT can go wrong:
A South African resident company (ABC) provides technical services to a resident company in an African country (XYZ). The income of these technical services is derived from a South African source as per Section 9 of the Income Tax Act. However, the domestic tax legislation of XYZ also creates the connection for the African country to tax the services in XYZ.
Because ABC is a South African resident, it is taxed based on the residence-based taxation (worldwide income). ABC will be taxed in both countries on the same income resulting in double taxation.
South Africa has entered into Double Tax Agreements (‘DTAs’) with some African countries to eliminate the risk of double taxation. Even though the domestic tax legislation of the contracting states creates a taxing right on a specific income, the DTA allocate the taxing right of the specific income to a specific country. However, African countries are notorious for not implementing the provisions of a DTA, leading to double taxation even with a DTA.
In the above example, should the African country withhold taxes on the service fees before it is paid to ABC, ABC would not be able to claim the credit available in Section 6quat of the Income Tax Act. Section 6quat will not be available because the African country did not have the right to tax that specific income, SARS will not allow the credit.
The only available option for ABC is now to approach the tax authority of the African country and try to claim the refund on those taxes withheld wrongfully. This route is a long and expensive battle that can be avoided.
How to avoid the WHT pitfalls
If your company is considering operating int an African country, first establish whether South Africa has entered into a Double Tax Agreement with that country. If an agreement is in force, establish the WHT rates in terms of the specific DTA. Below is a table of the DTAs South Africa has entered into with African countries and the WHT rates specified therein:
| Country |
Dividends |
Interest |
Royalties |
| Algeria |
10%/15%* |
10% |
10% |
| Botswana |
10%/15%* |
10% |
10% |
| Democratic Republic of Congo |
5%/15%* |
10% |
10% |
| Egypt |
15% |
12% |
15% |
| Ethiopia |
10% |
8% |
Domestic rates apply |
| Ghana |
5%/15%** |
10% |
10% |
| Kenya |
10% |
10% |
10% |
| Lesotho |
10%/15%** |
10% |
10% |
| Malawi |
No provision made in DTA. South African domestic rates apply. |
No provision made in DTA. South African domestic rates apply. |
Exempt in resident State if taxed in source State. |
| Mauritius |
5%/15%** |
0% |
0% |
| Mozambique |
8%/15%* |
8% |
5% |
| Namibia |
5%/15%* |
10% |
10% |
| Nigeria |
7.5%/10%** |
7.5% |
7.5% |
| Rwanda |
10%/15%* |
10% |
10% |
| Seychelles |
5%/10%** |
0% |
0% |
| Swaziland |
10%/15%* |
10% |
10% |
| Tanzania |
10%/15% |
10% |
10% |
| Tunisia |
10% |
12% |
10% |
| Uganda |
10%/15%* |
10% |
10% |
| Zambia |
No provision made in DTA. Domestic rates apply. |
No provision made in DTA. Domestic rates apply. |
Exempt in resident State if taxed in source State |
| Zimbabwe |
No provision made in DTA. Domestic rates apply. |
No provision made in DTA. Domestic rates apply. |
Exempt in resident State if taxed in source State |
*The lower WHT rate is applied when the beneficial owner is a company with at least 25% of the capital of the company paying the dividend. In all other cases the higher rate is applies.
**The lower WHT rate is applied when the beneficial owner is a company with at least 10% of the capital of the company paying the dividend. In all other cases the higher rate is applied.
***The lower WHT rate is applied when the beneficial owner is a company with at least 15% of the capital paying the dividend. In all other cases the higher rate is applied.
South Africa does not levy withholding tax on services, however, provision is made for reportable arrangements should non-residents provide services in South African that exceed the threshold. Other African countries may levy WHT on services in terms of their domestic tax legislation.
We recommend that before your company starts doing business in an African country, that you seek professional tax advice on the risks involved and how your company will be affected. Also obtain a practical risks assessment which will highlight each tax implication and not just WHT.
We further recommend that the local authority from the specific African country be approached to obtain their interpretation of the provisions of the DTA and how this is applied together with their domestic tax legislation.
How can BDO help you
We at BDO keep up to date with the changes in tax legislation, we have extensive practical knowledge of the WHT regime in South Africa and the African countries. With BDO offices situated in the majority of African countries, we have in-country experts that can assist with domestic legislation and practical knowledge. BDO can assist you from the planning phase to the implementation to make sure that that your expansion into Africa is as easy and painless as possible.
By taking the time to plan the expansion of your business and with the right partner in BDO, WHT will not be the obstacle to your expansion plans into Africa.
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