New Withholding Tax Rate - Does your Parent Country have a Treaty?
14 March 2017
By Roxanna Nyiri, Head of Transfer Pricing & International Tax and Jolani Proxenos, International Tax & Transfer Pricing Consultant, BDO South Africa
Mr Pravin Gordhan, in his 2017 Budget speech raised the withholding tax (‘WHT’) on dividends from 15% to 20%. This could have a negative effect generally on a South African subsidiary with a foreign parent in a non-treaty country.
In normal circumstances, dividends tax is raised on shareholders when they receive any payment from a resident company or if a non-resident company’s shares are listed on the South African Exchange. The company paying the dividend must withhold the dividends tax and pay it over to SARS. Exceptions do exist where dividends tax is not withheld, i.e. dividend payments made by qualifying headquarter companies.
As from 22 February 2017, dividends tax will be withheld at a rate of 20%, unless a treaty provision reduces the rate. Once the Government Gazette publishes a Tax Treaty, the provisions of that Treaty override domestic law. An example of where a treaty provision reduces the withholding tax on dividends rate is where a South African company pay dividends to a company situated in Mauritius, the withholding tax on the dividends would be reduced to 5% if the Mauritian company hold more than 10% shares in the South African company.
Many reasons and considerations exist when two countries are entering into a Tax Treaty. With South Africa being a capital import country, direct foreign investment is surely at the forefront when negotiating these treaties. With the fragile South African economy and not being considered as the only gateway into Africa anymore, foreign direct foreign investment has declined since 2015. Could South Africa afford to lose even more?
South Africa’s treaty network has become increasingly important over the last few years. South Africa is aligning itself with the international tax movement of the base erosion profit shifting (‘BEPS’) process and countries all over the world are climbing on board to combat harmful tax practices. If South Africa is willing to reduce the withholding tax on dividends paid to foreign companies in treaty countries to encourage foreign investment, could the opposite also be true? More importantly how will this impact the global effective tax rate when taxes are withheld at 20% on dividends paid to a foreign parent in the British Virgin Islands (a proud Tax Haven), compared to tax withheld at 5% on dividends paid to a foreign parent in the USA.
In its Economic forecast summary of South Africa (November 2016) the OECD projects an economic growth rebound in 2017 with 2018 showing an improvement. According to the OECD, the improvement will come from household consumption and investment, if the uncertain political circumstances disappear. Inbound investment from a treaty country where there is relief provided for withholding tax on dividends could on the face of it, certainly make more financial sense that from a non-treaty country.
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