Withholding Taxes on Service Fees Meets an Early Demise

By Esther van Schalkwyk, Senior Tax Consultant at BDO

The 2016 Budget proposed the withdrawal of the withholding taxes on service fees paid to foreign persons before it could take effect on 1 January 2017.

As this withholding tax introduced unforeseen issues, including uncertainty on the application of domestic tax law and taxing rights under tax treaties, Government proposed that it rather be dealt with as a reportable arrangement in terms of the Tax Administration Act.

SARS presumably wants to be alerted to the payment of substantial service fees to non-residents for rendering services in South Africa, as it may indicate the existence of undeclared permanent establishments by non-residents in South Africa.

The Commissioner published a revised notice listing reportable arrangements on 3 February 2016. The new notice replaces the previous notice on reportable arrangements, which was issued on 16 March 2015.

The new notice includes as a reportable arrangement an arrangement for the rendering of certain services listed below to:

1. a resident; or
2. a non-resident having a permanent establishment in South Africa to which that arrangement relates, in terms of which
   1. a non-resident or an employee, agent or representative of that person-
      1. was or is physically present in South Africa; or
      2. is anticipated to be physically present in South Africa, in connection with, or for purposes of, rendering those services; and
   2. the expenditure in respect of those services under that arrangement-
      1. incurred or to be incurred on or after the date of publication of the notice exceeds or is anticipated to exceed R10 million in aggregate; and
      2. does not qualify as remuneration as defined in the Fourth Schedule.

A wide array of services are included, such as consultancy, construction, engineering, installation, logistical, managerial, supervisory, and technical or training services.

Every participant to a reportable arrangement must disclose the prescribed information to SARS unless the participant obtains a written statement from another participant that the other participant has disclosed the reportable arrangement. Reportable arrangements must be reported within 45 business days after becoming a participant in a reportable arrangement or 45 business days after the date on which an arrangement qualifies as a reportable arrangement. Failure to disclose will result in severe penalties.

A participant includes a ‘promoter’, a person who directly or indirectly will derive or assumes that the person will derive a ‘tax benefit’ or a ‘financial benefit’ (as defined) by virtue of an arrangement or any other person who is a party to an arrangement listed in the notice issued by the Commissioner.

All participants in arrangements whereby service fees are paid to non-residents should therefore ensure that they comply with the disclosure obligations should the arrangement constitute a reportable arrangement in terms of the above criteria.