Double taxation confusion on withholding tax resolved by SARS
Johannesburg, 6 March 2013 - An uncertain legal position that faced potential investors in South Africa has at last been resolved by SARS providing clarity on the provisions of South Africa’s double tax agreements which impacts on some countries, says Deloitte.
“The action, says Musa Manyathi, Associate Director at Deloitte, resolves a conflict that caused confusion when applying double tax agreement (DTA) to relieving withholding tax when dividends and other income are repatriated to foreign investors.”
“The classic example, says Manyathi, is the DTA between South Africa and the United States where Article 10 of this DTA reduces South African dividend withholding tax to 5%, subject to compliance with prescribed conditions.”
“However, there has long been uncertainty as to whether this article helps to reduce dividend tax given the fact that Article 2 (‘Taxes Covered’) specifically lists South African tax types the DTA applies to, in this case ‘normal tax’, which excludes withholding taxes.
“In addition, this DTA does not have the wording of the first two paragraphs of the “Taxes Covered” Article as found in the OECD Model Tax Convention, which states that “This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.”
“SARS has finally put this uncertainty to rest by releasing a Binding General Ruling 9 that identifies the taxes administered by SARS, which in its opinion constitutes taxes on income or substantially similar taxes for purposes of South Africa’s DTAs. This brings withholding taxes within the scope of our DTAs.”
“Whilst there may be some reservations about SARS using a binding general ruling to create legislation without following a due legislative process, the route SARS has decided to take is welcome as it finally brings certainty to the application of our DTAs to provide relief in respect of withholding tax on dividends and other income. The ruling will equally apply to interest withholding tax which is due to come into effect during the second quarter of this year,” says Manyathi.