While the withholding tax on royalties (12%) has been levied for a couple of decades already, the South African Revenue Service (SARS) has only recently introduced a withholding tax on non-resident sports persons and entertainers (15%), a 15% withholding tax on dividends and a withholding tax on immovable property (5% to 10%).
A proposed 15% withholding tax on interest from 2015 is also in the pipeline. Internationally, tax authorities use withholdings tax as a mechanism to collect taxes from non-residents who may not be easily accessible. Tax authorities also favour the tax due to the relative ease of administration thereof.
Speaking to Moneyweb on the eve of the South African Institute of Chartered Accountant’s (Saica) 2013 Tax Conference, Prof Osman Mollagee, partner: international tax services at PwC, said the concept of “beneficial ownership” will probably receive increasing attention from tax authorities.
Although the term has been in tax treaties for decades, it has only recently been introduced in local tax law and has never been challenged on domestic soil. There is thus a lot of uncertainty around what it is and when it can be applied.
Mollagee says beneficial ownership is specifically relevant due to the international outcry against “treaty shopping”. Treaty shopping refers to the use of a conduit country as part of a transaction purely for the sake of getting tax treaty benefits.
“Very simplistically it means that you decided on a separate third location that has nothing to do with the deal but you decided to use that as an intermediary purely because of the double-tax agreement network.”
Mollagee says to counter the inappropriate use of double taxation agreements treaties will usually state that the taxpayer will only qualify for the benefit of the treaty if the interest, dividends or royalties “is beneficially owned” by the taxpaying company or person.
The question the taxpayer has to answer is whether it is the beneficial owner of the amount of interest, dividends or royalties that it received, or whether it actually belongs to someone else, he says. Mollagee says the concept of beneficial ownership is new to South Africa. Major court cases internationally have also not interpreted the concept the way tax authorities would have hoped.
With regards to the international outcry against tax base erosion and profit shifting (Beps), the abuse of treaties (and beneficial ownership) is one of the issues the Organisation for Economic Co-operation and Development (OECD) is unhappy with.
“One of the points that the OECD is making at the moment, and certainly South Africa is going to want to jump on this bandwagon, is that all income must be taxed somewhere. So as soon as you have any kind of structure which results in income flowing from one place to another place without any taxation along the way, my expectation is that South Africa is going to be as opposed to that as basically the richer nations and the OECD.”
Mollagee says against this background SARS will probably now start to take a harsher stance against treaty abuse, which may include a closer look at beneficial ownership – mainly because there is no local definition of the concept and because the international precedent has been less than satisfactory.