Withholding taxes: practical considerations and best practices

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Withholding taxes: practical considerations and best practices

There are numerous considerations one must keep in mind when dealing with entities in foreign countries. One of these considerations is withholding taxes on services rendered in foreign countries and the various ways to claim these back, which we will discuss in more detail below.

South African tax residents, including companies, are subject to income tax on their worldwide taxable income, regardless of the source of the income. Foreign-source amounts derived by a tax resident may under specific circumstances be taxed by the foreign country (authority) as well as South Africa (SA), resulting in double taxation.

When conducting business in foreign countries, tax is usually withheld on the customer invoice before the “net income” is paid over to the South African supplier. However, the total amount still needs to be included in the supplier’s income. The customer is liable to pay the tax component over to their relevant Revenue Authority, after which a certificate will be issued.

Relief from double taxation is normally granted by the South African Revenue Service (SARS). In many instances, countries provide relief from double taxation under a tax treaty, although many countries (including SA) also provide unilateral tax relief in their domestic tax law. The tax treaty of each country determines the type of services on which tax should be withheld, and the applicable rates.

SA provides relief from double taxation by rebate methods or a deduction for foreign taxes payable on income subject to normal South African tax. The rebate- and deduction methods are supplemented by certain exemptions for foreign-source amounts received by or accrued to residents.

The most common rebate is excised under section 6quat(1). This offers a rebate of foreign taxes on income to be deducted from ordinary tax payable by a resident. The rebate amount is determined with the following formula:

the lesser of the actual foreign tax credits withheld and

[Foreign taxable income / Total taxable income x Normal tax payable].

Foreign tax rebates can only be claimed to the extent the foreign tax is payable to a sphere of government of a foreign country without a right of recovery by any person.

Where qualifying foreign taxes that are payable exceed the rebate amount, the excess amount is carried forward to the following year of assessment. Any balance of excess foreign taxes may not be carried forward for more than seven years, calculated from the year of assessment in which the balance was carried forward for the first time.

Supporting documents

The foreign tax credit is claimed as part of the taxpayer’s income tax return. When SARS audits a return, the following minimum information is usually required:

  • Date of each transaction;
  • Relevant customer;
  • Country in which withholding tax was applied;
  • Indication of whether goods or services were required, and where services were provided, a description of the services rendered;
  • The location where services were rendered;
  • Amount of foreign income included in taxable income;
  • Foreign tax amount;
  • The exchange rate used, and
  • Rand amount of tax claimed

A person must, on request, provide certified copies of:

  • a certificate of tax withheld, issued by the person withholding the tax; or
  • a copy of a receipt issued by the relevant revenue authority as evidence of payment to the revenue authority of the amount of tax withheld.

SARS may require a person to have any documentary evidence worded in a foreign language translated to English by a sworn translator. Additionally, a certificate prepared by the translator officially stating that the translation is a true rendition of the original may also be requested.

Best practices

When dealing with withholding taxes and foreign tax credits, the following best practices may be of value:

  • Consider splitting invoices between goods and services to ensure that withholding tax is calculated on the correct amount (usually only services) and not goods as well.
  • Please make the necessary arrangements with customers to obtain the relevant withholding tax certificate from their country’s Revenue Authority to ensure that certificates are obtained timeously and can be claimed in the correct period.
  • Ensure beforehand that you and your clients are on the same page with regards to requirements and practical implementation of withholding taxes.
  • Where possible, disclose as much as possible information the relevant invoice / keep a separate schedule noting this information (refer to supporting documents)
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