close
Share with your friends

South Africa: Cash-flow issues relating to withholding tax on dividends, interest, royalties (COVID-19)

South Africa: Cash-flow issues, coronavirus

Taxpayers in South Africa need to be aware of any agreements or declarations that may give rise to withholding taxes on dividends, interest or royalties in light of the cash-flow challenges relating to the coronavirus (COVID-19) pandemic.

1000

Related content

In particular, taxpayers will want to determine that the liability for these withholding taxes does not arise prior to cash being available to settle these tax liabilities. A key tax principle is that liability for withholding taxes is triggered on the earlier of the date that the dividend, interest or royalty is paid and the date when it becomes “due and payable.” This means that it is possible for the withholding tax to be due to the South African Revenue Services (SARS) before the dividend, interest or royalty is actually paid.

The phrase “due and payable” is not defined in the income tax law, and there is case law addressing the meaning of the term. The position of SARS is that for an amount to be due and payable, the amount must be owed and the recipient must also have a right to claim payment of the amount. Thus, an amount becomes “due” when the stipulated date for payment has arrived. This is the position of SARS across the spectrum of withholding taxes (i.e., in relation to dividends, interest and royalties).

The withholding obligation will only arise when both conditions are met (the withholding tax must be both due and payable). Businesses therefore need to be mindful during the “lockdown period” of the details of any agreements that give rise to withholding tax obligations.

The following is a simple example illustrating the implication of the term “due and payable” given the cash-flow implications of COVID-19.

B (a non-South African resident) loans an amount to Company D (a South African resident taxpayer) on 1 March 2019. In terms of the written loan agreement, B is entitled to interest of 5% per annum on the loan balance, payable annually on 1 April. Interest is determined monthly and capitalised to the loan account.

Because of COVID-19-related cash-flow issues, Company D does not have the cash reserves to pay the interest on 1 April 2020. In this situation, even though the interest has not yet been paid on 1 April, interest withholding tax will still be triggered on 1 April 2020 because this is when the interest became due and payable. The withholding tax on interest (15%) will need to be paid to SARS by 31 May 2020 (subject to any relief in terms of a relevant double tax agreement). This tax, as well as penalties and interest that may be levied by SARS if the withholding tax is not paid when it is due, can be a cash- flow management issue.

Read an April 2020 report [PDF 338 KB] prepared by the KPMG member firm in South Africa

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal