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South Africa: Tax Treatment of Certain Fees Charged with Respect to Services Provided in Africa
by
Yasmeen Suliman, KPMG Services (Proprietary) Limited, South Africa
Companies with operations in African countries often import technical and consulting services from other countries. Increasingly, these services are being imported from South Africa. Many multi-national companies are also seeing opportunities for above-average growth in several African countries and, as a result, are expanding their operations into these countries.
Often the operation in an African country will depend on services provided in return for a fee—such as management services, technical services, or consulting services. For example, an oil company operating in Angola may need to import the services of qualified engineers, so that its plant and safety standards are maintained properly.
The following discussion focuses on the implications associated with the provision of these services by a South African entity.
Withholding Tax or Reverse VAT on Fees
Many African countries impose a withholding tax on fees paid to foreign jurisdictions. The tax is very often a final tax and can be levied at rates as high as 20% in certain countries (including Mozambique, Zimbabwe, and Kenya). In addition, the tax authority in certain jurisdictions may impose “reverse VAT” on the foreign service, which if not properly structured, can result in unnecessary additional taxation cost.
South Africa adopts a residence-basis of taxation. Therefore, the gross amount of the fees (before the deduction of foreign withholding taxes) would be included in income.
Given this situation, the question is: Is there any tax relief available to a South African company for the tax payable in the foreign country? There are two possible forms of relief available:
- Bilateral relief—potentially available when South Africa has entered into an income tax treaty with the foreign country
- Unilateral relief—potentially available to South African taxpayers through section 6quat of the Income Tax Act.
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Bilateral Relief
The fees charged for management, technical assistance, and consulting typically form part of business profits. Generally, an income tax treaty provides that, unless they are earned by a permanent establishment in the foreign country, the fees will only be taxed in South Africa. For example, in terms of Article 7 of the recent income tax treaty between Mozambique and South Africa, the profits of an
enterprise of South Africa are taxable only in South Africa, unless the enterprise carries on business in Mozambique through a permanent establishment situated in Mozambique.
KPMG Observation
Because of possible differences among the provisions of income tax treaties to which South Africa is a signatory country, prudent taxpayers would closely examine the relevant provisions of an applicable income tax treaty to determine if any bilateral relief exists.
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Unilateral Relief
In situations when there is no income tax treaty, or when the income tax treaty does not provide any tax relief, there may be some relief available in South Africa’s domestic law.
In terms of section 6quat of the Income Tax Act, a tax credit is available for foreign taxes paid by residents in respect of income that is derived from a source outside South Africa.
In the case of fees, if the work is done in the foreign country or is attributable to a permanent establishment situated in the foreign country, then the source of the fees is likely to be the foreign country. A tax credit for any foreign taxes incurred (withholding tax) can be claimed against the South African tax payable, but is limited to the amount of South African tax attributable to the foreign income inclusion.
Often, because the withholding tax is imposed on the gross amount of the fees, the tax credit available in South Africa is limited. This is due to the fact that, after taking expenses into account, the South African tax attributable to the foreign income will be lower than the withholding tax paid. In this case, the excess tax credit may be carried forward to the next tax year.
KPMG Observation
The excess tax credit can only be carried forward for a period of seven years after the year of assessment in which it arose—after that period, the credit expires and is lost.
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When the fees are derived from a source in South Africa (for example, the fee is for services that were rendered from South Africa), then the tax credit is not available. In terms of section 6quat(1C), the South African company may however claim a deduction of the foreign tax payable and pay South African tax only on the net amount.
KPMG Observation
Taxpayers providing services to entities in foreign jurisdictions need to evaluate and consider possible tax implications before completing the agreement. Failing to consider the tax issues properly could mean that the fees could be subject to double tax and in certain cases rendered non-claimable “reverse VAT” which could render the provision of the services economically unviable.
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For more information, contact a tax professional with KPMG in South Africa:
Yasmeen Suliman, +27 (0) 31 327 6067,
yasmeen.suliman@kpmg.co.za
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