Source information: SARS INTERPRETATION NOTE 116, dated 23 April 2021, and the INCOME TAX ACT 58 OF 1962, SECTIONS 49A to 49H
The 40-page SARS Note provides guidance on the interpretation and application of sections 49A to 49H related to withholding tax on royalties.
This article, the fourth in a series, summarises the liabilities for the taxpayer.
Liability for the payer and the recipient of South African-source royalties
Withholding tax on royalties must be levied on South African-source royalties paid to or for the benefit of a foreign person. The withholding tax on royalties system imposes liabilities on both the payer of the royalty and the foreign person that receives it or for whose benefit it is paid. Generally, the payer is required to withhold the tax from the royalty payment and to pay it to SARS, and the foreign person is liable for the tax unless it has been paid over to SARS by someone else. These liabilities are considered below.
Liability for withholding tax on royalties
Section 49C(1) places the liability for withholding tax on royalties on the foreign person to whom or for whose benefit the royalty is paid, that is, actually paid or becomes due and payable. If the withholding tax on royalties has been withheld as required by the payer and paid over to SARS as required, it will be regarded as being paid in respect of, and therefore discharging, the foreign person’s liability for withholding tax on royalties. The foreign person’s liability for withholding tax on royalties will not be discharged if the withholding tax on royalties is withheld by the payer but not paid over to SARS.
Liability to withhold the tax
Although the liability for withholding tax on royalties is on the foreign person to whom or for whose benefit the royalty is paid, an obligation to withhold the tax rests on the person making the payment of the royalty under section 49E(1). The term “paid” is defined as the earlier of payment or being due and payable, and therefore withholding tax on royalties must be “withheld” on the earlier of the actual date of payment or when the royalty becomes due and payable.
Under section 156 of the TA Act, this person is referred to as a withholding agent. A “withholding agent” means “a person who must, under a tax Act, withhold an amount of tax and pay it to SARS”.
The person paying the royalty is thus obliged to withhold the withholding tax on royalties on the gross amount paid to or for the benefit of the foreign person unless an exemption applies. The tax so withheld and paid over to SARS as required is regarded as a payment made on behalf of the foreign person. The payer of the royalty must therefore ascertain the identity of the beneficial recipient of the royalty payment to be able to comply with the requirements of section 49E.
Such an enquiry is particularly important when royalty payments are made to trustees or nominees holding investments on behalf of others.
A withholding agent will be personally liable for the withholding tax if that agent withholds an amount but does not pay it to SARS, or does not withhold an amount that should have been withheld.
If a withholding agent is held personally liable for an amount of tax as indicated above and the amount is paid to or recovered by SARS from the withholding agent, that amount is regarded as an amount of tax which is paid on behalf of the relevant taxpayer in respect of the taxpayer’s liability under the relevant tax Act.
Section 160(1) of the TA Act provides that a representative taxpayer, withholding agent or responsible third party that, as such, pays a tax is entitled to recover the amount so paid from the person on whose behalf it is paid; or to retain out of money or assets in that person’s possession or that may come to that person in that representative capacity, an amount equal to the amount so paid.
Unless otherwise provided for in a tax Act, a taxpayer on whose behalf an amount has been paid to the Commissioner by a withholding agent under a tax Act or by a responsible third party under section 179 of the TA Act, is not entitled to recover from the withholding agent or responsible third party the amount so paid. The person is, however, entitled to recover the amount of an unlawful or erroneous payment from SARS.
Release from the obligation to withhold tax
Under section 49E(2), no obligation to withhold tax will arise:
• to the extent that the royalty is exempt under section 49D(c); or
- if the foreign person to or for the benefit of which the payment of the royalty is to be made has submitted, before the royalty is paid, the following to the person making payment: a declaration in such form as prescribed by the Commissioner that the person is exempt from withholding tax on the royalty payment under section 49D(a) or (b) (see 4.6.1 and 4.6.2); and
a written undertaking in such form as prescribed by the Commissioner to inform the person making the payment in writing should the circumstances affecting the above-mentioned exemption change or should the royalty no longer be for the benefit of that foreign person.
The date of payment of the royalty is the earlier of the payment due and payable.
With effect from 1 October 2020, the declaration and written undertaking submitted to the person making payment will expire and be invalid after five years from the date of the declaration.
A declaration and written undertaking may expire and be invalid before the automatic expiry after five years from the date of the declaration as referred to above. A declaration and written undertaking will also expire and be invalid as from the date that the foreign person’s circumstances change and the information contained in the declaration or written undertaking is no longer accurate. For example, the foreign person’s circumstances may change 12 months after giving the declaration, such that they no longer meet the requirements in section 49D(a) or (b) for the exemption. In such a case, the declaration and undertaking expire and are invalid from the date the circumstances have changed and the information in the declaration or written undertaking is inaccurate.
Once a declaration and written undertaking have expired they will no longer meet the requirements for no withholding tax on royalties to be withheld (see above) and the full rate of 15% must be held unless a new and current declaration and written undertaking have been completed and submitted by the foreign person before the royalty is paid.
For example, if a declaration and written undertaking were submitted by a foreign person on 1 January 2016 and a royalty is paid to the foreign person on 1 January 2021 without that foreign person having submitted a new declaration and written undertaking, the person making payment must withhold withholding tax on royalties at the full rate of 15%.
In summary, if the declaration and written undertaking are not submitted before the royalty is paid or if the declaration and undertaking have expired and are therefore invalid, withholding tax on royalties must be withheld at the full rate of 15%.
Reduction of the withholding rate
The rate at which withholding tax on royalties has to be withheld can potentially be reduced by an applicable tax treaty.
Section 49E(3) provides that if a foreign person submits a declaration form declaring that an applicable tax treaty provides for a reduced rate of withholding tax on the royalty and a written undertaking (see below), to the person paying the royalty before the royalty is paid, the payer must withhold withholding tax on royalties at the reduced rate reflected in the declaration. For example, the rate of 15% in section 49B may be reduced to 5% or 10% by the treaty. The date of payment of the royalty is the earlier of the date of payment or the date on which it is due and payable.
The declaration and the written undertaking must be in the form prescribed by the Commissioner. In the written undertaking, the person must undertake to inform the person making the payment in writing if the circumstances affecting the reduced rate change or if the payment of the royalty is no longer for the benefit of that foreign person.
With effect from 1 October 2020, the declaration and written undertaking submitted to the person making payment will expire and be invalid after five years from the date of the declaration.
Withholding Tax on Royalties Declaration Form
One of the requirements under section 49E(2)(b) and (3), which deal with specified exclusions from the obligation to withhold withholding tax on royalties or to withhold at a reduced rate is that the declaration that must be submitted to the payer of the royalty must be “in such form as may be prescribed by the Commissioner”. The form “Withholding Tax on Royalties Declaration (WTRD)” has been prescribed for this purpose and is available on the SARS website.
The form must be completed by the foreign person to or for the benefit of whom the royalty is paid and submitted to the payer before the royalty is paid to give effect to:
• certain of the exemptions from the withholding tax; or
• the reduced rate of tax.
Failure to submit the form by the required date will result in the tax being withheld at the full rate of 15%.
The declaration form requires:
• Particulars of the person making payment of the royalty;
• Particulars of the foreign person;
• If an exemption is applicable, the reason why the foreign person is exempt from the withholding tax; and
• If a reduced rate of withholding tax is available, the number of the applicable article in the tax treaty between the contracting states and the reduced rate, which is the applicable rate of tax under the tax treaty.
The form also includes an undertaking by the foreign person that the foreign person will inform the payer of the royalty in writing of any changes in the circumstances referred to in the declaration.
A new declaration will be required if there is a change in the foreign person’s circumstances or if the payment is no longer for the benefit of the foreign person.
A change in circumstances may mean that an exemption or a reduced rate of tax no longer applies. Failure by the foreign person to inform the payer of the change in circumstances could result in an incorrect amount of withholding tax on royalties being withheld. The amount not withheld remains payable. Any underpayment may be subject to the imposition of interest and penalties.
In addition, with effect from 1 October 2020, the declaration and written undertaking submitted to the person making payment will expire and be invalid after five years from the date of the declaration.
The next article will discuss payment of withholding tax, refund of withholding tax on royalties, and currency of payments made to the Commissioner.