In a recently issued Government Gazette, the Government has changed the administrative rules that made it challenging for non-residents to meet their tax liabilities in South Africa.
In terms of these new rules, non-resident companies now only
need to register with the South African Revenue Service (SARS) as a
taxpayer "if they carry on a trade through a permanent
establishment in South Africa" or "if they derive a
capital gain from a source within South Africa".
This is a significant and welcome change from the old rules, which
required registration for non-resident companies "if they
derived any gross income or capital gain from a South African
source". Critics had complained that this forced non-resident
companies to register as South African taxpayers if they earned
dividends and royalties from South Africa, even though these income
streams were already subject to South African withholding taxes
before reaching their hands. It also compelled them to file tax
returns to claim exemption from South African taxation when
exemptions were granted to them under treaties, known as
"double-tax agreements", that the South African
Government concluded with other countries. Whilst it had not
been disputed that it is necessary for SARS to know about income
derived by foreign companies from a South African source, critics
argued that it was pointless to prescribe a costly and
time-consuming registration process for non-resident companies,
when their income was ultimately not going to be subject to
tax.
The new rule resolves these difficulties by only requiring
registration for non-resident companies under two limited
circumstances.
The first of these arises when the foreign company has a South
African "permanent establishment", which usually refers
to a fixed place of business that the non-resident company
maintains in South Africa. This could be, for example, a branch or
a building site or other business-place that is indicative of an
intention of the non-resident to do business within South Africa
for an extended period. This is in sharp contrast from the past,
which would have affected foreign companies that are here for only
a short period.
The second category relates to non-resident companies that derive
capital gains from South African sources. As capital gains may only
be made by non-resident companies on the disposal of South African
immovable property or interests in immovable property that are not
held as trading stock, this would not encumber most foreign
businesses that merely sell goods or provide services in South
Africa.
While this is a positive development, the administrative problems
of foreign companies persist in respect of taxes other than income
tax. For example, foreign companies are still required to register
as a vendor for Value Added Tax (VAT) purposes if the goods or
services they provide in South Africa exceed R1 million within a
12-month period, even if they are present in South Africa for less
than 12 months. Registration as a VAT vendor is no simple
procedure, requiring, inter alia, a physical residential address, a
locally-based VAT representative, a municipal account as well as
the opening of a South African bank account. Only a rarely granted
ruling from SARS may provide exemption from this onerous
requirement. Non-registration of a foreign company that does
business in South Africa for a short time would not result in a
loss to the South African economy, so it is disappointing that the
new rules do not ease these requirements as well.
Next year, SARS plans to introduce a withholding tax on fees for
services rendered by non-residents in South Africa. It is hoped
that SARS uses this opportunity to simplify the remaining
administrative procedures for foreigners to pay their taxes.
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