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.