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(1)COPYRIGHT AND CITATION CONSIDERATIONS FOR THIS THESIS/ DISSERTATION. o Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. o NonCommercial — You may not use the material for commercial purposes.. o ShareAlike — If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the original.. How to cite this thesis Surname, Initial(s). (2012) Title of the thesis or dissertation. PhD. (Chemistry)/ M.Sc. (Physics)/ M.A. (Philosophy)/M.Com. (Finance) etc. [Unpublished]: University of Johannesburg. Retrieved from: https://ujcontent.uj.ac.za/vital/access/manager/Index?site_name=Research%20Output (Accessed: Date)..

(2) WITHHOLDING TAX ON INTEREST: PRACTICAL DIFFICULTIES FOR WITHHOLDING AGENTS by CHARL HORN LIMITED-SCOPE DISSERTATION Submitted in partial fulfilment of the requirements for the degree MAGISTER COMMERCII in SOUTH AFRICAN AND INTERNATIONAL TAXATION in the FACULTY OF ECONOMIC AND FINANCIAL SCIENCES at the UNIVERSITY OF JOHANNESBURG. SUPERVISOR: MARINA BORNMAN CO SUPERVISOR: LIZANNE BARNARD. AUGUST 2017. i.

(3) DECLARATION I, Charl Horn, hereby declare that the work on which this limited-scope dissertation is based is my original work (except where acknowledgements indicate otherwise) and that neither the whole work nor any part of it has been, is being, or is to be submitted for another degree at this or any other university. I authorise the university to reproduce for the purpose of research either the whole, or any portion of the contents in any manner whatsoever.. SIGNATURE:. ________________________________. DATE:. ________________________________. ii.

(4) ACKNOWLEDGEMENTS Firstly, thank you Heavenly Father for giving me the wisdom and favour to complete this work. Thank you for Your Hand of direction which guided me. Marina & Lizanne, many thanks for your valued input and assistance, your quick turnaround time and making the journey of completing this dissertation a smooth one. To my beautiful wife, thanks for your patience and sacrifice and all the small things you did for me to help me complete this work – it didn’t go unnoticed. Last but not least, to my family and friends, thank you for your support and prayers.. iii.

(5) ABSTRACT The South African Revenue Service introduced Withholding Tax on Interest effective 1 March 2015. It is a final tax applied against interest paid to non-residents from a South African source. The overall objective of the study is to highlight certain legislative provisions of Withholding Tax on Interest as set out in section 50A to 50H of the Income Tax Act in order to address areas of concern for ‘withholding agents’. These areas of concern relate to whom the person is, that is responsible for withholding the tax on interest payments and to the timing of when interest is deemed to be paid in order to comply with the withholding obligation. Using a doctrinal method, the study builds an argument to provide clarity on these provisions by recognising, analysing, organising and interpreting appropriate legislative provisions, court rulings and commentary related to the topic. The study aims to provide clarity of the phrase that the ‘person who makes payment’ of an amount of interest is the person who is responsible for withholding tax on the interest paid to the non-resident. This uncertainty arose out of specific reference to dematerialised instruments and how other local withholding provisions, and countries like the United Kingdom and United States of America, have incorporated this concept and clarified who has the withholding obligation. For withholding tax on interest in South Africa, no such clarity exists. Furthermore, the study explores the practical difficulty for ‘withholding agents’ to comply with the withholding obligation when interest is deemed to be paid on the concept of ‘due and payable’, yet no cash flow was necessarily available from which to withhold the tax. The analysis determines that the ‘person who makes payment’ is the person who has the relationship with the non-resident and is in a position to accurately account whether withholding applies. This implies that for instruments that are dematerialised, it would be the last client-facing intermediary and for instruments that are in physical format, it would be the issuer. Concerning the concept of ‘due and payable’, an amount is ‘due’ when it has been incurred or created resulting in that amount being owed, while ‘payable’ refers to the time where the need to make payment has arrived. This does not necessarily mean that iv.

(6) payment will in fact be made on the agreed date. The withholding responsibility should be applied to the concept of ‘paid’ which refers to the time period where payment has already been made. It is only in this case that ‘withholding agents’ will be in a position to withhold. The study concludes with making some recommendations for either amendments to the Act or the issue of an interpretation note by South African Revenue Service to clarify the uncertainties.. v.

(7) ABBREVIATIONS USED IN THIS DOCUMENT Abbreviation. Meaning. the Act. Income Tax Act No. 58 of 1962. BASA. Banking Association of South Africa. CIR v People’s Stores. Commissioner. for. Inland. Revenue. v. People's Stores (Walvis Bay) (Pty) Ltd [1990] ZASCA 1 CSD. Central Securities Depository. CSDP. Central Securities Depository Participants. DT. Dividends Tax. DTA. Double Taxation Agreement. FMA. Financial Markets Act No. 19 of 2012. HMRC. Her Majesty’s Revenue and Customs. IP. Intellectual Property. IRC. Internal Revenue Code. JSE. Johannesburg Stock Exchange. RI. Regulated Intermediary. SA. South African. SARS. South African Revenue Service. Singh v CSARS. Singh v CSARS (500/2001) [2003] ZASCA 31. STRATE. Share. Trading. Transactions. Totally. Electronic Company TAM v Grindstone Investments. Trinity Asset Management (Pty) Ltd v Grindstone Investments 132 (Pty) Ltd (1040/2015) [2016] ZASCA 135 2016. TAA. Tax Administration Act No. 28 of 2011. UK. United Kingdom. USA. United States of America. WTI. Withholding Tax on Interest. WTR. Withholding Tax on Royalties. vi.

(8) Table of Contents Abstract…………………………………………………………………………………………..iv Abbreviations…………………………………………………………………………………....vi. Chapter One 1. Introduction and Background………………………………………………………….1 1.1 Introduction…………………………………………………………………………………..1 1.2 Overview of the Withholding Tax on Interest in SA……………………………………...2 1.2.1 Interest defined.........……………………………………………………………………..2 1.2.2 Foreign person defined...……........……………………………………………………..3 1.2.3 Source of the interest.......................……………………………………………………3 1.2.4 Exemptions from WTI………………………………………………………………….... 4 1.2.5 The withholding tax rate………………………………………………………………….5 1.2.6 The liability to withhold…………………………………………………………………...5 1.2.7 Timing of withholding…………………………………………………………………… . 5 1.3 Research problem…………………………………………………………………………..6 1.4 Research objective……………………………………………………………………….....7 1.5 Motivation for the study………………………………………………………………. ...... 7 2. Research methodology……………………………………………………………………... 8 2.1 Paradigm………………………………………………………………………………….....8 2.2 Methodological approach………………………………………………………………… . 8 2.3 Method…………………………………………………………………………………….....9 2.4 Data sources………………………………………………………………………………...9 2.5 Data collection…………………………………………………………………………......10 2.6 Data analysis……………………………………………………………………………….10 2.7 Validity...................................................................................................................... 11 vii.

(9) 2.8 Ethical consideration ............................................................................................... 11 2.9 Limitations and delineation of the research ............................................................. 11 2.9.1 Limitations ............................................................................................................ 11 2.9.2 Delineation ........................................................................................................... 12 2.10 Proposed chapter layout ....................................................................................... 12. Chapter Two 2. The Person who makes payment..................................................................... 14 2.1 Introduction ............................................................................................................. 14 2.2 Dematerialisation in practice ................................................................................... 16 2.3 The application of Dividends Tax in respect of the withholding obligation.................19 2.4 Comparison to the application of Withholding Tax on Royalties .............................. 23 2.5 The concept of “Withholding Agent” ........................................................................ 25 2.6 A review of applicable USA legislation pertaining to withholding of taxes ............... 25 2.7 A review of applicable UK legislation pertaining to withholding taxes...................... 27 2.8 Current practice in SA ............................................................................................. 27 2.9 Conclusion .............................................................................................................. 28. Chapter Three 3. ‘Due and payable’ and ‘paid’ ............................................................................. 30 3.1 Introduction ............................................................................................................. 30 3.2 The meaning of ‘paid’ .............................................................................................. 32 3.3 The meaning of ’due and payable’ .......................................................................... 34 3.3.1 Due ................................................................................................................... 35 3.3.2 Payable ............................................................................................................. 35 3.4 Comparison to the application of Dividends Tax ..................................................... 37. viii.

(10) 3.5 Irrecoverable interest............................................................................................... 41 3.6 A review of applicable USA legislation pertaining to ‘due and payable’ or ‘paid’ ..... 43 3.7 A review of applicable UK legislation pertaining to ‘due and payable’ or ‘paid’ ....... 44 3.8 Conclusion .............................................................................................................. 44. Chapter Four 4. Findings, Conclusion and recommendations ................................................ 47 4.1 Synthesis and conclusion ........................................................................................ 47 4.1.1 The person who makes payment ...................................................................... 47 4.1.2 ‘Due and payable’ and ‘paid’ ............................................................................. 48 4.2 Recommendations .................................................................................................. 49 4.2.1 The person who makes payment ...................................................................... 49 4.2.2 ‘Due and payable’ and ‘paid’ ............................................................................. 50 4.3 Conclusion .............................................................................................................. 51 List of References ......................................................................................................... 52. ix.

(11) Chapter One 1. INTRODUCTION AND BACKGROUND 1.1. Introduction. According to the definition of ‘gross income’ in section 1 of the Income Tax Act No. 58 of 1962 (hereafter referred to as “the Act”), interest received by or accrued to a non-resident will form part of their gross income if it is sourced within the Republic of South Africa (hereafter referred to as “SA”). In terms of section 9(2)(b)(ii) of the Act, interest is deemed to be from a SA source where that interest is received in respect of the use or application in SA, by any person of any funds in terms of any form of interest-bearing arrangement. Further to this, the SA tax framework provides for an income tax exemption with regards to interest paid to nonresidents in accordance with section 10(1)(h) of the Act. This exemption results in the interest earned by non-residents not being subject to normal tax and therefore has the intention of attracting non-resident debt flows to SA (National Treasury, 2010:69). This exemption is prohibited if the non-resident lenders actively takes an interest in the SA economy through specified channels as explained by Ger (2015). It is highlighted in section 10(1)(h) of the Act that SA can only tax interest paid to non-resident lenders who create business in SA through permanent establishments (which are essentially fixed places of business) or non-residents who were physically inside SA for more than 183 days of the tax year. The desire for SA to lure outside funding and provide robust competition within the global debt capital business environment was important, however this could not happen at the cost of the economy. Hence, the purpose of introducing Withholding Tax on Interest (hereafter referred to as “WTI”) was to strike a balance between the necessity of bringing in outside debt wealth and the duty to protect the tax base against possible disintegration as the interest exemption under section 10(1)(h) of the Act did not accomplish a reasonable economic offset (National Treasury, 2010:69).. 1.

(12) WTI was legislated with effect 1 March 2015 and is, subject to certain exemptions, a final tax applied against interest specifically paid to foreign persons. According to section 50B(1) of the Act, the interest is subject to a 15% withholding rate whereby the actual withholding rests on ‘withholding agents’ who are persons other than the person (i.e. nonresident) liable for the tax. According to section 50F(2) of the Act, these withholding agents have the obligation to pay the withholding tax to the South African Revenue Service (hereafter referred to as “SARS”) one month following the month in which the interest was deemed to be paid. The reason for WTI being a final tax is explained by Ger (2015) in that it is practically very difficult to gather tax from non-residents who are not tied to SA, and therefore a final withholding tax was introduced to ease the burden of administering the tax. This was achieved by forcing the payer of the interest (i.e. withholding agent) to withhold the tax instead of the non-resident beneficiary. In this manner, Ger (2015) postulates that if the payer is a resident of SA (which should be the case in most instances), it will be less demanding for the SARS to uphold the burden of collecting the tax and thereby easing the tax administration of collecting tax. 1.2. Overview of the Withholding Tax on Interest in SA. The WTI provisions are contained in sections 50A to 50H of the Act. A brief review of important concepts, definitions and principles pertaining to WTI is presented here in order to create context for the research problem that will be presented in section 1.3. 1.2.1 Interest defined To clarify to what extent interest applies to the provisions of WTI, the term ‘interest’ is defined in section 50A of the Act and applies only to paragraphs (a) and (b) of the definition of ‘interest’ under section 24J(1) of the Act. The definition of ‘interest’ under paragraph (a) and (b) of section 24J(1) states that interest includes: (a) gross amount of any interest or similar finance charges, discount or premium payable or receivable in terms of or in respect of a financial arrangement;. 2.

(13) (b) amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents compensation for any amount to which the lender would, but for such lending arrangement, have been entitled to. 1.2.2 Foreign person defined Section 50A of the Act defines a ‘foreign person’ to be any person that is not defined as a ‘resident’ in section 1 of the Act. It is highlighted by Farrand and Dachs (2012) that the definition of a ‘resident’ is split between natural persons and juristic persons. According to the definition of ‘resident’ in section 1 of the Act, a natural person is ‘resident’ if they are ordinarily resident in SA or if they meet the physical presence test. In terms of a juristic person, the Act defines that a juristic person is a ‘resident’ in SA if they are incorporated, established or formed in the Republic or which has its place of effective management in the Republic. This definition excludes juristic persons who are deemed in terms of a Double Taxation Agreement (hereafter referred to as “DTA”) not to be ‘resident’ in SA. 1.2.3 Source of the interest It is important that the withholding tax must be levied on SA source interest. In terms of section 50B(1) of the Act: there must be levied…a tax to be known as the withholding tax on interest…of any interest that is paid by any person to or for the benefit of any foreign person to the extent that the amount is regarded as having been received or accrued from a source within the Republic in terms of section 9(2)(b).. If the source of the interest does not arise from within SA, WTI is not applicable. The meaning of the word ‘source’ is not defined in the Act although there are deeming provisions relating to interest. According to section 9(2)(b)(ii) of the Act, interest is deemed to be from a SA source where that interest is received in respect of the use or application in SA, by any person of any funds in terms of any form of interest-bearing arrangement.. 3.

(14) The above is interpreted by Ger (2015) that the person paying the interest does not need to be a SA resident and can therefore include a non-resident paying interest to a nonresident beneficiary. The real test is whether the non-resident has used or realised the debt funding in SA which gives rise to the interest. In addition, local interest paid to SA residents will fall outside the ambit of WTI. 1.2.4 Exemptions from WTI Numerous exemptions to WTI exist in terms of section 50D of the Act and SARS (2017) has highlighted three broad exemption categories, namely the person paying the interest, the instrument giving rise to the interest and the non-resident beneficiary of the interest. These exemptions are briefly explained below. Regarding the person paying the interest, in terms of section 50D(1)(a)(i) of the Act, the interest payment made to a non-resident is exempt from WTI if it is paid from the SA government, any SA bank or headquarter company. The instrument itself is exempt from WTI according to section 50D(1)(a)(ii) of the Act if it is a debt instrument that is listed on any recognised SA exchange, for example, the Bond Exchange of SA; or if the interest is payable to a trust account of the foreign owner of the funds in which an authorised user, for example, a licensed stock broker, is acting as a custodian providing custodian services to the foreigner (Dunning, 2016). In terms of the third category, the non-resident beneficiary receiving the interest amount is exempt in section 50D(3) of the Act if the non-resident individual is in SA for more than 183 days in a 12 month cycle prior to the date the interest is paid or if the interest payment is associated with a permanent establishment in SA. Furthermore, according to National Treasury (2016:55/56), any interest paid to multilateral development financial institutions shall be exempt from WTI. Section 50D(1)(d) of the Act defines these multilateral development financial institutions as constituting the World Bank, African Development Bank, International Monetary Fund, African Import and Export Bank, European Investment Bank and the New Development Bank.. 4.

(15) 1.2.5 The withholding tax rate The withholding tax rate is currently 15%, unless reduced by a DTA applicable between SA and the country of tax residence of the foreign recipient of the interest. To qualify for a reduced withholding rate or an exemption, the non-resident must complete a declaration and written undertaking in terms of section 50E of the Act. It is clarified by SARS (2015:112) that the declaration completed and signed by the nonresident will result in the non-resident qualifying for an exemption or a reduced withholding rate under the applicable provisions in the Act. The written undertaking is a declaration signed by the non-resident who declares to the person who has the withholding obligation, that should the conditions influencing the declaration change or the non-resident cease to be the beneficial owner of the interest payment, the nonresident will inform that person. 1.2.6 The liability to withhold According to section 50C(1) of the Act, the foreigner who receives the interest amount is liable for the tax on the basis that it has been received by or accrued to that foreigner from a SA source, but section 50E(1) of the Act explains that the tax on the interest must be withheld by “any person who makes payment of any amount of interest to or for the benefit of a foreign person”. The person who makes the interest payment is also referred to as the ‘payer of interest’ in terms of the heading of section 50E of the Act which states “Withholding of withholding tax on interest by payers of interest”. Although not specifically stated in the WTI provisions, the ‘person who makes payment’ can also be referred to as the ‘withholding agent’ in terms of section 156 of the Tax Administration Act No. 28 of 2011 (hereafter referred to as the “TAA”). 1.2.7 Timing of withholding Section 50B(2) of the Act deems interest to be paid on the “earlier of the date on which interest is paid or becomes due and payable” and according to section 50F(2) of the Act, needs to be paid over to SARS in the month following the month in which the interest is deemed to be paid. For example, if WTI is withheld from an interest payment to a non5.

(16) resident in April, the tax withheld needs to be paid over to SARS by the last business day of May. In closure, by introducing WTI, section 10(1)(h) of the Act (which deals with exemptions from normal tax) and the provisions of WTI are aligned to achieve the balance of protecting the tax base and attracting outside debt capital. It is suggested by Govan (2014:4) that this alignment is evident where interest payments made to a non-resident fall within the WTI provisions, thus the same interest will be excluded from income tax. Likewise, if the interest falls outside the provisions of WTI, it will be liable for normal tax as no exemption under section 10(1)(h) will apply. It is noted that section 10(1)(i) of the Act will provide some relief against the liability for normal tax only in instances where the non-resident person is a natural person. In cases where the non-resident is 65 years of age, the interest exemption allowable for that year of assessment is R34 500, in all other cases, the interest exemption limit is R23 800. 1.3. Research problem. The research problem highlights two areas of concern for withholding agents. The first problem is the lack of clarity provided in section 50E(1) of the Act when reference is made to the ‘person who makes payment’ regarding to the interest amount. Does the phrase ‘person who makes payment’ refer to the issuer of the debt instrument who originally makes the interest payment even though the issuer might or might not know who the foreigner is that is entitled to the interest, or is it the person who acts in the capacity of an intermediary between the issuer and foreigner and has the fiduciary duty of transferring the interest amount to the foreigner? It must be stated that the uncertainty does not extend to situations where the issuer of the instrument and the holder of the same instrument have no intermediary between the two parties. In such a case, the interest payment is facilitated directly between the issuer and the holder in which case the issuer would be the person who is making the interest payment and would have the withholding obligation. The second problem is the practical difficulty for withholding agents in applying the withholding obligation of ‘due and payable’ before the concept of ‘paid’. The payment of 6.

(17) withholding tax on interest to SARS occurs one month following the month in which the interest is deemed to be paid in terms of section 50F(2) of the Act. When due and payable is triggered although no actual payment of interest has taken place, withholding is still required although no cash flow or liquidity is available from which to withhold. This will impact on withholding agents being in contravention of the Act due to no WTI being able to take place, resulting in them being liable for the withholding taxes. It could not have been intention of the legislature to require withholding agents to withhold tax from interest payments where no monies have been received to withhold. 1.4. Research objective. The overall objective of the dissertation is to provide clarity on certain provisions of WTI as set out in section 50A to 50H of the Act in order to address areas of concern for ‘withholding agents’. Regarding the first research problem, the objective is to provide clarity on who the ‘person is who makes payment’ of any amount of interest in order to eliminate the uncertainty created by this phrase. In terms of the second research problem, the objective is to critically analyse the concept of ‘due and payable’ versus ‘paid’ in order to highlight the practical difficulty of complying with the requirement, considering that withholding tax must be levied at the earlier of these two concepts. Understanding this practical difficulty and finding possible solutions from case law or similar provisions in foreign legislation, may enable the researcher to suggest a change in the wording of section 50B(2) of the Act 1.5. Motivation for the study. The motivation for doing this study is based on the fact that many different financial service providers can be impacted by WTI and can be unaware of the unintended consequences of having no cash flow from which to withhold tax or not knowing that they have a withholding obligation. As the burden to meet tax compliance increases, it is important that affected parties can meet the legislative obligations in terms of withholding, reporting and paying the tax to 7.

(18) SARS. The consequences of not complying with legislation could be costly even though practically, it might not be possible to withhold and pay the interest to SARS. 2. RESEARCH METHODOLOGY 2. 1. Paradigm. This study will be approached using an interpretivist paradigm. It is explained by Riyami (2015:413) that an event can have various explanations and that interpretivism seeks to obtain a more in-depth understanding of the event and its intricacy within its exclusive situation, rather than generalising with regard to an entire population. This paradigm is appropriate because the researcher will be analysing and interpreting case law and local legislative provisions, in addition to exploring local and foreign legislative provisions in order to seek an in-depth understanding of certain concepts in the WTI provisions. The SA courts have highlighted how one should interpret case law. Judge Wallis JA in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) explained that the statute of interpretation should not be subjective but objective. A logical interpretation should be followed where one determines the purposive meaning of the words used instead of one’s own view. However, it is submitted that to give meaning to the concepts highlighted in the research problem, inductive reasoning and subjective interpretation by the researcher will be necessary, thus making interpretivism the appropriate framework. 2.2. Methodological approach. A qualitative approach will be used to address the research objectives which are associated with an interpretivist paradigm as highlighted by Rossman and Rallis (2003:35). Creswell (2007:39) explains that qualitative research seeks to interpret and understand human behaviour by asking questions relating to something specific. The present study aims to give meaning to certain concepts by investigating only textual data such as legislation and other written documents, and presents findings in. 8.

(19) comprehensive descriptions using words. It is therefore considered to be conducted from a qualitative approach. 2.3. Method. This research will rely on the doctrinal research method which has been described by Hutchinson and Duncan (2012:84) as a union of different rules, principles, norms, interpretative strategies and qualities. It explains, articulates or supports a section of the law within a bigger framework of the law. Furthermore, it represents the exact procedure of recognising, analysing, organising and blending legislative provisions, court rulings and commentary (Mckerchar, 2008:18). The technique for doctrinal research is often associated with the learning or studying of legislative writings as highlighted by Knight and Ruddock (2008), and for this reason, the researcher deems it to be an appropriate method since the research method entails analysing and interpreting legal work such as court cases, legislative provisions and legal commentary. Purposive sampling was used to select the two countries, namely that of the United Kingdom (hereafter referred to as “UK”) and the United States of America (hereafter referred to as “USA”). Their legislative provisions and legal guidelines clarify the research problems identified and the guidelines derived from analysing their provisions give sufficient substance to make recommendations in the SA context. 2.4. Data sources. Different data sources will be used to analyse key concepts between different countries and different legislative provisions. The data sources will comprise of different primary types of literature namely, legislative provisions like the Income Tax Act and similar legislation obtained from the different countries, the Tax Administration Act, SA court cases such as Geldenhuys v CIR and Singh v CSARS. Furthermore, secondary data will consist of the Comprehensive Guide on Dividends Tax issued by SARS; Explanatory Memorandums to the Taxation Law Amendment Bill; a draft 9.

(20) interpretation note on Withholding Tax on Royalties issued by SARS; articles from academic journals in the field of taxation; publications from different tax professional bodies; and relevant International literature and legislation. 2.5. Data collection. Data collection is explained by McMillan and Gogia (2014) as a means of assembling data for the purpose that is then examined and translated. As part of data collecting, searches will be conducted using keywords such as: ‘Withholding Tax on Interest’, ‘paid or received’, ‘withholding agents’, ‘regulated intermediaries’ and ‘due and payable’ applied to various databases (including the National Research Foundation, University databases and professional bodies’ websites). Various Acts, legislative guides and industry bodies (for example the Banking Association of South Africa and tax firms) will also be consulted. 2.6. Data analysis. The analysis of the data will proceed as follows: the meaning of ‘the person who makes payment’ will be analysed critically and compared to similar provisions in the Act which apply either the exact phrase or similar phrases. In addition, published guides issued by SARS on how they have interpreted the issue will be consulted to give meaning to the phrase. It is important to note that the principle of what is being compared (namely the meaning of ‘the person who makes the payment’) is the same in nature even though the legislative provisions apply to different transactions. Further, foreign legislation and commentary will be used to highlight how the UK and USA have clarified this concept. Following this, it would be appropriate to critically analyse the withholding trigger concept of ‘paid’ and ‘due and payable’ by examining the definitions and use thereof as found in other provisions of the Act and case law. Further, the timing of the withholding trigger of SA will be compared against that of the UK and the USA. This will highlight what practical difficulties and consequences are evident in trying to apply the concept. It will also enable the researcher to provide clarity on the concepts as well as with the suggestion of a change in the wording of section 50B(2) of the Act. 10.

(21) 2.7. Validity. The research is conducted in the form of an extended argument, supported by documentary evidence. The validity of the research and conclusion will be ensured by: •. adhering to the rules of legal interpretation, as established by common law;. •. placing greater evidential weight on legislation and case law which creates precedent or which is of persuasive value (primary data) as well as the writings of acknowledged experts in the field;. •. discussing opposing viewpoints and concluding, based on a preponderance of credible evidence; and. • 2.8. the rigor of the arguments. Ethical consideration. All sources disclosed in this dissertation are based on publically available information and have been properly referenced to maintain creditworthiness and to respect the authors. In instances where documentation from industry bodies is not publically available, full consent from the relevant member of the industry body will be obtained. 2.9. Limitations and delineation of the research. 2.9.1 Limitations Due to the specific nature of the industry impacted by the research problem and given the fact that WTI is a relatively new piece of legislation, limited public information is available from which to support the research objectives comprehensively. Information that is accessible to the public is limited to the general application on how WTI works. Furthermore to the nature of the research problem, the two countries selected were used for purposive sampling in order to support the researcher’s arguments and to assist in leveraging principles and guidelines in order to provide clarity articulated in the research objective. It is possible that other countries could generate different results but this was not considered as the researcher’s interpretation was limited to the two sample countries.. 11.

(22) The critical analysis of ‘due and payable’ and ‘paid’ with reference to case law is limited to court cases that are available. Certain court cases which cite other court cases could sometimes not be found. In section 3.2, the meaning of ‘paid’ can take the form of cash or in specie but for purposes of this dissertation, considering the scope of in specie within the context of ‘paid’ will not be explored. 2.9.2 Delineation The dissertation will not address the application of all the sections within the WTI provisions but only those which are relevant to the research problem, namely section 50A through to 50F. A high-level overview on the meaning of ‘resident’ will be highlighted but the intricacies of this definition will not be explored. Additionally, the dissertation will not address the intricate definition of a ‘royalty’ and certain provisions within the withholding tax on royalty section. Furthermore, reference to foreign legislation and guidelines dealing with WTI will be limited to information that is appropriate to the research topic. Highlighting all the various provisions of the foreign legislation will not be addressed. With reference to court cases referred to in this research assignment, information relating to the background of the case will not be discussed; only that which is pertinent to the research objectives. 2.10. Proposed chapter layout. The proposed chapter layout for the research assignment is as follows: Chapter One: Introduction Chapter one dealt with the introduction which consisted of the background, research problem, research objective, motivation for the proposal, the various aspects of the research methodology and the proposed chapter layouts.. 12.

(23) Chapter Two: Clarity on person making payment Chapter two will focus on providing clarity on who is the ‘person who makes payment’ of an interest amount in the context of that person having the withholding obligation, also known as the ‘withholding agent’. This will entail providing an understanding on how the payment system of dematerialised instruments and paper-based instruments operate in the industry. Reference to how other provisions in the Act have dealt with the issue of who the ‘withholding agent’ is will also be analysed, including the analysis of legislative provisions of the UK and USA. Chapter Three: Analysis of due and payable Chapter three will aim to critically analyse the concept of ‘due and payable’ versus ‘paid’ with the purpose of highlighting the difference and the practical difficulty for ‘withholding agents’ to comply with the withholding responsibility currently prescribed in the Act. Chapter Four: Findings and conclusions Chapter four will synthesise the findings and present a conclusion as well as make recommendations to address the research problems identified in the research assignment.. 13.

(24) CHAPTER 2 2.. AN ANALYSIS OF THE CONCEPT ‘THE PERSON WHO MAKES PAYMENT’. 2.1. Introduction. Section 50E(1) of the Act refers to the ‘person who makes payment’ of any amount of interest to, or for the benefit of, a foreign person, has the withholding obligation. Yet, it is unclear as to whom this person relates to because given the specific situation, the issuer can make the initial interest payment to the intermediary and the intermediary (who acts on behalf of the holder of the instrument) can transfer the same interest payment to the holder. To illustrate this point, a simple example is presented: when a client (the holder) buys a financial instrument that is listed on the Johannesburg Stock Exchange (hereafter referred to as the “JSE”) which pays interest, the client cannot buy the financial instrument directly from the issuer (the seller who is legally responsible for the obligation to make good the interest payment to the holder). The client must rather buy the financial instrument through the JSE (the entity which facilitates the transaction and acts as a type of intermediary). It is only the JSE which knows who the holder of the financial instrument is while the issuer will have no idea who owns the financial instrument. There is therefore no direct relationship between the issuer of the instrument and the holder of that instrument. When the time comes for the issuer to make the interest payment, the issuer will pay the JSE directly which will then transfer the interest payment to the relevant holder. Considering this, when there has been a payment of interest from a financial instrument, the question arises as to whether the above withholding obligation rests on the issuer who makes the actual interest payment even though the issuer does not know who the holder of the instrument is. Furthermore, it needs to be established whether the withholding obligation rests on the person (the intermediary, the JSE in the above example) who receives the interest payment on behalf of the holder and transfers that interest amount to the holder.. 14.

(25) The relevance of knowing who the person is making the interest payment, is important because it creates a withholding obligation on that person to withhold the correct amount of withholding tax in terms of section 50E(1) of the Act. The uncertainty of the phrase should not create a situation where both issuer and intermediary withhold tax due to a misinterpretation of the legislation or, conversely, result in a failure from either the issuer or intermediary from withholding. It might seem obvious that where the issuer faces a type of intermediary, the issuer should have no withholding obligation because it should be the intermediary who is the person who has the relationship with the holder; faces the holder and is the one who must withhold the appropriate amount of tax from the holder. This is the case in the DT legislation where in terms of section 64G and 64H of the Act, provision has been made to split the withholding obligation between the issuer and intermediary, depending on who faces the beneficial owner of the dividend. The definition of who is defined as an intermediary can be found in section 64D of the Act. However, the identity of the person who has the withholding obligation for WTI is not entirely clear in terms of how the WTI legislation has been drafted, specifically when it comes to instruments that are in a dematerialised format. Dematerialisation of investment securities are explained in section 2.2 below. It must be noted that where the issuer and holder have a direct relationship with each other and no intermediary interposes the two parties, there is no uncertainty as to who has the withholding obligation. In this instance, it is clear that the issuer must withhold the tax. The uncertainty is specific to the situation where the instrument is dematerialised – when a type of ‘intermediary’ between the issuer and the holder is automatically created. The purpose of this chapter is to highlight the uncertainty created in the way the current WTI legislation has been drafted in terms of who has the withholding obligation. This ambiguity will be illustrated by the concept of dematerialised instruments and the application of how other withholding provisions in the Act (namely the Dividend Tax and Withholding Tax on Royalties provisions) have dealt with the issue. In the last three sections of the chapter the withholding obligation as it is applied in the USA and UK is 15.

(26) investigated before the current practice in SA with regards to withholding WTI is addressed. 2.2. Dematerialisation in practice. The purpose of explaining the meaning of dematerialisation and how it operates in practice is to illustrate that when an instrument is in a dematerialised format, the issuer of the instrument will not know who the holder of the instrument is. This is where regulated intermediaries (hereafter referred to as “RI”) come into play who act as withholding agents between the issuer and holder. Explaining this concept creates a key platform to show that although dematerialisation applies in both DT and WTI, yet in the WTI provisions, no clarity is provided when compared to the DT provisions. Highlighting this concept creates an introduction as to why Dividends Tax (hereafter referred to as “DT”) is applicable (section 2.3). Dematerialisation is referred to by the Share Trading Transactions Totally Electronic Company (2017) (hereafter referred to as “STRATE”) as the procedure whereby physical paper-based certificates of a financial instrument owned by the investor are exchanged with electronic records of possession. The process is further detailed by Martínez-Calcerrada (2005:1) as follows: the client first needs to create an account with the relevant custodian before applying for the dematerialisation of his/her investment securities (which are currently in physical format). In this manner, the physical investments documentation is changed into electronic records of possession which are maintained in the account created with the relevant custodian. This electronic recording of instrument ownership is actioned in the background by the South Africa's Central Securities Depository (hereafter referred to as “CSD”) with the assistance of particular companies that have been given the power to act as CSD Participants (STRATE, 2017). The CSD does not deal with transactions where the financial instrument is issued in physical format or paper based format, i.e. where a physical certificate is issued by the issuer to the holder confirming that the holder is the registered owner of the instrument 16.

(27) (Banking Association of South Africa, 2015b:1) (hereafter referred to as “BASA’). In this case the issuer would know who the holder of the instrument is and not the CSD since the issuer would keep an up to date asset register. To understand the uncertainty created by dematerialised instruments better, background to how the industry works in practice is first required. The process is explained by STRATE (2017) as follows: the JSE offers a stage for investors to trade their investments (typically shares). A stockbroker (authorised to operate by the JSE), performing trading functions (like purchasing or selling) which is instructed by the investor, will conclude a transaction with an alternative stockbroker using the system furnished by the JSE. In order for the financial instrument to shift from the seller to the buyer and the cash to change hands from the buyer to the seller, the process is managed by the CSD, together with the assistance of other particular companies that have been given strict consent to perform an assistance function. These are known as Central Securities Depository Participants (hereafter referred to as “CSDP”). A CSD is an organisation entrusted with keeping electronic records of possession concerning financial instruments. These accounts are securely stored in electronic format by the CSD which permits day to day exchange of title rights of the financial instruments from seller to purchaser to occur seamlessly. The CSD refers to this process as ‘settlement’ (STRATE, 2017). When a trade has been concluded by the stockbrokers who utilise the exchange trading systems offered by the JSE, the JSE passes the trade deal information to the CSD which then passes the information on to the various CSDPs. The CSDPs then oversee the settlement procedure by investigating if the seller has the shares in electronic format to sell and if the buyer has the money on hand to pay for the financial instrument (STRATE, 2017). When these checks have been confirmed, the CSD ensures that the settlement process is realised by the relevant date. This is done by the CSD relocating the financial instrument from the seller to the purchaser and transferring the money due by the purchaser to the seller at the same time. The transfer of money takes place via the South African Reserve Bank into the bank account of the seller (STRATE, 2017). 17.

(28) The above has been detailed in the context of an exchange of a financial instrument. However, the same principle and process applies to distributions arising from the same financial instrument. When an investor receives an interest or dividend payment flowing from a financial instrument that is in a dematerialised format, the issuer who is obligated to pay the interest or dividends, must pay the CSD because it is only the CSD which knows who the beneficial owner of the distribution is. The CSD will then pass that distribution on to the various CSDPs and the CSDPs will pass the distribution (unless the investor resides directly within the CSDP) on to the appropriate financial service provider which ‘owns’ the investor or has the relationship with the investor. These authorised financial service providers will typically be stockbrokers, asset managers, linked investment service providers and management companies etc. Concerning the financial instruments which the CSD is entrusted to keep in electronic format, it is worth noting that the definition of ‘securities’ as stated by the Financial Services Board (2012:22) in the Financial Markets Act No. 19 of 2012 (hereafter referred to as the “FMA”) under Government Gazette No. 36121, includes listed and unlisted securities such as shares, bonds, debentures, derivatives, units in a collective investment scheme and money market investments. The CSD is regulated by the FMA (STRATE, 2016). It is important to grasp the scope of what may constitute a ‘security’ because a debt instrument that is listed on the JSE is exempt from WTI in terms of section 50D(1)(a)(ii). The act of dematerialisation as explained in this section, results in the issuer of the instrument not knowing the identity of the investor holding the instrument because there is no physical asset register held by the issuer. The ‘asset register’, so to speak, is maintained by the CSD and the various CSDPs. A brief exploration of international practice confirms that Belgium and Luxemburg (amongst other countries) support the same practice. Tison (2005:6) confirms that in Belgium, from the viewpoint of the issuer, dematerialised instruments are comparable to bearer instruments in that the issuer does not know who the holder of the instrument is. 18.

(29) The same view is held in Luxemburg where dematerialisation was introduced in 2013. Kayser and Spang (2013:2) clarify that any payment made by the issuer to a CSD absolves the issuer and thus any payments made by the CSDs to the investor holding the financial instrument absolves the CSD. Furthermore, the Ministry of Finance in Slovenia clarifies who has the withholding obligation with specific reference to dematerialised instruments (i.e. who is considered the ‘payer of interest’ in SA terms or in their terms, the ‘payer of tax’). This supports the position stated above that the act of dematerialisation results in the issuer of the instrument not knowing the identity of the investor holding the instrument (Ministry of Finance, 2015). In their clarification document, the Ministry of Finance (2015:3) states that: The payer of tax… who pays income from dematerialised financial instruments to an intermediary (i.e. a person who receives it for a third-party account) shall be obliged to calculate and deduct withholding tax… This means that withholding tax from dematerialised financial instruments paid to a person for a third-party account (intermediary) who is not considered the payer of tax… is always deducted at the highest applicable rate. The rule is based on the fact that the particular recipient of income is unknown to the payer of tax in such transactions (i.e. the payer of tax does not know the actual beneficiary). In this case the payer of tax can correctly fulfil his or her obligation of calculating, deducting and paying withholding tax only by calculating, deducting and paying the tax at the highest applicable rate.. The Slovenian Ministry of Finance (2015:4) additionally clarifies who would be considered an ‘intermediary’. However, in SA, it is simply stated by SARS (2015:44) that the flow of information (for ownership purposes) starts from the investor and moves to the entity that sees the investor as its client, then to the CSDP and then to the CSD. The same process occurs when a distribution takes place but just in reverse. 2.3. The application of Dividends Tax in respect of the withholding obligation. The purpose of introducing DT is to highlight the fact that when an instrument is in a dematerialised format, the DT legislation has been specifically drafted to clearly outline. 19.

(30) who has the withholding obligation, yet the same clarity in the WTI legislation is absent where instruments can also be dematerialised. If one considers the DT legislation in the Act, the legislature clearly defines the concept of a RI and splits the withholding obligation on either the company paying the dividend to the beneficial owner or on the RI transferring the dividend to the beneficial owner in terms of section 64G and 64H of the Act. This is due to the fact that the companies paying dividends do not always know who the beneficial owner of the dividend is, in the same way that issuers of interest instruments do not always know who the holder of the interest instrument is. Hence, where the RI faces the beneficial owner of the dividend instead of the company, the RI has the withholding obligation. The SARS Comprehensive Guide to Dividends Tax explains that if the dividend initially declared by a company is paid to a RI, then the main withholding responsibility shifts from the company to the RI under section 64H(1) of the Act (SARS, 2015:117). Section 64G(2)(c) of the Act specifically states that a company paying a dividend to an RI must not withhold any dividends tax from the payment of that dividend. It is further clarified in section 64H(2)(b) of the Act that an RI must not withhold any DT from the payment of any dividend if that person to whom the payment is made is another RI. It is clear that the withholding obligation shifts from person to person and therefore depends on who faces the beneficial owner. It must be stated that this withholding responsibility is clarified in the DT legislation. The wording of section 64H(1) of the Act (with section 64G being the same except that it refers to a company) confirms this in that it states: …a regulated intermediary that pays a dividend that was declared by any other person must withhold an amount of dividends tax from that payment…. Section 64D of the Act defines who constitutes an RI as follows: (a) central securities depository participant in section 32 of the Financial Markets Act; (b) authorised user as defined in section 1 of the Financial Markets Act;. 20.

(31) (c) approved nominee contemplated in section 76(3) of the Financial Markets Act; (d) nominee that holds investments on behalf of clients as contemplated in section 9.1 of Chapter 1 and section 8 of Chapter 11 of the Codes of Conduct for Administration and Discretionary Financial Service Providers, 2003 (Board Notice 79 of 2003) published in Government Gazette No. 25299 of 8 August 2003; (e) portfolio of collective investment scheme in securities; (f) transfer secretary that is a person other than a natural person and that has been approved by the Commissioner subject to such conditions and requirements as may be determined by the Commissioner; (g) a portfolio of a hedge fund collective investment scheme;. In simplistic terms, an RI is explained by SARS (2015:44) as an organisation that provisionally holds a dividend paid by a company before it is inevitably paid over to the beneficial owner and may have the withholding obligation to withhold DT before payment is made to the beneficial owner. It was explained by National Treasury (2009:41) that RIs were included in the DT legislation because RIs were usually the only reliable persons who knew who the enlisted shareholders were of listed companies (specifically on account of uncertificated shares i.e. dematerialised shares) because the listed shareholders were stored in share registers housed by different RIs. This is a direct result of the way dematerialised instruments operate in the market place. Considering that RIs were also incorporated into the DT legislation to accurately account for DT on beneficial owners who own listed shares, and taking into account that listed debt is specifically exempt from WTI in terms of section 50A(1) of the Act, the relevance of an RI is still critical from a WTI perspective. This is due to the definition of ‘securities’ in chapter 1 of the FMA as defined by the Financial Services Board (2012:22) which indicates what instruments custodians can hold in custody on behalf of the investor and that these instruments can be listed or unlisted. Therefore, an RI is still needed from a WTI perspective for unlisted instruments which are in a dematerialised format.. 21.

(32) The dematerialised concept applies in the same capacity to instruments paying interest as it does to shares paying dividends. In other words, as highlighted by SARS (2015:44), just like the flow of dividends starts from the listed company declaring and paying the dividend, the dividend then moves to the CSD and CSDP and from there to the various custodians who face the client, the exact process happens with dematerialised instruments that pay interest. As long as the instrument is dematerialised and unlisted, the likelihood of the issuer of the instrument knowing who the holder of the instrument is at the time the interest payment is due, is uncertain. The issuer might initially know who the holder is but the instrument can exchange hands or be bought and sold before the next interest payment is due. When the time comes for the interest to be distributed, it is uncertain whether the initial holder is still the same person who will receive the interest, hence payment goes to the CSD who knows who the holder is. Typical instruments which would fall into this category are unlisted bonds, money market instruments and unit trusts. Instruments in the WTI space and DT space can both be dematerialised but due to the fact that only DT has created a legislative framework for RIs to be held responsible for withholding, has created uncertainty in the WTI space in terms of who has the withholding obligation seeing that the principles are the same in both. It is stated in a BASA (2015b:1) submission to SARS that the uncertainty of who has the withholding obligation was created by the fact that there is no intermediary concept applied in the WTI provisions. In addition, BASA (2014:3) requested SARS to amend the existing WTI legislation to create certainty as to who is required to withhold (due to the different interpretations that existed in the market place) and that the legislative changes should replicate the DT legislation in practice, in the sense of defining who is termed to be ‘withholding agents’. The meaning of a ‘withholding agent’ is dealt with in section 2.5. In conclusion, the DT legislation has made it clear as to who has the withholding obligation with reference to dematerialised instruments by splitting the withholding responsibility between either the company facing the beneficial owner or the RI facing the beneficial owner and in terms of the latter, incorporating a definition as to what constitutes an RI. It 22.

(33) is submitted that since dematerialisation also applies in the world of WTI, the principle identified in DT should equally apply in WTI in that the last client-facing entity or the person facing the holder of the instrument and has the relationship with the holder (whether it is a company or RI) should have the withholding responsibility. 2.4. Comparison to the application of Withholding Tax on Royalties. It is noteworthy that the legislative provisions in respect of Withholding Tax on Royalties (hereafter referred to as “WTR”) has the exact same wording in respect of when withholding is triggered as WTI. This is in terms of section 49E(1) of the Act where any person making payment of any amount of royalties to or for the benefit of a foreign person, must withhold an amount of withholding tax on royalties from that payment. It must be mentioned that most of the provisions in both WTR and WTI are the same. The definition of what constitutes a royalty is very wide and falls outside the scope of this research topic, but if one considers the nature of what a royalty simplistically means, SARS (2016:2) states that WTR applies when a person pays royalties to a foreigner for the utilisation of intellectual property (hereafter referred to as “IP”). The definition of IP in terms of section 23I(1) of the Act principally refers to ‘copyrights, patents, trademarks and designs’. IP is more static in nature in the sense that it is enforced by a legal contract drawn up between specific parties, where the one who owns the IP agrees to receive a royalty from the one who wants to use it (Real Deal Docs, 2017). The legal contract is binding and confidential on the parties who agree to the terms. It has been emphasised by SARS (2016:12) in its draft Interpretation Note on WTR that the person responsible for withholding the tax on the royalty payment is the ‘person paying the royalty’. Again, the provisions of WTR do not clarify whether this withholding obligation refers to the licensee (equivalent to the issuer for context purposes) who initially pays the royalty amount or whether it is the ‘intermediary’ who transfers the royalty payment to the licensor. However, considering the nature of what a royalty is and how it typically works in practice should clarify this point.. 23.

(34) The definition of ‘securities’ in the FMA does not extend to include IP which is what a royalty is paid for. The definition includes listed and unlisted instruments but is not limited to the following: shares, bonds, debentures, derivatives, participatory interests in a collective investment schemes and money market securities. The definition of excluding IP must result in the CSD and the various CSDPs not having any electronic records of who is entitled to receive royalties. IP is not like a financial instrument that can be freely traded between investors on an open market and hence, is excluded from the scope of what the CSD, CSDP and other custodians are required to administer. If IP does not form part of the dematerialisation process, it must be assumed that the person (licensee) paying the royalty, has a direct relationship with the person receiving the royalty (licensor) and therefore must know who the person is who is receiving the royalty payment. The licensee can then make the determination if the licensor is a foreign person in order to know if tax must be withheld. Even though the licensee paying the royalty will always know who the licensor is who is legally entitled to receive the royalty, it does not necessarily mean that the licensee will directly pay the licensor (even though this is likely to happen most of the time). It is explained by SARS (2016:9) that the licensee can also pay the licensor’s representative or agent. This still does not change the fact that even though one can pay the licensor’s agent instead of paying the licensor directly, the licensee still knows who the person is who is legally entitled to the royalty because of the binding contract. The licensee can therefore, without uncertainty, withhold the appropriate amount of tax since (and assuming) the royalty is derived for the purpose of the foreigner. The researcher is of the opinion that the RI concept is therefore not needed in the context of WTR because IP is not something that can be dematerialised and does not have the same nature as financial instruments. The person paying the IP will always know the identity of the person receiving the royalty, which eliminates any uncertainty that could be created in terms of who has the withholding obligation. 24.

(35) In conclusion, considering the nature of royalties and it being based on the utilisation of IP which cannot be dematerialised, the current wording of the legislation works in terms of knowing who has the withholding obligation i.e. the payer of a royalty will always know who the ultimate receiver of the royalty is. However, the same cannot be said for WTI which has the same legislative wording but practically incorporates dematerialisation and the use of RI’s as the case in DT. 2.5. The concept of “Withholding Agent”. Various sources like the comprehensive guide to DT from SARS (2015:138), the draft Interpretation Note on WTR from SARS (2016:12) and even the SARS website (2017), make mention of the concept of a ‘withholding agent’, which is not defined in any withholding tax legislation in the Act. However, it is defined in section 156 of the TAA to mean ‘a person who must under a tax Act withhold an amount of tax and pay it to SARS’. The definition assists in understanding what is labelled as a person who has the withholding obligation, assuming the legislation is clear on who the person is who must withhold. For example, in DT, it would either be the company or the RI. The definition does not lend assistance in the WTI framework where there is uncertainty as to who has the withholding obligation. International legislation and guidelines will now be reviewed to gain an understanding of how these clarify the position of who has the withholding responsibility when an interest payment is made. 2.6. A review of applicable USA legislation pertaining to withholding of taxes. The Internal Revenue Service of the USA has similar withholding tax provisions on nonresidents as WTI in SA. In terms of section 1441(a) of the Internal Revenue Code (hereafter referred to as “IRC”), it is stated that: ...all persons, in whatever capacity acting…or…having the control, receipt, custody, disposal, or payment of any of the items of income specified in subsection (b)…, of any non-resident alien individual or of any foreign partnership shall…deduct and withhold from such items a tax equal to 30 percent thereof… (USA Internal Revenue Services, 1986). 25.

(36) It is evident that the withholding obligation is clearer in this context because it refers to different instances of when withholding can occur. Reference is made to ‘whatever capacity’ in which one has the ‘control, receipt, custody, disposal or payment’. In the light of dematerialised instruments, it is clear that if the person’s investments are held by a custodian, it would be the custodian who has the withholding obligation.. It is noteworthy to mention that dividends and interest (amongst other income types) must apply the same withholding trigger in terms of section 1441(a) of the IRC. This is according to section 1441(b) of the IRC which states the different types of income that qualify for withholding. It references the withholding responsibility on these incomes types back to section 1441(a) of the IRC. It is not split across different sections as is the case in the SA Income Tax Act where different provisions (like the RI concept) apply depending on whether one is dealing with dividends or interest. The treatment for dividends and interest is the same in the IRC.. The USA Department of the Treasury (2017:3) has provided a revised publication in which it is explained that a ‘withholding agent’ is the person in charge of withholding an amount made to a foreigner and can include the following persons:. individuals, corporation, partnership, trust, association, nominee, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.. The department further clarifies that although there can be numerous withholding agents, the tax withheld should only take place once by the person making the payment, although different withholding agents might be obligated to withhold (USA Department of the Treasury, 2017:3). For instance, a pass-through entity that is confident or has reason to suspect that no withholding was performed by the person who paid them the amount, is obligated to do the necessary withholding since this entity is also included in the meaning of a withholding agent (USA Department of the Treasury, 2017:3).. 26.

(37) This clarification document eliminates any uncertainty as to who must withhold and illustrates, similar to what was proposed by BASA (2015b:1) in that the ‘last client facing entity’ or the intermediary who has the relationship with the ultimate investor, must exercise the withholding responsibility. In a US tax journal, Young (2015:1) confirms this view that an issuer may rely on an intermediary to perform the reporting and withholding pending the responsibility undertaken by the intermediary and the contractual activities between the parties. 2.7. A review of applicable UK legislation pertaining to withholding taxes. Under section 874(2) of the UK Income Tax Act, the requirement to withhold tax on yearly interest arises when the person makes the interest payment to a non-resident. Even though this wording is very similar to the current WTI in SA, the difference is that Her Majesty’s Revenue and Customs (2016:1) (hereafter referred to as the “HMRC”) clarifies what this position entails in its tax manuals. It is explained by the HMRC (2016a:1) that where the interest payments are processed through various pass-through entities, the requirement to withhold tax only rests on one flow-through entity. This will be the last UK-resident entity in the flow-through chain that transfers the interest payment to the foreign person entitled to the interest. Further to this, the HMRC (2016a:1) acknowledges that practically speaking, borrowers will more often than not, not know about the withholding responsibility and HMRC will typically look to the final person through whom the interest payment is made to fulfill the withholding obligation. It is evident from the clarification provided in the UK tax manuals that the ‘withholding agent’ is the last person who has sight of the investor and who is in a position to withhold the correct amount of tax. 2.8. Current practice in SA. It is relevant to state at this point that after much discussion between BASA and SARS in terms of who the person is who is making the interest payment, the current practice agreed to by SARS, BASA, the JSE, the CSD and the CSDP forum is that ‘withholding agents’ will apply the appropriate withholding tax from the interest payment (BASA, 27.

(38) 2015a:1). Although the confusion has been cleared, it must be noted that the current WTI legislation is still unclear and needs to be amended to accurately clarify this agreement. In the same BASA (2015a:1) correspondence to SARS, it was agreed that ‘withholding agents’ would refer to ‘last client-facing entities’ like CSDPs, asset managers or stock brokers who receive interest payments from the CSD on dematerialised instruments only. In instances where the instrument is still in physical format, the issuer will be responsible for withholding and be classified as the ‘withholding agent’. Part of the process for the issuer is to inform the CSD if the instrument paying the interest is subject to the WTI provisions as described by STRATE (2015:4). This will allow the rest of the CSDPs and ‘intermediaries’ to know whether they need to investigate if the investor is a foreigner, pending the WTI status of the financial instrument. 2.9. Conclusion. This chapter aimed to address the objective of providing clarity on who is the ‘person who makes payment’ of any amount of interest in the context of instruments that are dematerialised. In this chapter guidance was sought on how dematerialised instruments operate in practice; interpretation from other local provisions on how they have dealt with the issue; and the USA and UK legislative provisions pertaining to their application of who is the ‘person who makes payment’. Based on the analysis presented, it is clear that the current wording in the WTI provisions has raised concern as to who must withhold, especially if one considers how the DT legislation was drafted which incorporates RIs. The fact that the concept of dematerialised instruments apply to both DT and WTI legislative provisions and that we are dealing with the same custodians who manage dividend and interest payments, adds to the confusion as no clarity is provided in WTI. In addition, when comparing the USA and the UK legislation in this regard, clarity is provided on who must do the withholding. The common principle gained from the analysis of sub-section 2.1 to 2.8 is that in order to practically withhold the correct amount of withholding tax before payment is made to 28.

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