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Johannesburg - A proposal to extend South Africa's withholding tax on cross-border services could make the country less attractive to foreign investors, PricewaterhouseCoopers (PwC) Tax Services said on Tuesday.
The move was not consistent with international norms and would make South Africa unattractive as an investment or operating location, PwC Africa tax desk head Elandre Brandt said in a statement.
At present, South Africa was one of only a few African countries which did not require the taxation of payments for services to non-residents.
Finance Minister Pravin Gordhan announced in the 2013 Budget Review in February that the tax on cross-border service fees would be introduced from March 1 next year. It was believed the tax would be applied at a 15% rate.
Withholding taxes on dividend and interest payments were also recently introduced, and the rate of withholding tax on royalties was increased.
"The South African government is concerned that non-resident providers who derive income from South Africa may not all be paying tax in the country; therefore the need to deduct the tax before their payments are received," Brandt said.
The tax would be imposed when the payment was made, so the payer acted as an agent of the government for collecting the tax. It would constitute a prepayment of income tax, and would be refundable on annual tax returns if it exceeded the determined income tax liability.
However, Brandt said withholding tax was, in practice, often inadvertently imposed on turnover, at rates of between five and 20 percent, which in effect eroded businesses' profit margins.
"To safeguard their margins, non-resident service providers tend to price-in the effect of this tax, which ultimately increases the cost of doing business for local businesses with a potential ripple effect on the prices of goods and services across the nation."
He said South Africans who regularly used foreign services would have to deal with additional administrative burdens, including deducting the tax, remitting it to the SA Revenue Service, obtaining proof of tax payment, and providing this to the service provider.
"Service payments which tend to be more frequent will no doubt require significant man hours in terms of administration as well as upgrades to existing accounting systems," Brandt said.
