Section 35 of the Income Tax Act No. 58 of 1962 (“the Act”) deals with royalty withholding taxes. This section was repealed by the Taxation Laws Amendment Act, 2012 as from 1 July 2013. The new royalty withholding tax regime (at a rate of 15%) substituted the old royalty withholding tax (at a rate of 12%). The new regime is contained in Section 49A to 49G of the Act. The draft Taxation Laws Amendment Bill 2013 proposed that the new withholding tax regime was deferred to 1 January 2015 without providing for the reinstatement of the old tax regime in the interim (i.e. the period between 1 July 2013 to 1 January 2015). This created confusion on whether you have to continue to withhold tax at the old rate of 12% or whether you need to withheld at the new rate of 15% or whether you can assume that no withholding tax on royalties applies until 1 January 2015.
The Taxation Laws Amendment Bill (B39 of 2013) (“TLAB”) has now rectified the position. In terms of section 49B of the Act, the 12% withholding tax on royalties will apply until 1 January 2015 after which the 15% withholding tax rate will apply.
The TLAB confirm the introduction of interest withholding tax at a rate of 15% as from 1 January 2015 which applies in respect of interest that is paid or that becomes due and payable on or after that date.
In terms of the TLAB withholding tax on service fees will come into effect from 1 January 2016 and will apply in respect of service fees that are paid or become due and payable on or after that date. Even though submissions were made that the rate is too high (considering services are generally priced at cost plus a small margin), the withholding tax rate remains at 15%. We however expect more changes to the services withholding tax regime before the effective date 1 January 2016.