In the Budget Speech of 2013 it was announced that a withholding tax on services would be introduced. The initial date was 2014 but implementation was subsequently postponed and the new effective date is 1 January 2016. 

The purpose of the introduction of a withholding tax on services (WHTS) is mainly to identify and collect revenue from non-resident taxpayers. WHTS is usually levied on technical, management or consulting fees that are delivered by non-resident taxpayers in South Africa but that currently fall outside the tax net. 

South Africa already has withholding taxes on interest, royalties and dividends. 

Some of the reasons for the introduction of WHTS can be found in the explanatory memorandum on the Taxation Laws Amendments Bill 2013, which states that fees like interest and royalties create local deductions for tax and therefore erode the local tax base. Withholding tax is a form of protection of the tax base. 

Another reason is that foreign entities with permanent establishments in South Africa are not registered for tax in South Africa and therefore not filing tax returns. In that way, they avoid paying tax in South Africa. 

National Treasury’s stated intention is therefore not primarily to raise revenue but to use the WHTS as a tool to identify and collect tax from non-residents who operate in South Africa. National Treasury also indicted an increase in service fees paid to low-tax jurisdictions, especially after the introduction of withholding tax on interest (WHTI) and the increase of the withholding tax rate on royalties. 

New Zealand, Australia, Malaysia and most African countries have a similar tax. 


The current proposal is that 15% will be withheld on any service fee paid to non-residents, having been received or accrued to such non-residents from a South African source. The rate of the tax could also be reduced if a double tax agreement (DTA) is in place between South Africa and the country receiving the service fee. 

The WHTS is a final tax, but there are a few exemptions: 

  • If a foreign person spends more than 183 days in South Africa during the 12 months preceding the date on which the service fee is paid
  • If the service fee is effectively connected with a permanent establishment of that foreign person in South Africa if that foreign person is registered as a taxpayer in South Africa, or
  • If the service fee is subject to employees’ tax in South Africa. 

In some countries WHTS will be a final tax while in other countries withholding taxes are provisional taxes and can be offset against the final tax liability of the company concerned. 

In South Africa, the proposal is that it will be a final tax. 


Withholding tax normally leads to the gross-up of fees and is therefore to be borne by the South African company. This increases the cost of doing business. In contrast, in terms of the Nigerian regulations, grossing-up provisions in contracts are illegal to the extent that it shifts the tax burden back to Nigeria. 

Another issue that requires careful considering is the complexity of determining the actual source of the service. The number of court cases generally dealing with a source of income is an indication of the complexity of this. 

Listed companies are not aware of whether the foreign person is rendering services in South Africa. 

It is also of concern that this could become yet another negative consideration for foreign companies when deciding whether to invest in South Africa. Specifically so when considered together with our complex labour environment, the administrative burden in setting up business and the current concern regarding the state of South Africa’s economy and the resultant impact thereof on its credit rating. 

The penalty that could be levied in terms of the Tax Administration Act for non-disclosure is severe. 


Companies investing in South Africa or using South Africa as a springboard to the rest of Africa are usually domiciled in First World countries that also have WHTS and other similar taxes and are therefore familiar with this concept. 

As mentioned above, companies will usually get a credit for the WHTS they have paid in South Africa either in terms of local legislation or if a DTA is in place between South Africa and their country of domicile. As such the WHTS therefore should not be the main reason for not investing in South Africa. 

From a South African perspective, we need to broaden our tax base or the number of taxpayers who are paying tax. 

It is common knowledge that the number of taxpaying companies is decreasing and that those that are paying are contributing less than expected a result of the current economic climate. The result is that South African individuals are increasingly required to carry the tax burden. 

This, in turn, will increase the number of taxpayers, thus ensuring that the burden is increasingly carried not only by South African individuals but also by other foreign businesses that utilise our resources. 

However, as with any other tax legislation, the success of the WHTS will be strongly influenced by administrative burden that accompanies it. This is usually where new legislation fails. 

A case in point is section 6 in the draft Taxation Laws Amendment Bill 2015 where it is proposed that this section be scrapped – one of the reasons being the resultant compliance burden that SARS themselves have difficulty managing. 


The South African government is facing an ongoing challenge to maintain the balance between encouraging foreign direct investment while ensuring that foreign businesses comply with local legislation and pay their fair share of tax in South Africa. 

WHTS itself, if believe, will not be the only reason to detract foreign business from investing in South Africa – the key factor will be the administrative requirements and related costs associated with the new tax that South African and foreign businesses will incur. 


Kemp Munnik CA(SA) – Head of Tax at SizweNtsalubaGobodo