As the Receiver of Revenue ('SARS') continues to discourage base cost erosion, various sections of the Income Tax Act ("the Act") have recently been added or amended. This may have severe consequences for clients who have loans with parties outside the country. 
Sections 50A-50H of the Income Tax Act, which are effective from 01 January 2015, have introduced a withholding tax on interest amounts paid to certain foreign persons. The tax is levied on 15% of the interest on earlier of payment or when is due and payable. The taxes withheld must be paid over to SARS by the end of the month after the interest withholding tax is triggered.

Importantly, the withholding tax is applicable to all interest which is paid, or becomes due and payable, on or after the above date. This means that withholding tax will also be triggered on interest which has been capitalised to a loan account in prior years and is repaid, or becomes due and payable, on or after the above date.

According to case law precedent, 'due and payable' is considered to be the date on when a company is legally obligated to make an interest payment according to the relevant finance agreement.

The accounting entries illustrate that the newly introduced withholding tax reduces the effective return on the loans granted by foreign lenders, who now only receive 85% of the agreed interest.  These lenders may be tempted to increase the interest rate in order to arrive at the same effective return they originally expected from their assets. This may trigger transfer pricing adjustments in terms of section 31 of the Act if the Commissioner determines that the interest rate paid is not market related. Any portion deemed to be excessive would be disallowed as a deduction and deemed to be a dividend in which case dividend withholding tax could be payable.

Companies affected by the new interest withholding tax provisions need to ensure they are in compliance with the new provisions.  Foreign loan account balances at 1 January 2015 should be analysed in order to determine whether they contain any unpaid interest amounts, which, when paid, may trigger withholding tax.  Relevant double tax agreements and the exemptions in the Act should also be considered and the necessary declarations lodged with SARS, where required, to ensure the requirements for exemptions or reductions are met, where these are available for interest withholdings tax.