Published on December 14th, 2012 | by admin0
UNDERSTANDING THE WITHHOLDING TAX
The Minister of Finance announced in July 2011 that various measures would be considered to broaden the tax base in Namibia. One of the new taxes the Minister announced at the time was the withholding tax that is payable when a non-resident is paid for services rendered to a Namibian resident. This new tax has far reaching commercial and statutory implications for Namibian residents. The introduction of this tax has been criticised by many taxpayers due to the high withholding tax rate (25% on the gross amount paid to the non-resident) and the range of services that are subject to the withholding tax.
Given the fact that government is expecting a decline in the main source of income (being the revenue received from the common customs union), it came as no surprise that the withholding tax on services tax was top of the list of various new taxes that will be introduced in the near future. This form of tax collection can be described as low hanging fruit compared to some other forms of tax collection. The onus is on the taxpayer to make a declaration of the tax that has to be paid. All the Revenue Authority really has to do to make sure it is getting the right amount of tax is to ensure taxpayers comply with the law. Most Namibian residents are law abiding so will comply with law. To encourage taxpayers to comply with the law, the sanctions for non-compliance are usually very harsh. In this particular case the potential sanctions are no exception.
The tax must be collected (deduct it from the amount to be paid) by the Namibian resident before paying the non-resident the amount that has been charged for the services that are rendered. The tax withheld must then be paid over by the Namibian resident to the Revenue Authority on a monthly basis. It does not matter where the services are rendered – the trigger for the obligation to withhold the tax on the amount charged for the service is whether the service provider is a non-resident or not. Therefore, even if the non-resident never travels to Namibia to render the service, the withholding tax applies and must be deducted from the amount charged for the service rendered.
The rationale for the introduction of the withholding tax on services rendered by non-residents is simple – a Namibian resident is generally allowed to deduct expenditure incurred outside Namibia to determine the tax payable on Namibian profits but the non-resident is not necessarily registered for income tax in Namibia and therefore the withholding tax on payments to non-residents makes up for the revenue the government loses when allowing the Namibian taxpayer the deduction for the amount paid if the non-resident is not an income taxpayer in Namibia.
The tax deducted from non-resident service providers must be paid to the Revenue Authority by the 20th day of the month following the month in which the tax was deducted. The sanction for failing to pay the tax deducted by the due date is 10% per month or part of the month for the period the tax remains unpaid. This penalty is limited to the tax deducted. Furthermore, the late payment of the tax is also subject to interest at rate of 20 percent per year for the period the tax remains unpaid. The Revenue Authority has the right to recover the withholding tax from the Namibian resident who is responsible to deduct the tax from payments made to non-residents.
At 25 percent the tax rate is very high compared to other countries in this part of the word. It is common in service supply agreements of this nature to find a clause which stipulates that the non-resident will not be liable for any domestic taxes. This really means that the recipient of the service bears the cost of the withholding tax because the non-resident expects to receive the amount that has been invoiced for the service rendered. This is what has happened in many cases since the introduction of the tax on 30 December 2011. The effect of this practice is that the Namibian resident bears the cost of the withholding tax because the original cost must be grossed up so that the law is complied with. The 25 percent withholding tax rate then effectively becomes 33 percent.
Withholding tax rates are generally much lower because it is applied to the amount paid to the non-resident on the basis that the recipient of the amount has incurred costs to render the service. A tax rate of 10 percent would have been received much more favourably by all and sundry in my view.
The definition of the services which are subject to the tax is also problematic. It is very clear that the Revenue Authority’s intention was that all possible types of services should be subject to the tax. The definition includes among others management, administration, consulting and technical services or any service of a similar nature. Also included in the definition are directors’ fees and fees earned by entertainers and sports persons who earn income from performing in Namibia.
While it is completely understandable that management and administration fees are subject to the tax, it is questionable why services that are specialised and which are generally not available in Namibia would be treated the same as services that are commonly available in Namibia for purposes of this tax. Specialised services in the mining and oil and gas industry comes to mind here and the grossing up of the service fees effectively kills a project before is has started. An increase of 33 percent in the project cost of drilling a well or building a mine increases the risk of return for the investor to such an extent that other alternatives with a better investment return will be considered. Namibia’s attractiveness as an investment destination has declined significantly over the last 12 months and the introduction of this tax has definitely played its part. Our country needs direct foreign investment but other investment destinations will be picked ahead of us if the return on investment in Namibia lags behind others.
It was government’s main intention to plug the revenue hole created by allowing a deduction for amounts paid to non-residents when determining the tax payable by Namibian residents. There was clearly a secondary intention with this tax given various other government policies to address unemployment in our country – to encourage non-residents to set up shop in Namibia and render the services from a local base that has the potential to create employment opportunities for Namibians and to transfer knowledge to Namibians. In some cases this will be successful but unfortunately it is not that simple. Some services are so specialised and require extraordinary skills that they are concentrated in other parts of the world where they can easily be mobilised to serve customers where ever they are.
A positive way to address the impact this tax has had is to lower the tax rate or consider multiple rates for various types of imported services so that Namibia and its people are the overall beneficiaries at the end of the day.
The author, Cameron Kotze, is a tax partner at Ernst & Young