In this newsletter, we look at the practical implications of withholding tax on foreign services and of other changes to the Income Tax Act and there are a few links to very interesting articles that recently appeared in various media.
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Tilman Friedrich's Industry Forum
Benchtest Monthly 12.2011
We do not see much excitement coming from our local financial markets over the next year or two. Under these circumstances, diversifying offshore, more specifically to the US would appear worth a consideration. European markets also offer great opportunities if you are brave and if you can be patient.
For the next year or two, interest rates and inflation in the developed world are likely to remain at current levels. Bourses and economies will be sluggish, particularly in the Eurozone, while there is a fair chance of US rates to start rising over the course of the next year. As US consumer sentiment improves, taxes are likely to be raised dampening any emerging renewed interest in investment markets and equities.
For further analyses and our views download the report, here...
Law and legal snippets
Income Tax Amendment Act –
Act 15 of 2011, Gazette 4864 of 30 December
This Act is effective 1 January 2012 for companies and 1 March 2012 for taxpayers other than companies, except certain changes to the regime with regard to withholding tax on interest, which is deemed to have come into effect on 1 March 2009.
In this newsletter we draw the readers’ attention to any action required to be taken. In a special newsletter on this Act circulated early January, more detail is provided, which can read on our website or downloaded in PDF format here...
1. Employer Funded Policies
What to do?
A number of retirement arrangements have been set up in the past capitalizing on a ‘loop hole’ in the Act. This allowed employers to deduct premiums paid in respect of life policies taken out on the lives of employees (e.g. funeral policies, keyman policies, group life schemes outside an approved fund etc.). The ‘loop hole’ allowed the policy proceeds due in the event of death of any employee to be paid to the employee’s dependents or nominees tax free.
Policy proceeds upon the death of an employee are now taxable in the hands of the employer, if the employer claimed any premiums in respect of the relevant policy for tax purposes, in the past. An employer who maintains such a life assurance scheme needs to introduce a new employment policy to define its intention regarding the impact of tax on the gross proceeds. i.e. will the employer carry the cost or will the cost be passed on to the beneficiary/ies? If the tax is to be recovered from the gross proceeds before affecting payment to any beneficiary/ies, procedures and controls need to be introduced to ensure that the gross proceeds are reduced by the tax effect before paying a benefit.
2. Commutation of Small Pension Fund Annuities
What to do?
Trustees need to consider whether they want to draw their pensioners’ attention to this opportunity, recognizing that the payment of every annuity normally attracts a fee either based on the annuity capital, or a transaction based fee or both.
3. Education Policies
What to do?
This means that where one of your staff members claims premiums towards an educational policy against the taxable income administered by your company, we suggest that you consider the following:
the employee to provide a copy of the policy to prove that the policy complies with the definition per the Act;
your HR/payroll department to diarise the maturity date of the policy and to introduce a strict routine to follow up on maturity date;
the employee to sign an undertaking, to inform HR/payroll department immediately upon cashing in the policy proceeds and to indemnify your company against any penalty as contemplated in section 11A of schedule 2, should he/she fail to inform your company immediately upon having cashed in the policy proceeds.
To ensure that proceeds from an education policy are not subjected to income tax, the employee needs to ascertain that the purpose of the policy is to provide capital for -
education or training at an educational institution of public character;
the purpose of obtaining a post-school qualification.
4. Withholding Tax on Interest
What to do?
For financial planning purposes, take into account that there is no withholding tax on bills and bonds issued by Government, regional and local authorities or on negotiable instruments issued by a local bank.
5. Withholding Tax on Services Payments to Non-residents
What to do?
Companies, trustees and individuals:
Ascertain whether you have any business dealings with any foreigner, where no double taxation agreement exists with Namibia (note that SA has a double taxation agreement with Namibia). If you do, ascertain whether these dealings fall into the ambit of the definitions of “entertainment fee”, “management or consultancy fee” or director’s fees. If they do, inform your business associate that you will be obliged to withhold 25% as from 1 January 2012 (all companies), respectively 1 March 2012 (all tax payers other than a company). Institute systems and procedures to identify taxable services, separately record the tax withheld from the gross amount, ascertain that all amounts withheld are paid over to Inland Revenue on or before the 20th of the month following the month in which any amount was withheld and complete the required form to accompany such payments.
Trustees and directors of unit trust management companies take note that funds and unit trusts are defined to be a ‘company’ and are therefore required to start deducting withholding tax as from 1 January 2012.
How will all of this work in practice though?
After discussions we held with Namibian Tax Authorities, it appears that Namibians may not need to withhold tax where Namibia entered into a Double Taxation Agreement with the country representing the tax domicilium of the non-resident or foreign company. It was also pointed out that the Namibian person obliged to withhold tax, must apply the rate agreed between Namibia and the relevant country should this be lower than 25%. Furthermore, we were informed that the process, procedures and documentation are not in place yet and that the first payment date has been extended to 20 March. Refer to this link to access PWC’s newsletter in this context.
Interesting media snippets
The curse of short-terminism
Here is an interesting commentary by Ricco Friedrich (no typo!) of Sanlam Investment Management, on typical human behaviour that prefers to focus on short-term pleasure and how this leads to decisions that will be to your disadvantage in the long-term.
Read this article, look in the mirror and ask yourself, are you wiser?
Investing in a living annuity can ensure stress free retirement...
...if you do the right things, like learning about gaps in pension planning from history, using the available tools to ensure adequate capital, even after death, remembering that inflation, capital growth and your draw down rate are key considerations. Follow this link to an interesting article that appeared in Patricia Holburn’s Money Marketing newsletter in December last year.
Conflicts of interest in the financial services industry...
...are unlikely to benefit you the consumer of financial intermediary advisory services. So what are you doing to protect yourself or your fund or company from falling prey to this everyday phenomenon?
In South Africa the FSB intends to put on the screws to protect the consumer. Follow this link to an article that appeared in Cover magazine in November last year.
Tilman Friedrich is a qualified chartered accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is a member of the marketing committee of ICAN and a member of the legal and technical committee of RFIN. Tilman is co-founder, shareholder and managing director of RFS.