Avoiding Double Taxation on Cross-Border Advisory Fees – An African Example

FULL QUESTION

If Company A is busy with a project (for example, in South Africa) and gets Company B based in Zimbabwe to do advisory work, company A will pay Company B a fee. The source of Company B’s income is South Africa. South Africa may be entitled to charge withholding tax, depending on the DTA, but Zimbabwe will also be entitled to tax company B on that income. How does one approach this problem to avoid double taxation?

• Determine whether SA actually imposes a WHT on fees?
• Determine whether there is indeed a DTA.
• Determine whether Company B is indeed a resident under the DTA.
• Determine the PE provisions and whether Company B may have a PE in SA.
• Determine the business profits provisions, seeing that no specific Article deals with fees.

ADDITIONAL WRITTEN ANSWER

To address the problem of potential double taxation between South Africa and Zimbabwe when Company A (based in South Africa) pays Company B (based in Zimbabwe) for advisory services, the following steps should be taken to ensure a proper solution:

• Determine South African Withholding Tax (WHT) on Fees: First, it is essential to confirm whether South Africa imposes a withholding tax on the type of income involved—advisory services fees. According to South African tax law, fees for services rendered by non-residents might be subject to withholding tax, depending on the nature of the services and their performance in South Africa.
• Examine the Double Tax Agreement (DTA) between South Africa and Zimbabwe: If there is a DTA between the two countries, it should be reviewed to determine how fees and income generated by services are treated. DTAs often contain provisions that limit the ability of the source country (South Africa in this case) to tax such fees or might reduce the withholding tax rate. The DTA would also clarify which country has the primary right to tax certain types of income and provide mechanisms to avoid double taxation.
• Determine Company B’s Residency under the DTA: The DTA would establish whether Company B (the Zimbabwean entity) qualifies as a resident of Zimbabwe. This would determine its eligibility for tax relief under the DTA. A clear residency status is critical to ensure that Zimbabwe can claim credit for any South African taxes paid by Company B.
• Consider the Permanent Establishment (PE) Provisions: It must be determined whether Company B has created a Permanent Establishment (PE) in South Africa by virtue of providing advisory services. Under the DTA, a PE might be established if Company B has a fixed place of business or presence in South Africa through which it conducts its business. If a PE exists, South Africa might be entitled to tax the business profits generated by Company B’s activities in South Africa.
• Evaluate the Business Profits Article in the DTA: Many DTAs have provisions governing the taxation of business profits. If there is no specific article on fees, the business profits article could apply. This article typically allows the source country (South Africa) to tax the profits attributable to the PE of a foreign company but exempts other types of income if there is no PE.

Practical Solution:

• Tax Credit in Zimbabwe: Since Zimbabwe may also seek to tax the income of Company B, the entity would be taxed in both South Africa and Zimbabwe. However, Zimbabwe’s tax laws, or the DTA (if applicable), would allow Company B to claim a foreign tax credit for taxes paid in South Africa. The credit would ensure that Company B does not suffer double taxation on the same income. However, the credit cannot exceed the amount of tax Company B would owe on the same income in Zimbabwe. This credit would be claimed in the tax return of Company B in Zimbabwe.
• Consultation with Local Experts: To ensure compliance with both jurisdictions’ tax laws, it would be wise for Company B to consult with tax experts in both South Africa and Zimbabwe. They can help confirm the application of WHT in South Africa, the existence and application of the DTA, and the procedures for claiming foreign tax credits in Zimbabwe.

By following these steps, Company B can avoid double taxation while ensuring compliance with the tax laws in both South Africa and Zimbabwe.