2007 Income tax amendments – Part 1

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

THE 2007 Income Tax Amendment Bill was tabled in the National Assembly a couple of weeks ago. The Minster of Finance has reinstated the in duplum rule for tax debts, which I referred to in my last article, and should be commended for doing this.This move will ensure that the decline in taxpayer morality will slow down and maybe tax morality will improve after this change.At least taxpayers will have the assurance that the interest on unpaid taxes will be capped and cannot exceed the original tax amount owing.The long-awaited withholding tax on interest that the Minister of Finance has warned us about was also included in the proposed amendments.The obligation to withhold tax on interest paid becomes effective March 1 2009.The institutions that have an obligation to withhold tax on interest have therefore received fair warning of the change in the law.They will need to adjust systems to cope with the obligation that has been placed on them to withhold the tax on interest earned by investors.What is very interesting is that the obligation to withhold tax on interest is limited to Namibian banking institutions, Namibian unit trusts and the Namibia Post Office Savings Bank who pays interest to any person.On the basis that Namibia has a sourced based tax system; it is not clear why loans made by foreign lenders to Namibian businesses have not been included.Clearly the Namibian Fiscus is losing out if they allow the interest paid to a non-resident for tax purposes but receive no tax from the foreign lender on the basis that the source of the interest is located outside Namibia.The rate of withholding tax on interest paid to any person other than a Namibian company is 10 per cent of the interest paid to the person.Any interest earned by you from a fixed-term deposit or savings account at a commercial bank will therefore be subject to the withholding tax.Investors can invest any amount tax free at the Namibia Post Office Savings Bank up to February 28 2009.From March 1 2009 tax-free interest can be earned on an amount invested up to N$100 000.The interest earned on amounts invested at the Namibia Post Office Savings Bank in excess of N$100 000 will be subject to the new withholding tax.At the tax rate of 10 per cent this is still a good deal compared to the lowest tax rate of 17,5 per cent if the interest income was taxed as normal income.Individuals who are dependent on the investment returns therefore needs to do a bit of planning to optimise their after tax return on capital.The interest withheld by the institution must be paid to the Receiver of Revenue by the 20th day of the month following the month during which the interest accrues or is paid to the investor or such further period as is approved by the Receiver of Revenue.If the payment is not made by the due date, the institution will be liable for a penalty of 10 per cent of the tax payable for each month the tax remains unpaid.The penalty is limited to amount of tax payable.In addition to the penalty, late payment of the tax also attracts interest at a rate of 20 per cent per year calculated on the simple basis method.The time period provided for by the legislation before the withholding tax becomes effective (by March 1 2009) should be sufficient to allow the institutions to make the necessary adjustments to their systems to ensure they can comply with the additional obligation that have been placed on them.For institutions it is a question of like it or lump it – you have to withhold the tax from the interest earned by investors.Next time we look at some more amendments.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.The Minster of Finance has reinstated the in duplum rule for tax debts, which I referred to in my last article, and should be commended for doing this.This move will ensure that the decline in taxpayer morality will slow down and maybe tax morality will improve after this change.At least taxpayers will have the assurance that the interest on unpaid taxes will be capped and cannot exceed the original tax amount owing.The long-awaited withholding tax on interest that the Minister of Finance has warned us about was also included in the proposed amendments.The obligation to withhold tax on interest paid becomes effective March 1 2009.The institutions that have an obligation to withhold tax on interest have therefore received fair warning of the change in the law.They will need to adjust systems to cope with the obligation that has been placed on them to withhold the tax on interest earned by investors.What is very interesting is that the obligation to withhold tax on interest is limited to Namibian banking institutions, Namibian unit trusts and the Namibia Post Office Savings Bank who pays interest to any person.On the basis that Namibia has a sourced based tax system; it is not clear why loans made by foreign lenders to Namibian businesses have not been included.Clearly the Namibian Fiscus is losing out if they allow the interest paid to a non-resident for tax purposes but receive no tax from the foreign lender on the basis that the source of the interest is located outside Namibia.The rate of withholding tax on interest paid to any person other than a Namibian company is 10 per cent of the interest paid to the person.Any interest earned by you from a fixed-term deposit or savings account at a commercial bank will therefore be subject to the withholding tax.Investors can invest any amount tax free at the Namibia Post Office Savings Bank up to February 28 2009.From March 1 2009 tax-free interest can be earned on an amount invested up to N$100 000.The interest earned on amounts invested at the Namibia Post Office Savings Bank in excess of N$100 000 will be subject to the new withholding tax.At the tax rate of 10 per cent this is still a good deal compared to the lowest tax rate of 17,5 per cent if the interest income was taxed as normal income.Individuals who are dependent on the investment returns therefore needs to do a bit of planning to optimise their after tax return on capital.The interest withheld by the institution must be paid to the Receiver of Revenue by the 20th day of the month following the month during which the interest accrues or is paid to the investor or such further period as is approved by the Receiver of Revenue.If the payment is not made by the due date, the institution will be liable for a penalty of 10 per cent of the tax payable for each month the tax remains unpaid.The penalty is limited to amount of tax payable.In addition to the penalty, late payment of the tax also attracts interest at a rate of 20 per cent per year calculated on the simple basis method.The time period provided for by the legislation before the withholding tax becomes effective (by March 1 2009) should be sufficient to allow the institutions to make the necessary adjustments to their systems to ensure they can comply with the additional obligation that have been placed on them.For institutions it is a question of like it or lump it – you have to withhold the tax from the interest earned by investors.Next time we look at some more amendments.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.