Withholding Tax On Interest Implications

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

Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com. With effect from 1 March 2009 any interest paid by a Namibian bank or unit trust to any person, other than to a ‘Namibian company’ or unit trust, must have tax withheld by the payer at the rate of 10%.The ‘withholding tax on interest’ is deductible from interest payments made to residents as well as non-residents and is generally a final tax.A ‘Namibian company’ includes a company, body corporate or association incorporated in Namibia, a Namibian unit trust and certain public benefit bodies.The amendments to the Income Tax have the effect that some persons who were previously exempt from income tax on their receipts or accruals of interest will now be subject to the withholding tax.Municipalities, churches, pension and provident funds and other organisations that are exempt from income tax on their receipts and accruals will be subject to the withholding tax provisions contained in the Income Tax Amendment Act.Even the government itself will be affected by the withholding tax if it has a bank account with a Namibian bank.Whether this was the intention of the legislation is not sure, but that this is the effect of the wording of the section 34A of the Income Tax Act.A Namibian company is not subject to withholding tax on interest because it is liable for tax on interest income at the corporate tax rate of 35% whilst the interest income for individuals and trusts will be exempt from income tax because it is subject to the withholding tax that will be effective from 1 March 2009.Where the interest is payable to a trust of which the company or unit trust is a beneficiary, withholding tax is deducted from the interest payment by the bank or unit trust and the tax deducted can be utilised as a credit against any normal tax payable by the recipient beneficiary of the trust (the company) on the interest received from or distributed by the trust.The application of this rule is by no means certain and the wording of the provisions is imprecise and open to dispute.The withholding tax must be paid within 20 days of the month-end after the month in which the interest accrued (the due date may be extended by the Minister).The withholding tax payment must be accompanied by a declaration in a prescribed form.To date, the prescribed from has not been issued by the Ministry of Finance.Late payment of the withholding tax attracts a penalty of 10% of the tax due, for each month or part thereof until the tax is paid, although this penalty can be waived if the Minister is satisfied the failure to pay was not due to any intent to evade the obligation.Interest is also payable on any late payment of the withholding tax at the rate of 20% per annum.Any amounts deducted in excess of the amount due must be refunded to the creditor/unit holder and will be credited by Revenue Namibia against future withholding taxes due.The Bank or unit-trust must deliver a certificate to the recipient of the interest, showing the amount of interest paid and the tax withheld in each period 1 March to the last day of February in the following year.With effect from 1 March 2009 any interest paid by a Namibian bank or unit trust to any person, other than to a ‘Namibian company’ or unit trust, must have tax withheld by the payer at the rate of 10%.The ‘withholding tax on interest’ is deductible from interest payments made to residents as well as non-residents and is generally a final tax.A ‘Namibian company’ includes a company, body corporate or association incorporated in Namibia, a Namibian unit trust and certain public benefit bodies. The amendments to the Income Tax have the effect that some persons who were previously exempt from income tax on their receipts or accruals of interest will now be subject to the withholding tax.Municipalities, churches, pension and provident funds and other organisations that are exempt from income tax on their receipts and accruals will be subject to the withholding tax provisions contained in the Income Tax Amendment Act. Even the government itself will be affected by the withholding tax if it has a bank account with a Namibian bank.Whether this was the intention of the legislation is not sure, but that this is the effect of the wording of the section 34A of the Income Tax Act.A Namibian company is not subject to withholding tax on interest because it is liable for tax on interest income at the corporate tax rate of 35% whilst the interest income for individuals and trusts will be exempt from income tax because it is subject to the withholding tax that will be effective from 1 March 2009.Where the interest is payable to a trust of which the company or unit trust is a beneficiary, withholding tax is deducted from the interest payment by the bank or unit trust and the tax deducted can be utilised as a credit against any normal tax payable by the recipient beneficiary of the trust (the company) on the interest received from or distributed by the trust.The application of this rule is by no means certain and the wording of the provisions is imprecise and open to dispute. The withholding tax must be paid within 20 days of the month-end after the month in which the interest accrued (the due date may be extended by the Minister).The withholding tax payment must be accompanied by a declaration in a prescribed form.To date, the prescribed from has not been issued by the Ministry of Finance.Late payment of the withholding tax attracts a penalty of 10% of the tax due, for each month or part thereof until the tax is paid, although this penalty can be waived if the Minister is satisfied the failure to pay was not due to any intent to evade the obligation. Interest is also payable on any late payment of the withholding tax at the rate of 20% per annum.Any amounts deducted in excess of the amount due must be refunded to the creditor/unit holder and will be credited by Revenue Namibia against future withholding taxes due.The Bank or unit-trust must deliver a certificate to the recipient of the interest, showing the amount of interest paid and the tax withheld in each period 1 March to the last day of February in the following year.