A South African company has a building contract in Lesotho. The company employs a few local citizens for the construction of the project. Please advise on the following: 1. Should the Lesotho employees pay PAYE and UIF? 2. What is the tax implications of buying and selling of Bitcoin? 3. What constitutes capital gains? (for example how many transactions or what capital gain value) 4. What constitutes a trader? 5. What are the tax rates around Bitcoin?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
You will need more facts from your client before you can provide the advice required. And you need to read the double tax agreement and the legislation. Note for instance that the term “permanent establishment”, in the treaty, likewise encompasses: (a) a building site, a construction, assembly or installation project or any supervisory activity in connection with such site or project, but only where such site, project or activity continues for a period of more than six months; Some further considerations: In terms of paragraph 3, of Article 13 of the RSA / Lesotho treaty, the term “technical fees” as used in this Article “means payments of any kind to any person, other than to an employee of the person making the payments, in consideration for any service of a technical, managerial or consultancy nature.” The general rule, under paragraph 1, is that “technical fees arising in a Contracting State (Lesotho) and paid to a resident of the other Contracting State (RSA) may be taxed in that other State (RSA).” Remember that, under paragraph 4, the “provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the technical fees, being a resident of a Contracting State, carries on business in the other Contracting State in which the technical fees arise through a permanent establishment situated therein and the technical fees are effectively connected with such permanent establishment. In such case, the provisions of Article 7 shall apply.” In this respect you must take specific notice of paragraph (3)(b) of Article 5.
But we suspect that Article 7 applies – paragraph 1: The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. We also do not provide guidance on foreign legislation and specifically with respect to the withholding of Lesotho tax on payments to the employees (resident in Lesotho). Refer to their income tax – it is ‘employment income’ as defined and the obligations of the employer is covered there as well. Cryptocurrency is an asset, a financial instrument – see paragraph (f) of the definition of “financial instrument” in section 1(1) of the Income Tax Act. The essential question here is whether or the receipt (accrual) from the disposal of the cryptocurrency is of a capital nature. If the taxpayer were to argue that the receipt on disposal is capital in nature, the taxpayer bears the burden to prove on a balance of probabilities that the proceeds were capital in nature (what the taxpayer’s intention was). The number of transactions may well be relevant to the intention. Our courts have dealt with this issue on many occasions – the most recent being 9 February 2016. Judge van Der Merwe confirmed in this SCA case (CSARS v Capstone 556 (Pty) Ltd) that “… our courts have … consistently applied the test that a gain made by an operation of a business in carrying out a scheme of profit-making, is income and vice versa.” With ‘income’ the judge of course refers to ‘gross income’. The Judge continued as follows: “Where a profit is the result of the sale of an asset, the intention wp purpose of reselling it at a profit and assumed the character of trading stock …” When the client is generating (referred to as mining the currency) a Bitcoin (as a cryptocurrency) once a block has been decrypted or (more likely) by simply buying it, exchanging physical currency for digital at a Bitcoin exchange like Mt. Gox or Bitstamp, or through a service like BitInstant, the person is probably carrying on a trade and it would be gross income when sold (or trading stock).