South Africa’s intention to introduce a 15% withholding tax on cross-border services fees would stymie the country’s plans to increase its attractiveness as an investment destination, while increasing the cost of doing business, states audit, tax and advisory firm PricewaterhouseCoopers (PwC).

In his February Budget Review, Finance Minister Pravin Gordhan announced plans to introduce the tax from March 1, 2014.

“The South African government is concerned that nonresident providers who derive income from South Africa may not all be paying tax in the country; therefore, the need to deduct the tax before their payments are received,” PwC tax partner and head of the Africa Tax Desk Elandre Brandt said in a statement on Tuesday.

However, PwC believed the proposed new tax would place an added administrative burden to those regularly procuring offshore services, as implementation and continued tax processing and remittance would require extra infrastructure, including upgrades to existing accounting systems and manpower.

It would also narrow international service providers’ profit margins and raise the cost of doing business.

Nonresident service providers tended to price-in the effect of this tax, which was inadvertently imposed on turnover at percentages that ranged from 5% to 20%, which effectively eroded the profit margins made by businesses, Brandt explained.

This not only effectively increased the cost of doing business for South African businesses, but also enabled a potential “ripple effect” on the prices of goods and services across the country, he added.

Despite South Africa being one of the few countries in Africa that did not impose a requirement to deduct a tax on payments to nonresident persons for services rendered, the tax proposal was not in line with international norms and made South Africa unattractive as an investment or operating location, he said.

Withholding tax was common in most developed countries and several countries required taxes, including dividend, interest, royalty and rent, to be deducted in advance on payments to nonresident persons.

Until recently, South Africa only imposed a withholding tax on royalty, dividend and interest payments, certain disposals by nonresident persons and payments to visiting entertainers and sportspersons, Brandt noted.