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Thread: Amortization of software

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    Amortization of software

    Hello,
    I represent a foreign company interested in selling in South Africa to financial institutions a license to use a computer based software which generates buy and sell signals - commonly known as market timing - for the major international equity markets, mostly the US and which can be applied to trade ETF's and the major equity derivatives such as futures on the NDX 100 or the S&P 500. The software will be installed on a PC, with a value of 20,000 rand with the selling price of the software being $ 5 million, about 40 million rand. The price is justified by the outstanding performance of the software which can easily be assessed by a sophisticated financial institution. The software would have annualized returns in excess of 15% over the past eleven years as applied to the S&P 500 index. While past performance is no indication/guarantee of future performance, the decision process used is fully disclosed to the buyer which can use the software in its overall decision making process. The buyer will receive two weeks of on premise training and five years of technical support. While the buyer will be able to operate the computer and software on a daily basis, the seller will provide also the timing signals as they occur.

    I understand from an other from posting that software installed on a PC can be amortized by corporations over two years for tax purposes.
    Does this apply to any software or only off the shelf software packages worth a few 100,000 rands. Any limitations given the size of the purchase, about 40 million rand. Useful life of the software is difficult to assess, but five years seems reasonable, with periodic updates.
    Where can I find detailed information on this subject matter?

    My other question relates to exchange control matters. The selling price of $5 million will be paid at the closing of the sale by the buyer's bank to the seller's bank in Hong Kong in $US. What is the best and most cost effective manner to make the payment and obtain government authorization to pay

    Looking forward to a long and pleasant experience with the forum
    Norhatley

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    Site Caretaker Dave A's Avatar
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    I've moved this into the tax forum where it is more likely to attract the attention of someone who might know the answers.
    The trouble with opportunity is it normally comes dressed up as work.

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    Silver Member geraldenek's Avatar
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    wear and tear on software for a personal computer is 2 years and 3 years is it is for main frames. this applies to purchased software which the client will purchase in your case from your company.

    With regards to your foreign payment - the buyer will prior to paying over the fund need an invoice - he/she will go to the bank to the foreign department and fill in forms in order to make this payment.

    As for China - not sure what documents you will need / to do in order to clear the funds.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

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    Many thanks for doing this.
    norhatley

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    Do exchange controls apply to this kind of transaction?
    How long does it take to get approval to transfer funds? Does the size of the transfer matter?
    Thanks
    Norhatley

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    Silver Member geraldenek's Avatar
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    Hello Norhatley

    Exchange control applies to all money being transferred - not talking about the small amounts of buying something over the internet with your credit card. If i can remember it used to take two business days for the bank to process the transaction. The amount would not matter as long as there are supporting documents in terms of an invoice.

    You can always e-mail or phone a bank over here, we have FNB, Absa, Nedbank and Standard Bank and speak to their foreign exchange department.
    Geraldene Kapp
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    www.mytaxhelp.co.za

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    thanks
    What about withholding taxes? If the software is acquired either from the Netherlands or from Hong Kong, would there be withholding taxes if the payment for the software is considered as royalties, which is the case for most countries?
    thanks
    norhatley

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    Silver Member geraldenek's Avatar
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    Hello Norhaley

    It is really difficult to comment – because in your first statement you are saying it is software and on the other some countries see is as royalties – then it has to do with the way the selling agreement is drawn up. Maybe it is best to consult with a South African lawyer about your current contract and he will also be able to assist you with the tax side of it. Sorry but I can’t raise a proper opinion as I do not have all the facts.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

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    Thanks Geraldene,
    Let me rephrase the question.
    My view is that the acquisition of the software is of a capital nature and the cost of the software can be amortized over two years, being computer software.
    My question is whether the payment for the software and the computer to a foreign country, if the acquisition cost is indeed viewed as of a capital nature, be subject to withholding tax in South Africa, or any other tax that I have not yet discovered?
    Some countries view payments made for the use of computer software as royalties. I was curious to know whether that was the case in South Africa, and if yes, whether the payments would be subject to withholding tax?.
    Can this kind of question of general be directed to a SARS contact center, without seeking an advance tax ruling, and if yes, where should I direct the question?
    Many thanks
    Norhatley

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    Hi norhatley
    I think Geraldine is saying that it is a complex question, as you know, and much of the interpretation and treatment would depend on the terms of licence, which is after all what is being sold.

    I found this link at SAICA, South African Institute of Chartered Accountants, which should shed some light on how it is treated in SA.

    http://www.saica.co.za/integritax/19..._copyright.htm

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