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South Africa: Dividends Withholding Tax Regime Expected to Replace Secondary Tax on Companies
South African taxpayers need to consider the implications of a dividends tax regime that could be enacted and implemented towards the end of 2010.
Enactment of a new dividends tax would bring the South African system into line with standard international tax practice and would provide for the repeal of the existing secondary tax on companies (STC) regime in South Africa—a regime that currently is followed only by South Africa, India, and Estonia. In contrast to the STC regime, the new dividends tax regime would impose a tax on dividends at the shareholder level, at a rate of 10% (subject to a rate reduction in terms of any relevant income tax treaty provisions). The party liable for the tax would be the party that ultimately is entitled to the benefit of the dividend (i.e., the beneficial owner).
Calculation of Tax
Because dividends would be declared exclusive of the dividends tax, a shareholder would have to pay a slightly higher effective tax rate on dividends than does a company paying STC at 10%.
For example, a dividend of R100,000 declared under the STC regime results in STC of R9,090 (R100 000 x 10/110), leaving a net dividend for distribution to the shareholder of R90,909.
Under the new dividends tax regime, the R100,000 would be subject to the dividends tax at a rate of 10% (R10,000) and would result in a net dividend of R90,000. Therefore the shareholder would receive R909 less as a dividend under the new dividend tax regime.
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Withholding of Tax
Although ultimate liability for the tax would be that of the beneficial owner, an obligation to withhold the tax would initially rest with the company declaring the dividend. However the withholding tax obligation could shift to what the draft legislation refers to as an intermediary.
An intermediary, in essence, would be another entity that temporarily holds the dividend before it is eventually paid over to the ultimate beneficial owner. The amount of the dividends tax would be withheld at a rate of 10% and paid over to the South African Revenue Service by the end of the month following the month of payment of the dividend.
Exemptions
Exempt beneficial owners (that is, those exempt from the dividends tax) would include South African resident companies; retirement and benefit funds; various governmental entities; various tax-exempt bodies (i.e., PBOs—public benefit organisations—and other similar tax-exempt organisations); and shareholders in registered micro-businesses to the extent that the aggregate amount of the dividends paid during the tax year does not exceed R200 000. The tax would only arise once profits are remitted offshore or leave the corporate environment (e.g., paid to individuals).
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Dividend to Be Redefined, Other Legislative Considerations
The introduction of the new dividends tax has resulted in a number of proposed amendments to existing law. One amendment would concern a proposed re-write of the definition of “dividend.” The new definition of a dividend (in contrast to the lengthy and rather complex current definition) would be both short and simple. The proposed dividend definition would include any amounts transferred by a company to a shareholder to the extent that it does not result in the reduction of contributed tax capital (CTC) and constitutes shares in the company (e.g., capitalisation issue).
KPMG Observation
In light of the pending dividends tax, a company looking to pay a dividend (under the new regime) would need to consider whether such payments result in the reduction of CTC or not. Such a consideration would be relevant in determining the portion of the payment that would not result in the reduction of CTC and accordingly be subject to tax.
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The CTC of a company would be defined (under the draft legislation) to include amounts received by or accruing to the company as consideration for the issue of shares by the company, and would include the share capital and share premium of the company immediately before the date on which the new dividends tax is effective. Note that consideration received by the company for the issue of shares would include not only cash or the value of assets provided by the beneficial owner, but also would include the value of services provided to the company by a beneficial owner.
An area of complexity introduced by the amended legislation concerns the treatment of STC credits (i.e., the excess of dividends accrued previously subjected to STC over dividends declared). The need to avoid subjecting “profit” previously subject to STC to the dividends tax has been recognized, and a transition rules would allow for the use of STC credits for a period of five years after the effective date of the dividends tax regime. Under the transitional arrangement, existing STC credits could be used against dividends paid to beneficial owners.
Example
Assume Company X has an STC balance of R100 (on the day of implementation of the new dividends tax regime) and declares a dividend of R150 to its shareholders. Company X would be required only to withhold dividends tax on R50 of the dividend.
Further, in the event that a dividend is declared and the STC credits are used, the company declaring the dividend would need to notify its shareholders to the extent of which the dividend is offset (utilised) by STC credits.
To the extent that the company pays dividends and uses available STC credits against dividends paid, the company would in terms of the amended legislation be deemed to have paid “nil” dividends to the beneficial owners. The use of STC credits by companies against dividends paid, would require the distributing company to notify all beneficial owners of the extent to which STC credits were used against dividends paid (i.e., an added administrative task).
KPMG Observation
In general, the new dividends tax regime itself would effectively levy a 10% tax on shareholders. While this concept may be simple, it is anticipated to have a significant effect on companies, intermediaries, and beneficial owners. Much of the pending legislation concerns the administration of the system. Other areas that taxpayers may need to consider include:
- The distinction between regulated and unregulated intermediaries and the administration burden on companies and intermediaries that would result from the new dividends tax regime
- The implications for passive holding companies
- Other rules that could apply, i.e., concerning deemed dividends anti-avoidance provisions, specialised regulated intermediaries, distribution of shares and share rights.
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For more information, contact a tax professional with KPMG in South Africa:
Teresa Calvert, + 27 (0) 11 647 6887,
teresa.calvert@kpmg.co.za
Roné la Grange, +27 (0) 11 647 5721,
rone.lagrange@kpmg.co.za
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