Following suit and aligning its tax on dividends with international practice,South Africais the latest country to replace its secondary-tax-on-companies (STC) regime with the controversial dividend-witholding-tax (DWT), which came into effect on 01 April 2012.
Distinction between STC and DWT
STC was payable at a rate of 10% of the net dividend amount. The net dividend amount is calculated by taking the dividend declared during the dividend cycle less any dividend accrued during the same period. To illustrate this concept, if a company X declares a dividend of R 100 000 on 1 January 2012 and has accrued dividends of R 60 000 from other companies, the net dividend amount will be R 40 000 (R 100 000 – R 60 000). STC at 10% of R 40 000 = R 4 000. This amount is then payable to SARS over and above the dividend of R 100 000 payable to the shareholder. The liability therefore rested with the dividend declaring company. Should the dividends accrued exceed the dividends declared by a company, no STC is due or payable. The amount by which dividends accrued exceeds dividends declared is treated as a STC credit, which is carried forward to the next dividend cycle and set off against the next dividend declaration.
DWT, on the other hand, is a tax levied on the shareholder instead of the dividend declaring company, as is the case under STC. As DWT came into effect on 01 April 2012, all STC credits had to be disclosed to SARS by way of an IT56 form, whereby a company declares dividends on 31 March 2012, irrespective of whether the company has dividends to declare or not. A company’s net STC credits on 31 March 2012 will be carried forward into the new DWT regime on 01 April 2012, which may then be used over a period of five years thereafter.
DWT is levied on dividends declared and paid by companies resident inSouth Africaas well as foreign companies which are listed on the JSE (Johannesburg Stock Exchange) at a rate of 15%. This rate is 5% higher than the initially proposed 10% which was in line with the STC rate. In this instance, the declaring companies are required to withhold the DWT and pay same over to SARS and subsequently pay the remaining (net) portion of the declared dividend over to shareholders.
As with every general rule, there are exceptions to this one as well. Beneficial shareholders exempted from paying DWT are the following:
- A South African Company
- Public benefit organizations
- Government and semi-government institutions
- Pension, provident, retirement funds and similar funds
- Environmental rehabilitation trusts
- Shareholder in a micro business (R 200 000 of the total dividend paid by the business during a particular year of assessment will be exempt)
- Medical aid schemes
In order to qualify for the abovementioned exemption, beneficial shareholders are required to submit a declaration to the declaring company, notifying it that they are exempt from DWT, along with a written undertaking that they will notify the declaring company of any changes in their details. Should the exempted shareholder not comply with these pre-requisites, DWT will be withheld by the company and the shareholder will thus not enjoy the benefit of the exemption. SARS will hold the beneficial shareholder and the company jointly and severally liable for the payment of the taxes until the liability has been discharged.
Foreign shareholders are not exempted from DWT. Should such shareholder reside in a country other than a treaty country, DWT will be levied at 15%. If a foreign shareholder resides in a treaty country, the rate provided for in the double tax agreement (DTA) will apply, which rate may be less than 15%. In order to qualify for this exemption, foreign shareholders must declare to the company that they reside in a treaty country (in terms of which a reduced DWT rate applies) and furnish the company with a written undertaking that they will notify the company of any changes in their details.
If the declaring company sets off its STC credits against the declared dividend during a particular dividend payment, it has to notify the shareholders receiving such dividend that a STC credit was used and the extent of such credit. As SARS does not have jurisdiction in foreign countries, it is doubtful whether SARS will require declaring companies to send notifications to its foreign shareholders too. Even though one or more of the shareholders are exempted from DWT and will never use the STC credits, the declaring company is still required to reduce its STC credits by the portion attributable to such beneficial shareholder/s.
Dividends received by a company after 01 April 2012 will generally not form part of its STC credits. The only way in which a company’s STC credits can increase after 01 April is when it, as a shareholder of another dividend declaring company, receives notice from that company of an amount by which the declaring company’s STC credits have been reduced by a particular dividend payment to the receiving company. The STC credit of the receiving company will then increase with the proportionate reduction in the declaring company’s STC credit. Thus, this is basically a transfer of STC credits from one company to another. However, should the STC credit be “used” on a shareholder who does not declare dividends and can therefore not use the STC credits, e.g. an individual, the STC credit will be lost to the fiscus. As SARS does not have jurisdiction in foreign countries, STC credits used on foreign shareholders will also be lost to the fiscus and not transferred to the foreign juristic shareholder.
Along with the new regime came an additional layer of administrative rules and regulations. This will burden further the already compliance burdened tax payer. Additional supporting data required to accompany a dividend tax return is onerous. Although dividends will now be taxed in the hands of the shareholder, the company declaring the dividends will act as a collection agent on behalf of SARS. Whether the taxpayer and SARS will be able to handle and efficiently manage the new tax regime remains to be seen.