Tax-Avoiding Dividend Schemes to be Closed Down
30 April 2011
Posted by: Author: Phakamisa Ndzamela
Tax-Avoiding Dividend Schemes To Be Closed Down
The long-awaited STC replacement finally kicks in on 1 April 2011—with a few stings in its tail
Tax-Avoiding dividend schemes will be closed as a new dividend tax kicks in on 1 April 2012.The new dividend tax is are placement to the secondary tax on companies.According to a spokesperson for National Treasury, "several dividend schemes undermine the tax base.One method involves the use of dividend cessions, where taxpayers effectively purchase tax free dividends without any stake in the underlying shares.Another scheme involves the receipt of dividends from shares in which the taxpayer has no meaningful economic risk (e.g. has an off setting derivative position).
Some arrangements make use of preference shares that generate allegedly tax free dividends, while the dividends are indirectly generated from interest yielding debt. All these schemes will be closed by treating the dividends at issue as ordinary revenue”.Minister of Finance Pravin Gordhan added that the introduction of the tax should correct the impression that a tax on dividends is another tax on businesses.
He said that the tax on dividends will apply to individuals and nonresident shareholders.Treasury noted that most issues around the tax on dividends had been resolved with the assistance of public consultation. But matters remained unresolved on inbound foreign dividends, as foreign dividends are taxable at varying levels. Treasury said that some dividends are exempt, while others are taxable at top marginal rates of 40% (or 28% in the case of companies).
On the unresolved matter,Treasury said that currently,foreign-owned South African branches are subject to tax at a 33% per cent rate instead of 28% for local companies.The 33% serves as an alternative to a branch profits tax for physical branch repatriations.But Treasury noted that the higher level of tax is only made possible by certain exceptions made to various non-discriminatory provisions within tax treaties.
According to Treasury, "at this stage, it must be determined whether the change from a secondary tax on companies for dividends to a new dividends tax renders these exceptions null-and void for treaty purposes, thereby calling into question the 33 percent branch rate as a whole. When the new dividends tax comes into effect,it is proposed that this rate be reduced if discriminatory”.
Source: By Phakamisa Ndzamela (Tax breaks)