Tax Transition: From STC to Dividend Tax
03 July 2012
Posted by: TaxFind ™
Tax Transition: From STC to Dividend Tax
2012 will be a challenging year that will be dominated by significant changes. The enforcement of the Tax Administration Bill, scheduled to be approved and promulgated during November, will be rolled out early next year. Also, the shift from STC (Secondary Tax on Companies) to a Dividend Tax will be effective from 1 April 2012.
The dividend tax regime, effective from 1 April 2012, will shift the tax liability from the company that declared the dividend in the form of STC, to a tax liability for the dividends paid to the beneficial owner of the dividend.
To ensure that the dividend tax is paid, the declaring company must with hold the equivalent tax from the dividend paid, and in turn pay this over to SARS. This mechanism should cater for both resident taxpayers and foreign non-taxpayers. The foreign person receiving the dividend will effectively rely on the withholding tax system and will not be required to lodge an annual tax return for this, if they are not a taxpayer.
It is in this mechanism that companies will find the additional disclosure and administration burden. The withholding dividend taxis with held from each beneficial owner of the dividend, and not merely an STC calculation and payment based on the total dividenddeclared. Also, the law provides a number of exemptions regarding withholding dividend tax, and some non-resident beneficiaries are entitled to a reduced dividend tax rate.
Companies will be required to issue a certificate to each beneficial owner of the dividend declared, the value of with holding tax paidto SARS, and reasons for not withholding tax or applying a reduced tax rate. Considering the number of shareholders, frequency of changes in shareholders, and regularity of dividends declared could prove to be a very arduous administrative burden on companies.
The new dividend tax has been progressively developed and implemented over the past four years, starting with the reduction of the STC rate from 12,5% to 10% with effect from 1 October 2007. The exemption with regards to dividends declared in anticipation of liquidation or deregistration of a company was withdrawn with effect from 1 January 2011 (originally intended to be withdrawn from 1 January 2009).
The ‘dividend’ definition was amended with effect from 1 October 2007 to include both realised and unrealised profits of the company. The ‘dividend’ definition was again amended with effect from 1 January 2011, diluting the previous lengthy version of the definition, coupled with a new definition of ‘contributed tax capital’.
Sections 64D to 64L of the Income Tax Act were introduced with regards to the new dividend tax, but subject to only be effective from a date to be determined. The Minister of Finance, during his 2011 Budget Speech, announced that the new dividend tax would be implemented as from 1 April 2012.
A ‘value-extraction tax’ was introduced as an anti-avoidance measure that was intended to come into effect the same day asdividend tax. However, the Taxation Laws Amendment Bill 2011 proposes that the value-extraction tax be repealed on the same day that the dividend tax becomes operative.
Further amendments were proposed in the Taxation Laws Amendment Bill 2011 to hybrid equity instruments, quantification of the contributed tax capital regarding capital distributions and share buybacks (including a deeming provision in case of a liquidationdistribution), and amendment with regards to the treatment of capital distributions.
It is intended that dividend income will still be exempt from normal tax in the beneficiary’s hands as the dividend tax is a distinct tax which is separate from the normal income tax rules. However, foreigndividends are (as a general rule) included in the beneficial owner’s gross income and subject to tax at the taxpayer’s marginal tax rate, and various exemptions to this rule are contained in section 10(1)(k)(ii) of the Income Tax Act.
In order to address issues of the new dividend tax and when aresident taxpayer receives both local and foreign dividend, theTaxation Laws Amendment Bill 2011 proposed the introduction of section 10B into the Income Tax Act.
The new dividend taxhas been progressivelydeveloped andimplemented over the past four years, starting with the reduction of the STC rate from 12,5% to10% with effect from 1 October 2007.
In terms of the proposed section 10B, foreign dividends received will still be included in gross income. The exemptions on foreigndividends are still recognised, with minimum changes. Section 10B now includes provision for a partial exemption, which is available against the residual foreign dividends that did not qualify for full exemption. The proposed section 10B(3) provides that the residualforeign dividends received will qualify for partial exemption in the ration 18:28 for companies and 30:40 for individuals and trusts. This should yield an effective tax rate of 10% on the residual foreigndividends received, even though the taxpayer may have a 40% marginal tax rate for that year of assessment.
Also, taxpayers will still be entitled to foreign tax credits / rebates (section 6 quat) on foreign taxes paid in relation to the foreigndividend. However, the foreign dividend exemption of R3 700 available to natural persons will fall away.
With regards to withholding dividend tax, the following dividends are not subject to the withholding tax, if:
• The beneficiary of the dividends is a resident company;
• The beneficiary of the dividends is the local, provincial, or national government;
• The dividends is paid to certain specified taxexempt beneficiaries;
• The dividend is declared by a micro business, up to R200 000;
• The dividend is declared by a foreign company listed in the JSEto a non-resident beneficiary; or
• The dividend is declared by a Head Office company.
The company will be required to retain proof of withholding taxes and where exemption for the withholding tax was applied. With regards to the exemptions, the company may only rely on the exemptionif the beneficiary has provided a written declaration stipulating that it is exempt from the withholding dividend tax, and it willin form the company once it is no longer the beneficial owner of the shares. Where the beneficial owner is a part of the same group of companies as the company declaring the dividend, or if the payment is made to a ‘regulated intermediary’, an approved nominee, or certain collective investment schemes, the written declaration is not required.
The final withholding tax on dividends, effective 1 April 2012, will qualify for tax treaty relief (DTA). If a non-resident beneficiary wishes to rely on a reduced dividend tax rate in terms of a tax treaty, the non-resident beneficiary must provide a declaration that the reducedtax rate applies. Where a regulated intermediary pays a dividend, it must withhold dividend tax, unless the payment of dividend is to another regulated intermediary or the beneficial owner has provided a declaration of exemption.
The transition from STC to dividend tax also recognises the STC credits accumulated under the STC system. STC credits availableto a company as at 1 April 2012 will be carried forward into the dividend tax system and can be utilised against dividends paid. The STC credits will only be valid for a period of five years as from 1 April 2012.
Source: SAIPA (Tax Committee)