Reduction in income tax rate for foreign companies
16 July 2012
Posted by: SAIT Technical
By Andrew Seaber (DLA Cliffe Dekker Hofmeyr Tax Alert 13 July 2012)
The latest draft of the Taxation Laws Amendment Bill, 2012 (TLAB), released for public comment last week, contains a large number of proposed amendments to the Income Tax Act, No 58 of 1962. One of such proposed amendments is the harmonisation of the income tax rate applicable to resident and non-resident companies.
Under the former secondary tax on companies (STC) regime (which was deleted with effect from 1 April 2012 when the new dividends tax regime came into operation) a resident company was, in addition to tax on its income at a rate of 28%, also liable for secondary tax on companies at the rate of 10% of dividends declared by the company to its shareholders. With income tax and STC combined, a resident company was thus subject to an effective tax rate of 34,5%.
As non-resident companies were not subject to STC, the income tax rate of non-resident companies was increased to 33% following the introduction of STC, so as to place non-resident companies on par with resident companies.
Following the introduction of dividends tax on 1 April this year, resident companies pay tax at a lower rate than non-resident companies. The reason is that insofar as cash dividends are concerned, the person liable for dividends tax is the beneficial owner of the dividend and not the company declaring the dividend. If the company is not liable for dividends tax its effective rate of tax is 28%.
The result is that following the introduction of dividends tax, non-resident companies are subject to tax at an additional 5%, being the difference between the rate at which it is taxed (33%) and the rate applicable to resident companies (28%). As with STC, dividends tax is not payable in respect of paid declared by non-resident companies except if the dividend is a cash dividend and is paid in respect of a share listed on the JSE.
The question that arises is whether it is viable or justifiable to tax non-resident companies at the higher rate. In its explanatory memorandum on the TLAB, the National Treasury states that there are arguments that retaining the additional 5% rate on non-resident companies will be in contravention of tax treaty non-discrimination provisions and that in the absence of STC the retention of the additional 5% will be a violation of the bona fide undertakings made to South African treaty partners during tax treaty negotiations. On this basis, it is proposed that the rate at which non-resident companies is taxed be reduced to align it with the rate applicable to resident companies.
The reduction of the rate of income tax applicable to non-resident companies from 33% to 28% means that it is more tax efficient for a foreign company to conduct its South African operations through a branch located in South Africa, than to establish a South African subsidiary. The reason is that dividends paid by a resident subsidiary to a non-resident company will be subject to dividends tax, although the rate of dividends tax may be reduced in terms of an applicable treaty.
In closing, it is noted that the amendment, if brought into operation, is proposed to take effect from the years of assessment beginning on or after 1 April 2012, being the same effective date applicable to the new dividends tax regime.