By Mogola Makola
It has been three years since the former Minister of Finance, Mr Trevor Manuel announced that there would be changes to the system of taxing of dividends in South Africa. The changes would take place in two phases. The first phase of the process involved a reduction of the rate of Secondary Tax on Companies (“STC”) from 12.5% to 10%. The second phase would involve the replacement of STC with a withholding tax on dividends.
- The reduction of the STC rate was effected in 2007 in terms of the Revenue Laws Amendment Act No 35 of 2007 (“the 2007 Amendment Act”), with effect from 1 October 2007. However, there were no details in the 2007 Amendment Act regarding the proposed withholding tax. It was only in 2008, when the Revenue Laws Amendment Act No. 60 of 2008 (“the 2008 Amendment Act”) was enacted, that we finally got to see what the new tax would look like. Section 56 of the 2008 Act inserted Part VIII (sections 64D to 64L inclusive) in Chapter II of the Income Tax Act.
- Last year, the Taxation Laws Amendment Act of 2009 (“the 2009 Amendment Act”) introduced amendments to the 2008 Amendment Act. The changes introduced by the 2009 Amendment Act were alluded to in the budget speech of 2009. It is possible that there will be further amendments before the withholding tax takes effect.
The withholding tax on dividends
The provisions impose a withholding tax on dividends at a rate of 10% of the amount of any dividend paid by a company. The tax is payable on dividends paid by South African resident companies and non-resident companies in respect of shares that are listed in South Africa. The imposition of the tax on dividends paid by non-resident companies is a result of the amendments introduced by the 2009 Amendment Act, apparently in order to ensure equal treatment.
There are various exemptions from the dividends tax. The exemptions go further than the exemptions from STC. For instance, dividends paid to South African resident companies are exempt from the tax, irrespective of whether the company paying the dividends and the shareholder for part of the same group of companies. Dividends paid to pension funds are also exempt from the withholding tax. There is no such exemption under the STC regime. Apparently the exemption is provided for in order to encourage retirement savings!
The withholding obligation of companies
- The company that declares and pays dividends bears the primary withholding obligation. This is subject to a number of exemptions. Some of the exemptions require the submission of a declaration that the dividends in question are exempt from the tax. The other exemptions apply automatically without the submission of a declaration.
- Dividends paid to regulated intermediaries entitle the company to an automatic exemption from the withholding obligation, as do dividends between groups of companies. Regulated intermediaries are entities such as a central securities depository participant, brokers, nominees and collective investment schemes.
- The withholding liability can be reduced upon the timely receipt of a written declaration that the beneficial owner is entitled to be taxed at a lower rate as a result of the application of a double taxation agreement. In the absence of a declaration, the tax must be withheld in full.
The withholding obligation of regulated intermediaries
Where dividends are paid to regulated intermediaries the withholding obligation shifts from the company to the regulated intermediary, hence the automatic exemption for companies.
The withholding rules applicable in respect of regulated intermediaries are similar to those that apply in respect companies. There are also exemptions from the withholding obligation. There is an automatic exemption for dividends that are paid to another regulated intermediary. There is also an exemption where a declaration claiming exemption has been submitted to the intermediary.
As with companies, the withholding liability of a regulated intermediary can be reduced upon the timely receipt of a written declaration that the beneficial owner is entitled to be taxed at a lower rate as a result of the application of a double taxation agreement. In the absence of a declaration, the tax must be withheld in full.
Withholding of dividends tax by insurers
- Dividends that are paid to long term insurers are deemed to be a regulated intermediary and therefore relieve the paying company from the withholding obligation. A long term insurer operating under the four fund system will be required to withhold tax from the dividends that it allocates to the individual policy holder fund is required.
- In order to allow companies to use up their STC credits, the legislation will exempt dividends that reduce the STC credits of a company, from the withholding tax. Companies will have five years to use its STC credits. After the expiry of the five year period, the STC credits will disappear.
There are penalties for non-compliance with the withholding obligation and they are serious. The legislation renders any person who fails to withhold the dividends tax as required by legislation personally liable for the tax, unless the amount has been paid by another person. The same applies to a person who withholds the tax but fails to pay it over to SARS as required by the legislation. In addition to the personal liability, interest is payable on any amount that has been withheld but not paid over to the authorities within the prescribed period.
In addition to the penalties imposed on the withholding entity, the legislation renders every person that controls or is regularly involved in the management of the overall financial affairs of an unlisted company that is liable to withhold dividends tax and who is a shareholder or director of the unlisted company personally liable for the dividends tax, additional tax, penalty or interest for which the company or intermediary is liable.
Refunds of tax
- Provision is made for the refund of over deductions. These over deductions would normally arise where a company or regulated intermediary was compelled to withhold the full amount of the tax because the beneficial owner of the dividends did not submit the required declaration timeously. The refund is only available if the declaration is submitted within three years from the date of payment of the dividends. Only the company or regulated intermediary, as the case may be, is responsible for the refund.
- Refunds by companies must be funded out of future dividends tax withheld within a year from the date of the submission of the declaration. If the future dividends tax is not enough to fund the refund, the company must claim the excess from SARS and pay it to the beneficial owner of the dividends. Refunds by regulated intermediaries can only be funded out of future dividends tax.