It seems like a lifetime ago when the Minister of Finance announced in 2007 that Secondary Tax on Companies (STC) would be replaced with a new Dividend Withholding Tax (DWT).

Background

The process of reform to the new tax started in October 2007 when the rate of STC was reduced from 12.5% to 10%. The next step is the introduction of a new system that will become effective from 1 April 2012.

One of the primary reasons for the change from STC is to be in line with international norms. It is often difficult for foreigners to understand this secondary level of tax on a company when declaring a dividend. It created the impression that South Africa’s corporate rate of taxation was higher than international competition, making the country a less attractive destination for investment. The main difference is that the DWT will be a tax on the recipient of the dividend, and not the company paying it.

What does this mean for the recipient of a dividend?

The financial effect on the recipient of a dividend subject to DWT in comparison to a dividend subject to STC may be illustrated as follows:

Assume a company sets aside R110 to declare a dividend and to cover the STC liability. The comparison is a company paying a dividend of R110, with the DWT being withheld from the payment to the recipient.

STC

Dividend declared by company                                                  100

STC at 10% paid by company to SARS                                          10

 

Dividend received by shareholder                                              100

 

DWT

Dividend paid by company                                                         110

DWT at 10% withheld by company and paid to SARS                    11

 

Net dividend received by shareholder                                        99

This simplistic illustration shows that there is a nominal difference between the two methodologies in respect of the amount actually received by the shareholder.

Exemptions from DWT

Dividends paid to certain recipients will be exempt from the DWT. These include South African resident companies, approved Public Benefit Organisations and Retirement Funds, amongst others.

Furthermore, non-resident investors may be entitled to a form of relief depending on the terms of the Treaty for the Avoidance of Double Taxation that may be in force between South Africa and that investor’s country of residence. If certain criteria are met, the rate of withholding tax may be reduced.

Practical application

Companies should be aware of the new administrative procedures to be followed to comply with the new DWT regime. Specific data may need to be gathered to support the nature of the recipient of the dividend, which may impact on the DWT withheld.

The actual declarations and submissions to SARS are intended to be handled by means of the e@syFile system, the same system as currently used for PAYE submissions. It has also been noted that companies with a small number of stakeholders may be able to make the submissions on the SARS eFiling system.

Neil Hughes

Tax and Trust Partner, Johannesburg