What will happen to those STC credits?

2011-06-02 00:00

THE new dividend tax is set to replace secondary tax on companies (STC) from April 1, 2012. This was confirmed by the Minister of Finance in the 2011 Budget Speech delivered in February 2011.

With the introduction of the dividends tax, one of the concerns arising for taxpayers is the loss of STC credits once the dividend tax comes into effect. In terms of the current STC regime, STC is payable on the net dividend declared by a company. The net dividend is basically calculated as the difference between dividends declared and dividends accrued in a dividend cycle. Where the amount of dividends accrued exceeds the dividends declared the excess is referred to as STC credits and such credits are carried forward to subsequent dividend cycles. These STC credits may be applied to reduce STC payable on future dividend declarations.

The question that has arisen is what will happen to these STC credits when the dividend tax regime comes into effect. STC is a tax on the company declaring the dividend whereas dividend tax is a tax on the shareholder. Therefore logically the STC credits accumulated when STC applied would not be available to reduce dividends tax withheld.

The legislators have taken this issue into account and proposed transitional measures to deal with the issue of STC credits.

In terms of the provisions, a company with STC credits may carry its STC credits into the dividend tax regime for set-off against future dividends declared. Therefore the company declaring a dividend may reduce the dividends tax payable by the STC credits it has carried forward.

In addition, where the payor of the dividend has used STC credits in paying the dividend, a local resident company that is the recipient of the dividend may also accumulate STC credits in respect of the dividend accrued. Thus the STC credits are not lost from firm to firm or within the group.

The company paying the dividend must notify the recipient of the dividend of the amount by which STC credits have been used in order for the recipient to accumulate STC credits.

Furthermore, the use of STC credits is not elective; a company declaring a dividend will not be empowered to make a decision, whether or not it is declaring a dividend out of STC credits. The STC credits are automatically utilised and once used up dividend tax will become payable.

Companies will, however, only be able to use their STC credits for five years after the dividend tax regime comes into effect. The STC credits will cease to exist completely on the fifth anniversary of the introduction of dividends tax regime, which is April 1, 2017.

We recommend that a record of existing STC credits is maintained and tracked to ensure that the STC credits are not lost forever.

Companies do not have to be in a hurry to use the STC credits, but need to be mindful that they do have an expiry date.

For more information, call KPMG at 033 347 7600.

 

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