Shift to dividend tax a feature

2008-02-20 00:00

ONE of the key issues expected to dominate Finance Minister Trevor Manuel’s annual budget speech this afternoon will be South Africa’s shift from a secondary tax on companies (STC) toward a dividends tax on shareholders.

The transition means that companies will no longer bear the responsibility and liability of paying STC, essentially lowering SA’s effective corporate tax rate.

Analysts and companies alike are hopeful that Manuel will provide more clarity on the details and timing of the final transition to a “withholding tax”.

According to Leigh Bainbridge of Bainbridge Chartered Accountants, STC created a relatively high effective corporate tax rate.

“This [transition] will make SA more attractive to foreign investors.”

The focus now shifts toward the shareholders (hence the phrase “withholding tax on dividends”), in line with international best practice of levying the tax on shareholders.

SA is one of a handful of countries that still has STC, making it a relatively unfamiliar tax — and one that repels potential investors.

There is even speculation that Manuel may cut the corporate tax rate by one percent to 28%.

The basic company tax rate in the country is 29%. However, the STC is also payable, at a rate of 10% on profit declared.

Therefore, the effective corporate tax rate at present could be as high as 35,54%.

Last year, Manuel announced a 2,5% reduction in the STC (effective from October 1, 2007) and the first step in the transition to a withholding tax on shareholder dividends.

Analysts at Deloitte noted that they expect changes to the provisional tax system.

“This has been a source of frustration for revenue [SA Revenue Service] for some time as it is seen as a form of deferment,” noted Chris Clarke, director at Deloitte.

As things currently stand, companies pay tax on earnings from the last year of assessment.

Clarke noted that the amount paid could be based on figures that date back as far as one or two years, thereby creating the gap that Manuel is expected to address this year.

Put another way, companies have essentially been able to extend the submission date of the annual tax return by more than one year, explained Bainbridge.

Analysts believe that certain penalties may be imposed on companies in this regard.

SARS may also increase the frequency of provisional tax payments, perhaps shifting to a “quarterly” system.

Two obligatory provisional tax payments are made during the year (usually at six months and 12 months).

A third voluntary “top-up” payment is also paid by companies.

Another expert, Johan Troskie, director of Deneys Reitz Tax, has called for a maximum corporate tax rate of 25%, arguing that doing business in SA is more expensive than it seems.

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