secondary tax on companies to go
13 August 2007

The expected change from secondary tax on companies (STC) to a final withholding tax has created some speculation including when the change will be implemented, what the transition provisions will be, if any, and how financing structures will be affected, say tax analysts.

There are also uncertainties as to how financing structures of black economic empowerment transactions will take place.

The tax has been the subject of much criticism since its introduction. It was largely condemned by foreign investors as a disincentive who found the tax confusing.

A great deal of the criticism has been leveled at SA’s effective corporate tax rate of 36,9% which far exceeds the global average of 27,76%. When the country’s additional secondary tax on companies is added, at the rate of 12,5% on net dividends declared by a company, the total tax reaches 36,9%.

Government has argued that the tax was an incentive for growing companies and to stimulate job creation. However, tax analysts have argued that STC has been an awkward and minimal tax for the South African Revenue Service (SARS).

The phasing out of the tax is intended to take place in two stages. Firstly, the rate of the tax will be reduced from 12,5% to 10% from October 1 this year, together with a broadening of the STC base.

Secondly, STC will be replaced with a withholding tax on dividends at shareholder level at the end of next year, depending on the renegotiation of certain double tax treaties that SA has in place with other jurisdictions. The change to a tax at shareholder level will take place when amendments to the treaties are effected.

Ernie Lai King, head of Deneys Reitz Tax Services, said at the weekend that the philosophy of a withholding tax is quite different from that of STC. “A withholding tax is a tax on the shareholder,” said Lai King. On the other hand, STC is a tax on the company.

Lai King said that STC is levied on the declaration of the dividend and as that dividend moves up a corporate group, it does not attract tax again due to the STC credit provided. In other words, to the extent that a company declared a dividend, which matched dividends received, no STC is taxable.

“I expect that as dividends move through a corporate chain, no withholding tax will be levied.” “Irrespective of whether the dividend travels up a chain in a group of companies, or whether dividends are received by companies outside of the group, I expect those dividends to be exempt … and a withholding tax only levied when the dividend leaves the entity and is received in the hands of an individual,” he said.

Sanchia Temkin, www.businessday.co.za