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SARS closes dividend payment gap, notes Deloitte

Johannesburg, 17 January 2013 - Five years of uncertainty and discussion around the introduction of dividends withholding tax have at last been laid to rest, says Deloitte.

Legislation that took effect on 01 April 2012 specifies a dividend withholding tax (DWT) rate of 15%, which is, however, subject to applicable domestic exemptions or tax treaties,” says Musa Manyathi, Associate Director in Taxation Services at Deloitte.

“The introduction of DWT marked the end of Secondary Tax on Companies (“STC”), which, until now, had been part of our tax regime for nearly 20 years - although it had never quite been understood by our major international trading partners. This ultimately was the fatal blow delivered to its existence.”

“DWT as an alternative tax ensures South Africa’s alignment with the international trend on the taxation of dividends. It therefore encourages much-needed foreign investment, and should have the benefit of compensating the fiscus for revenues lost as a result of the abolition of STC.

“Whilst STC was a tax borne by the company declaring the dividend, DWT, in line with the rest of the world, is borne by the shareholder provided that the dividend is a cash dividend,” says Manyathi.
“Although the DWT legislation is only eight months old, it has already undergone significant changes,” notes Manyathi.

“The most significant change was the introduction of anti-avoidance provisions aimed at curbing certain identified dividend tax schemes. These schemes originate from the differing rates and exemptions applicable depending on the shareholder involved. For example, dividends paid to pension funds are exempt, dividends paid to domestic companies are also generally exempt and dividends paid to certain foreign shareholders may also be eligible for tax treaty relief.

The anti-avoidance provisions have been inserted into the Taxation Laws Amendment Bill, 2012 as a new section (64EB) and provides as follows:

  1. Where a person that is a beneficial owner contemplated in section 64F acquires the right to a dividend by way of cession; and
  2. that dividend is either announced or declared before that acquisition, that dividend is deemed to be a dividend paid for the benefit of the person ceding the right:
  3. Provided that this section does not apply to any cession in respect of a share if the right to that dividend is ceded together with all of the rights attaching to that share.

For the purposes of this Part, where -

  1. A person that is a beneficial owner contemplated in section 64F borrows a share in a listed company from another person; and
  2. A dividend is either announced or declared before that share is borrowed,
    So much of any amount paid by the person in respect of that borrowed share as does not exceed the amount of the dividend is deemed to be a dividend paid for the benefit of that other person.

For the purposes of this part, where -

  1. A person that is a beneficial owner contemplated in section 64F acquires a share in a listed company (or any right in respect of that share) from another person after a dividend is announced or declared in respect of that share; and
  2. that acquisition is part of an arrangement in terms of which that share or a share of the same kind or of the same or equivalent quality must be disposed of to that other person or to any other company forming part of the same group of companies as that other person,

That dividend is deemed to be a dividend paid to that other person.”

“These provisions are primarily intended for schemes involving foreign shareholders, which is where the ‘abuse/loopholes’ have been identified,” says Manyathi.

“The primary purpose core of the anti-avoidance legislation is to close the gap between the date of declaration of a dividend and the actual date of payment of the dividend, with the latter being the trigger for DWT payment. Transactions that exploit this gap may very well fall foul of the anti-avoidance provisions and result in DWT,” says Manyathi.

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Kerri Lurie
Magna Carta (PR)
Job Title:
+27(0) 11 784-2598
Musa Manyathi
Deloitte & Touche
Job Title:
Associate Director, Tax
+27 (0)11 209 8323
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