- How business can qualify for new tax incentives 22 March 2010
Tim Desmond* - Moneyweb Tax
Follow the right procedures and you could claim as much as R900m back in tax for a greenfield project or R550m for a brownfield project.
National Treasury recently released draft regulations relating to tax incentives in support of governments industrial policy strategy. These tax incentives were announced in the 2008 Budget. The Revenue Laws Amendment Act, 2008 then inserted a new section 12I into the Income Tax Act.
The tax incentives comprise additional investment and training allowances for approved industrial policy projects. The projects that will qualify are greenfield and brownfield projects in the manufacturing sector (with some specific exclusions), that will spend certain minimum amounts on manufacturing assets (50% within four years of approval) and will upgrade an industry. There are limitations for companies obtaining other benefits and a requirement for a tax clearance certificate.
The minimum amounts to be spent on manufacturing assets are R200m for greenfields projects and at least R30m for brownfields projects. A project will be regarded as upgrading an industry if it provides skills development and utilises new technology resulting in improved energy efficiency.
If a project meets the qualifying criteria, an adjudication committee will consider its application on a points scoring basis. If five out of ten points are scored, a project will qualify for an additional investment allowance of 35% of the cost of manufacturing assets, up to a maximum of R550m for a greenfield project or R350m for a brownfield project. If eight or more points are scored, a project will have ""preferred status"" and its allowance will increase to 55% and the maximum amount claimable to R900m for a greenfield project or R550m for a brownfield project.
The additional investment allowances can be claimed in the year that the manufacturing assets are brought into use and are in addition to other allowances. If they increase recently incurred assessed losses, such increase may be enhanced by a notional interest amount.
The point scoring criteria cover the following: innovative processes, improved energy efficiency, general business linkages, SMME utilisation, direct employment creation and skills development. Greenfield projects can also score for being located in an industrial development zone.
The total additional investment allowances available under the programme will be R20bn. The cut-off date for applications is December 31 2014.
Training costs incurred for the furtherance of an approved project, within six years of approval, will qualify for an additional training allowance. Such allowance may not exceed R36 000 per employee or a total of R30m for projects approved with preferred status or R20m for those without.
*Tim Desmond is a director of tax and commercial departments at Garlicke & Bousfield Inc
Tuesday, March 31, 2009
Wednesday, March 18, 2009
For every door that closes, another opens for BEE
- Paul Austin, Head of Corporate Finance - BDO Spencer Steward
Many of the black economic empowerment (BEE) deals struck in recent years after painstaking negotiations may have to be renegotiated – dealing a blow to the Department of Trade and Industry’s goal for an unencumbered 25 percent of the economy to be in black hands by 2017, according to Werksmans Attorneys and auditors BDO Spencer Steward.
Roughly R41 billion worth of potential BEE deals have been wiped out due to unfavourable trading conditions in the past two years, according to statistics sourced from BEE rating agency Empowerdex. Last year alone the total value of BEE deals sealed on the JSE declined fivefold to R13 billion (from R66 billion in 2007). But the real threat is that deals already struck may begin to unwind.
A solution, according to Morné van der Merwe, Werksmans senior director in the corporate and commercial department, with special focus on M&A, would be for government to consider a bail-out package to ensure no BEE deals fail, and the country remains on target to meet DTI objectives.
Van der Merwe says that a number of BEE deals will undoubtedly be under threat during the current economic slowdown, especially those deals struck in the mining sector at the top of the cycle, as many were last year, to meet the Mining Charter deadline.
“However, I’m confident a large portion of the deals should be safe in light of the fact that a significant number of the latest wave of BEE deals were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the Nineties market correction.
“We will not see anything like that this time round,” adds van der Merwe. “Vendors tend to be a lot more sympathetic and would rather renegotiate the deal to save it than see it collapse.”
However, many deals (especially the large value deals) were structured using bank and private equity funding.
Paul Austin, Head of Corporate Finance at BDO Spencer Steward in the Cape, says that where bank finance is present in a deal, the structure may be under stress, not so much because of the share price collapse, but due to falling company earnings in an economic slowdown.
“A lot of BEE deals are still financed with debt, and bankers the world over are under pressure to find more security and reduce their exposure to risk.
“Although banks have a substantial exposure to BEE finance, we have not yet seen any deals actually collapse, because there is a degree of robustness in many of the older deals. Even if a share price has collapsed from, say, R500 to R300, if the deal was done in 2005 it is likely to still be in the money. For instance, the original share price might have been R100,” says Austin.
“It would only affect deals either done at the peak of the cycle last year, or where the share price collapse has been of spectacular proportion,” he adds. However, there have been some such spectacular collapses in share price of as much as 94 percent in the case of Super Group. Austin says many of these deals still have a long time horizon in which to recover, and BEE partners are therefore no worse off than other shareholders.
In most deals involving bank finance, a certain rigour was introduced by the banks’ process of due diligence. Austin says although banks have been heavily involved in funding BEE deals, “they never gave anything away, and every deal had to be bankable with their loan capital well secured”.
In the few cases where deals have to be renegotiated, both van der Merwe and Austin see a positive aspect to it: only last September were the Codes of Good Practice finally published, and only in February this year was the final piece of the jigsaw put in place when a verification system was authorised.
Therefore, says Austin, only now can broad-based BEE fully get under way. This means all the earlier deals, while in most cases perfectly valid, did not fully comply with the Codes.
Van der Merwe says any renegotiation therefore offers the opportunity to strike new fully-compliant deals which offer maximum scorecard points, and create the opportunity for more broad-based partners to be brought into any deal.
Van der Merwe says this would align with a financial role by government agencies in supporting vulnerable deals.
“Government has charged agencies such as the Industrial Development Corporation and National Empowerment Fund with supporting BEE, and they could play a role – especially if there was now the opportunity to make them more broad-based – to provide finance or guarantees to such deals, and even facilitate the introduction of specific BBBEE groups,” he says.
“Banks aren’t lending, and government has funds for BBBEE as well as the infrastructure to accomplish it through its development finance institutions. Government really needs to step in here to ensure all the good work achieved in BEE is not undone by factors which started beyond our borders, as well as helping preserving the good parts while improving those aspects deserving of criticism,” says Van der Merwe.
Austin says in the absence of a government bailout or renegotiation, there are few alternatives still open to BEE groups: “It’s very difficult to raise new finance in this market to replace debt, and if you can do so it will most likely be expensive.”
Should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch – one that complies with the DTI Codes and can now be verified as such by one of the accredited BEE verification agencies, says Austin.
Many of the black economic empowerment (BEE) deals struck in recent years after painstaking negotiations may have to be renegotiated – dealing a blow to the Department of Trade and Industry’s goal for an unencumbered 25 percent of the economy to be in black hands by 2017, according to Werksmans Attorneys and auditors BDO Spencer Steward.
Roughly R41 billion worth of potential BEE deals have been wiped out due to unfavourable trading conditions in the past two years, according to statistics sourced from BEE rating agency Empowerdex. Last year alone the total value of BEE deals sealed on the JSE declined fivefold to R13 billion (from R66 billion in 2007). But the real threat is that deals already struck may begin to unwind.
A solution, according to Morné van der Merwe, Werksmans senior director in the corporate and commercial department, with special focus on M&A, would be for government to consider a bail-out package to ensure no BEE deals fail, and the country remains on target to meet DTI objectives.
Van der Merwe says that a number of BEE deals will undoubtedly be under threat during the current economic slowdown, especially those deals struck in the mining sector at the top of the cycle, as many were last year, to meet the Mining Charter deadline.
“However, I’m confident a large portion of the deals should be safe in light of the fact that a significant number of the latest wave of BEE deals were struck on a vendor-finance basis, using less bank finance than was the case under the model that collapsed during the Nineties market correction.
“We will not see anything like that this time round,” adds van der Merwe. “Vendors tend to be a lot more sympathetic and would rather renegotiate the deal to save it than see it collapse.”
However, many deals (especially the large value deals) were structured using bank and private equity funding.
Paul Austin, Head of Corporate Finance at BDO Spencer Steward in the Cape, says that where bank finance is present in a deal, the structure may be under stress, not so much because of the share price collapse, but due to falling company earnings in an economic slowdown.
“A lot of BEE deals are still financed with debt, and bankers the world over are under pressure to find more security and reduce their exposure to risk.
“Although banks have a substantial exposure to BEE finance, we have not yet seen any deals actually collapse, because there is a degree of robustness in many of the older deals. Even if a share price has collapsed from, say, R500 to R300, if the deal was done in 2005 it is likely to still be in the money. For instance, the original share price might have been R100,” says Austin.
“It would only affect deals either done at the peak of the cycle last year, or where the share price collapse has been of spectacular proportion,” he adds. However, there have been some such spectacular collapses in share price of as much as 94 percent in the case of Super Group. Austin says many of these deals still have a long time horizon in which to recover, and BEE partners are therefore no worse off than other shareholders.
In most deals involving bank finance, a certain rigour was introduced by the banks’ process of due diligence. Austin says although banks have been heavily involved in funding BEE deals, “they never gave anything away, and every deal had to be bankable with their loan capital well secured”.
In the few cases where deals have to be renegotiated, both van der Merwe and Austin see a positive aspect to it: only last September were the Codes of Good Practice finally published, and only in February this year was the final piece of the jigsaw put in place when a verification system was authorised.
Therefore, says Austin, only now can broad-based BEE fully get under way. This means all the earlier deals, while in most cases perfectly valid, did not fully comply with the Codes.
Van der Merwe says any renegotiation therefore offers the opportunity to strike new fully-compliant deals which offer maximum scorecard points, and create the opportunity for more broad-based partners to be brought into any deal.
Van der Merwe says this would align with a financial role by government agencies in supporting vulnerable deals.
“Government has charged agencies such as the Industrial Development Corporation and National Empowerment Fund with supporting BEE, and they could play a role – especially if there was now the opportunity to make them more broad-based – to provide finance or guarantees to such deals, and even facilitate the introduction of specific BBBEE groups,” he says.
“Banks aren’t lending, and government has funds for BBBEE as well as the infrastructure to accomplish it through its development finance institutions. Government really needs to step in here to ensure all the good work achieved in BEE is not undone by factors which started beyond our borders, as well as helping preserving the good parts while improving those aspects deserving of criticism,” says Van der Merwe.
Austin says in the absence of a government bailout or renegotiation, there are few alternatives still open to BEE groups: “It’s very difficult to raise new finance in this market to replace debt, and if you can do so it will most likely be expensive.”
Should the worst happen and some deals collapse, companies might even view this as a benefit, as it would give them the opportunity to negotiate a new deal from scratch – one that complies with the DTI Codes and can now be verified as such by one of the accredited BEE verification agencies, says Austin.
Thursday, March 12, 2009
SARS turns screws on rich tax cheats
- Simpiwe Piliso - Sunday Times
The taxman has unleashed his investigators on some of the country’s richest cheats, who could include banking executives, media barons, IT moguls, sports stars, celebrities and empowerment millionaires.
As part of a major crackdown, SARS has launched a review of the files of more than 600 wealthy individuals, including their family trusts.
Wealthy tax dodgers are short-changing the government’s coffers of billions of rands, leaving ordinary South Africans to carry the can.
SARS spokesman Adrian Lackay said: “SARS is owed billions by people who have the capacity to pay their tax, but choose not to.”
Wealthy individuals are those whose annual income is between R5-million and R40-million, or who have net assets exceeding R75-million.
The files under review include 273 associated entities — such as offshore accounts, private companies or close corporations — 103 trusts and 231 individuals.
Measures used by SARS to check assets against declared income include:
* Agreements with 35 tax havens to improve transparency and establish the effective exchange of information in tax matters; and
* A rigorous lifestyle questionnaire that asks about holidays, flights, restaurants, cellphone bills and shopping habits.
“Any taxpayer who receives a lifestyle questionnaire has ample reason to believe they are under serious investigation for possible tax evasion,” said a statement by Grant Thornton, the specialist tax and advisory services firm.
The questionnaire is sent to an individual as part of a preliminary investigation, which could lead to a search-and-seizure warrant being issued.
However, it is not just these taxpayers who will feel the heat. The taxman has uncovered that there are about 400000 unregistered taxpayers by simply cross-checking IRP5 information, which employers are now compelled to submit.
“These people are employees for which an employer issued an IRP5, but who were not on the SARS register. Therefore, they do not necessarily represent individuals who had not paid tax, but rather those who had failed to register as required,” Lackay said.
Grant Thornton points out in its report, The Tax Line, that the number of people being investigated by the tax authorities has increased significantly in recent years.
And while there are legal tax avoidance measures, independent tax consultant Nathan Endersby warned: “Some large companies and rich individuals are exploring forms of avoidance that they may think are legal, but SARS thinks are illegal.”
These include transferring money to tax havens that facilitate tax avoidance schemes.
Tax havens with which SARS has entered into agreements include the Seychelles, Mauritius, the Bahamas, Bermuda, the Isle of Man, the British Virgin Islands and Liberia.
Investigators said that although a lot of the information had been gleaned from lifestyle surveys , other information to catch tax cheats was based on public information on salaries, bonuses, share options, and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management officials also provided information.
Lackay said data accessed from the Masters Office, the Deeds Office and the Departments of Home Affairs and Transport were also used.
In addition, records of the sale and purchase of assets such as private jets, wine farms and racehorses also came in handy.
One such example is billionaire entrepreneur Dave King, who is fighting a marathon R2.3-billion claim against SARS.
The claim was sparked by a senior SARS investigator who noticed an Irma Stern painting in King’s mansion in Hyde Park, Johannesburg.
King, who stated that he earned R80000 a year in his tax returns, had snapped up the painting for a record R1.76-million at an auction.
Investigators this week said a lot of the information had been drawn up from lifestyle surveys carried out by Sars, while other information was based on public information on salaries, bonuses, share options and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management also provided information.
Sars has also been probing HNWI making use of resident and offshore trusts as conduts to redirect revenue in order to reduce their taxable income.
Sars has also collected and compiled information on complex structures used such as trusts, close corporations, syndicates and family companies.
Other information tools used for risk identification and detection purposes, said Lackay, include data accessed from other agencies and government departments, such as the Masters Office, the Deeds office, the Home Affairs Department, the Transport Department.
Also monitored by Sars are the sales and purchases of personal assets such as private jets, wine farms, racehorses and luxury homes and cars.
The public pursuit by tax officials of billionaire Dave King, embroiled in one of SA’s biggest tax claims, is one of the examples of this approach, targeting individuals who lead lavish lifestyles that seem to be at odds with their declared earnings.
A senior Sars investigator, reading a business magazine, noticed as an Irma Stern painting hanging in King’s Hyde Park mansion, north of Johannesburg.
King, who reportedly stated that he earned R80 000 a year in his tax returns, had snapped up the painting for record R1.76-million at an auction.
Realising that King had also applied to be deregistered as a taxpayer, investigator Charles Chipps, wrote to King asking him, among other questions, why it was that with only R80 000 a year “declared income”, he had bought the Irma Stern painting and wine farms in the Western Cape.
King, who is facing a tax claim of R2.3-billion (comprising of R913-million in personal tax and R1.4-billion for his trust, Ben Nevis) was arrested in May 2002 and faced 322 criminal charges.
The taxman has unleashed his investigators on some of the country’s richest cheats, who could include banking executives, media barons, IT moguls, sports stars, celebrities and empowerment millionaires.
As part of a major crackdown, SARS has launched a review of the files of more than 600 wealthy individuals, including their family trusts.
Wealthy tax dodgers are short-changing the government’s coffers of billions of rands, leaving ordinary South Africans to carry the can.
SARS spokesman Adrian Lackay said: “SARS is owed billions by people who have the capacity to pay their tax, but choose not to.”
Wealthy individuals are those whose annual income is between R5-million and R40-million, or who have net assets exceeding R75-million.
The files under review include 273 associated entities — such as offshore accounts, private companies or close corporations — 103 trusts and 231 individuals.
Measures used by SARS to check assets against declared income include:
* Agreements with 35 tax havens to improve transparency and establish the effective exchange of information in tax matters; and
* A rigorous lifestyle questionnaire that asks about holidays, flights, restaurants, cellphone bills and shopping habits.
“Any taxpayer who receives a lifestyle questionnaire has ample reason to believe they are under serious investigation for possible tax evasion,” said a statement by Grant Thornton, the specialist tax and advisory services firm.
The questionnaire is sent to an individual as part of a preliminary investigation, which could lead to a search-and-seizure warrant being issued.
However, it is not just these taxpayers who will feel the heat. The taxman has uncovered that there are about 400000 unregistered taxpayers by simply cross-checking IRP5 information, which employers are now compelled to submit.
“These people are employees for which an employer issued an IRP5, but who were not on the SARS register. Therefore, they do not necessarily represent individuals who had not paid tax, but rather those who had failed to register as required,” Lackay said.
Grant Thornton points out in its report, The Tax Line, that the number of people being investigated by the tax authorities has increased significantly in recent years.
And while there are legal tax avoidance measures, independent tax consultant Nathan Endersby warned: “Some large companies and rich individuals are exploring forms of avoidance that they may think are legal, but SARS thinks are illegal.”
These include transferring money to tax havens that facilitate tax avoidance schemes.
Tax havens with which SARS has entered into agreements include the Seychelles, Mauritius, the Bahamas, Bermuda, the Isle of Man, the British Virgin Islands and Liberia.
Investigators said that although a lot of the information had been gleaned from lifestyle surveys , other information to catch tax cheats was based on public information on salaries, bonuses, share options, and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management officials also provided information.
Lackay said data accessed from the Masters Office, the Deeds Office and the Departments of Home Affairs and Transport were also used.
In addition, records of the sale and purchase of assets such as private jets, wine farms and racehorses also came in handy.
One such example is billionaire entrepreneur Dave King, who is fighting a marathon R2.3-billion claim against SARS.
The claim was sparked by a senior SARS investigator who noticed an Irma Stern painting in King’s mansion in Hyde Park, Johannesburg.
King, who stated that he earned R80000 a year in his tax returns, had snapped up the painting for a record R1.76-million at an auction.
Investigators this week said a lot of the information had been drawn up from lifestyle surveys carried out by Sars, while other information was based on public information on salaries, bonuses, share options and the sale and purchase of shares by directors of listed companies.
Notices of company takeovers, new appointments or the retirement of top management also provided information.
Sars has also been probing HNWI making use of resident and offshore trusts as conduts to redirect revenue in order to reduce their taxable income.
Sars has also collected and compiled information on complex structures used such as trusts, close corporations, syndicates and family companies.
Other information tools used for risk identification and detection purposes, said Lackay, include data accessed from other agencies and government departments, such as the Masters Office, the Deeds office, the Home Affairs Department, the Transport Department.
Also monitored by Sars are the sales and purchases of personal assets such as private jets, wine farms, racehorses and luxury homes and cars.
The public pursuit by tax officials of billionaire Dave King, embroiled in one of SA’s biggest tax claims, is one of the examples of this approach, targeting individuals who lead lavish lifestyles that seem to be at odds with their declared earnings.
A senior Sars investigator, reading a business magazine, noticed as an Irma Stern painting hanging in King’s Hyde Park mansion, north of Johannesburg.
King, who reportedly stated that he earned R80 000 a year in his tax returns, had snapped up the painting for record R1.76-million at an auction.
Realising that King had also applied to be deregistered as a taxpayer, investigator Charles Chipps, wrote to King asking him, among other questions, why it was that with only R80 000 a year “declared income”, he had bought the Irma Stern painting and wine farms in the Western Cape.
King, who is facing a tax claim of R2.3-billion (comprising of R913-million in personal tax and R1.4-billion for his trust, Ben Nevis) was arrested in May 2002 and faced 322 criminal charges.
Wednesday, March 4, 2009
New dividends tax brings both simplicity and complexity
- Ernest Mazansky, Director - Werksmans Attorneys
South Africa has just fallen in line with international tax trends with the introduction of a dividends tax to replace the secondary tax on companies (STC), a move likely to make South Africa a more attractive foreign investment destination.
However, while this may simplify tax from the perspective of foreign investors, and go some way to attracting capital flows, for local companies it introduces a number of complexities, says Ernest Mazansky, head of Werksmans tax practice.
Speaking at a recent Werksmans-hosted tax seminar, he described the major difference as lying in who pays the tax. “Conceptually we have moved away from a company tax to an effective tax on shareholders payable on the distribution of dividends by a company,” he told seminar delegates.Dear Janine Connor,
Of interest to local companies is that the South African Revenue Service (SARS) acceded to pressure to give credit for the many millions in STC credits that are currently on the books of South African companies.
“This was a sensitive issue for companies that had already paid the 10% STC and now their shareholders will have to pay another 10% dividends tax. The tax amendment now allows companies in effect to off set the amount of STC paid, as a credit against dividends tax for a period of 5-years. But they have to notify shareholders of the deduction. Failure to do so effectively results in their having to pay double tax. If you don’t notify all shareholders, you cannot use the STC credit as far as those shareholders are concerned,” said Mazansky.
The new tax further extends the principle of directors’ liability. The new legislation has more teeth in that it deems certain executive directors and shareholders of an unlisted company that fails to withhold the tax, liable for the dividends tax. Directors of private companies need to take special care as they are personally liable where the dividends tax is not withheld and paid by that company.
“This is nothing new, but continues the disturbing trend of eroding the concept of limited liability for companies,” said Mazansky.
The dividends tax rate will remain at 10%, as is currently the case with STC, and not being company tax but a dividends tax payable by the shareholder, the effective South African company tax rate is now simplified and fixed at 28%.
Mazansky said this places our company tax rate on a par with international practice, is familiar to international investors and will assist in the creation of tax certainty for foreigners.
Under the previous STC regime, a company declaring dividends had an effective tax rate of around 35%, when one added the STC to the corporate tax rate.
Under the new system, South African shareholders will pay a slightly higher effective rate of tax than under STC because the dividend is now declared exclusive of any dividends tax. For example, if a dividend of R100,000 is declared, under STC, that R100,000 is deemed to include the STC. The calculation can simply be described as R100,000 x 10/110 which results in STC of R9,090, leaving a net dividend for distribution to the shareholder of R90,909. Under the new system, the R100,000 will attract a dividend tax of 10%, which is R10,000, and will result in a net dividend of R90,000. The shareholder receives R909 less as a dividend.
The treatment for foreign shareholders may be different: many countries have double taxation treaties with South Africa. In terms of about seven of them, their residents who are shareholders will not pay the dividends tax. Mazansky said these agreements were largely already re-negotiated, and only awaited signing and ratification, something that was expected to be completed between late-2009 and early-2010 – hence the delay in implementing the new tax. Government has indicated that it is quite happy with a reduction in the rate to 5% for certain foreign shareholders under South Africa’s treaties with other countries.
The areas of complexity introduced by the amendment include: the introduction of a class of exempt organisations; the simplified definition of ‘dividend’; and the introduction of a concept of ‘contributed tax capital’ (CTC) which now gets introduced into the legislation.
“The dividends tax will be payable on the payment of any dividend declared by a company, subject to certain exemptions. Most importantly, the exemption applies where the dividend is declared to another resident company, thereby eliminating the payment of dividends tax on inter-company dividend distributions. This will assist groups of companies tremendously and will avoid unnecessary administration,” said Mazansky.
Another exemption is made for dividend distributions to exempt entities, such as Public Benefit Organisations (PBOs) and by ‘very small businesses’, provided the dividend declared does not exceed R200,000 a year.
The concept of CTC means that companies will now effectively have to maintain a ‘tax balance sheet’ as well as the usual accounting balance sheet. Mazansky described this as one of the complexities of the amendment, with questions as to whether smaller companies could manage such dual accounting, and whether the SARS had the capacity to police it.
The effective date of the new dividends tax is yet to be determined by the Minister of Finance, Trevor Manuel.
South Africa has just fallen in line with international tax trends with the introduction of a dividends tax to replace the secondary tax on companies (STC), a move likely to make South Africa a more attractive foreign investment destination.
However, while this may simplify tax from the perspective of foreign investors, and go some way to attracting capital flows, for local companies it introduces a number of complexities, says Ernest Mazansky, head of Werksmans tax practice.
Speaking at a recent Werksmans-hosted tax seminar, he described the major difference as lying in who pays the tax. “Conceptually we have moved away from a company tax to an effective tax on shareholders payable on the distribution of dividends by a company,” he told seminar delegates.Dear Janine Connor,
Of interest to local companies is that the South African Revenue Service (SARS) acceded to pressure to give credit for the many millions in STC credits that are currently on the books of South African companies.
“This was a sensitive issue for companies that had already paid the 10% STC and now their shareholders will have to pay another 10% dividends tax. The tax amendment now allows companies in effect to off set the amount of STC paid, as a credit against dividends tax for a period of 5-years. But they have to notify shareholders of the deduction. Failure to do so effectively results in their having to pay double tax. If you don’t notify all shareholders, you cannot use the STC credit as far as those shareholders are concerned,” said Mazansky.
The new tax further extends the principle of directors’ liability. The new legislation has more teeth in that it deems certain executive directors and shareholders of an unlisted company that fails to withhold the tax, liable for the dividends tax. Directors of private companies need to take special care as they are personally liable where the dividends tax is not withheld and paid by that company.
“This is nothing new, but continues the disturbing trend of eroding the concept of limited liability for companies,” said Mazansky.
The dividends tax rate will remain at 10%, as is currently the case with STC, and not being company tax but a dividends tax payable by the shareholder, the effective South African company tax rate is now simplified and fixed at 28%.
Mazansky said this places our company tax rate on a par with international practice, is familiar to international investors and will assist in the creation of tax certainty for foreigners.
Under the previous STC regime, a company declaring dividends had an effective tax rate of around 35%, when one added the STC to the corporate tax rate.
Under the new system, South African shareholders will pay a slightly higher effective rate of tax than under STC because the dividend is now declared exclusive of any dividends tax. For example, if a dividend of R100,000 is declared, under STC, that R100,000 is deemed to include the STC. The calculation can simply be described as R100,000 x 10/110 which results in STC of R9,090, leaving a net dividend for distribution to the shareholder of R90,909. Under the new system, the R100,000 will attract a dividend tax of 10%, which is R10,000, and will result in a net dividend of R90,000. The shareholder receives R909 less as a dividend.
The treatment for foreign shareholders may be different: many countries have double taxation treaties with South Africa. In terms of about seven of them, their residents who are shareholders will not pay the dividends tax. Mazansky said these agreements were largely already re-negotiated, and only awaited signing and ratification, something that was expected to be completed between late-2009 and early-2010 – hence the delay in implementing the new tax. Government has indicated that it is quite happy with a reduction in the rate to 5% for certain foreign shareholders under South Africa’s treaties with other countries.
The areas of complexity introduced by the amendment include: the introduction of a class of exempt organisations; the simplified definition of ‘dividend’; and the introduction of a concept of ‘contributed tax capital’ (CTC) which now gets introduced into the legislation.
“The dividends tax will be payable on the payment of any dividend declared by a company, subject to certain exemptions. Most importantly, the exemption applies where the dividend is declared to another resident company, thereby eliminating the payment of dividends tax on inter-company dividend distributions. This will assist groups of companies tremendously and will avoid unnecessary administration,” said Mazansky.
Another exemption is made for dividend distributions to exempt entities, such as Public Benefit Organisations (PBOs) and by ‘very small businesses’, provided the dividend declared does not exceed R200,000 a year.
The concept of CTC means that companies will now effectively have to maintain a ‘tax balance sheet’ as well as the usual accounting balance sheet. Mazansky described this as one of the complexities of the amendment, with questions as to whether smaller companies could manage such dual accounting, and whether the SARS had the capacity to police it.
The effective date of the new dividends tax is yet to be determined by the Minister of Finance, Trevor Manuel.
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