In the 2017 Budget Speech, Finance Minister Pravin Gordhan announced an increase in the dividend withholding tax rate (DWT) from 15% to 20%, a measure which could have a far-reaching impact not only on the corporate community, but also on the South African economy.
This according to Etienne Louw, Senior Tax Consultant at Mazars, who states that increasing DWT substantially raises the effective corporate tax rate, which is detrimental for South Africa’s ability to attract foreign investment and economic growth.
“Corporations are already taxed on their profits at 28%. If they pay dividends to shareholders of the company, the increased tax on those dividends effectively pushes the total tax paid by a corporation to around 42%. This is high by international standards and likely to drive international investors away from South Africa,” Louw says.
In addition to this, Louw also notes that there is some confusion around this increase. “Firstly, there is the issue of the effective date of the increase. Treasury has indicated that the effective date is 22 February 2017. This raises the question for dividends declared prior to this day, specifically in respect of a resolution duly signed and executed on 21 February 2017, but with the dividend only due and payable on 23 February 2017. It is unclear whether this dividend declared on the 21st but only paid on the 23rd is subject to DWT at the former rate of 15%, or at the new rate of 20%.
Louw adds that it is important to keep in mind that the Income Tax Act differentiates between listed and unlisted companies. “A dividend declared by a listed company is deemed to be paid on the day the dividend is physically paid. It is therefore logical that all dividends declared by listed companies prior to the rate hike, but only payable thereafter, will be subject to the DWT at the higher rate,” he explains.
“The situation however becomes a bit trickier in the unlisted space. According to the Income Tax Act, a dividend declared by a company that is not listed, is deemed to be paid, either on the date it is paid or the date it becomes due and payable, depending on which of these happens first.”
Louw states that, according to case law, the payment of a dividend typically involves a two-step approach, namely the declaration of the dividend and the physical payment of the dividend.
“A delay may very well exist between the declaration of the dividend and the actual payment thereof or the date on which it becomes due and payable. For instance, an unlisted company may declare a dividend at the end of a month but specify in the authorising resolution that it is only payable in the middle of the following month,” Louw says.
“In such an instance, the DWT obligation will only arise in the middle of the following month. Whilst it is trite that the declaration of a dividend creates a debt owing to the shareholder in most cases, the facts of each case must be carefully scrutinised. In certain instances the authorising resolution could very well indicate that the dividend is only due and payable in the following month.”
“In such instances it is likely that, barring the dividend being due and payable immediately, that SARS would likely view dividends declared but only paid or becoming due and payable at a later stage to be subject to DWT at the higher rate of 20%,” Louw adds.