SOUTH AFRICAN REVENUE SERVICE
PRESS STATEMENT

21 FEBRUARY 2007

EXPLANATORY NOTE: STC REFORMS

In common with many countries worldwide, South Africa imposes a tax on dividends. What distinguishes South Africa's system, however, is that the formal liability for the dividend tax is at the company level as opposed to the shareholder level. South Africa then exempts dividends received by shareholders. Only two other countries, Estonia and India, have a formal dividend tax liability at the company level.

This has meant that international summaries of company tax rates have typically compared the combined company and dividend tax rate in South Africa with the company tax rate in other countries. (If apples are compared with apples and South Africa's combined rate in 2006 is compared with that of the OECD countries, South Africa would have the seventh lowest rate out of 31.)

International investors are also more familiar with a dividend tax at the shareholder level and often enjoy double tax treaty limitations on a dividend tax at this level. That is to say, double tax treaties limit the dividend tax imposed at the shareholder level but not at the company level.

Finally, company accounts have shown the STC paid as tax paid by companies.

The reforms announced in the Budget Review 2007 address these issues.

The reforms take effect in two main phases. The first phase takes effect from 1 October 2007 and the second from 2008, depending on the renegotiation of certain double tax treaties. An anti-avoidance measure is also announced with immediate effect.

21 February 2007

The STC exemption for amalgamation transactions contained in section 44(9) of the Income Tax Act, 1962, is withdrawn. This exemption permits a permanent loss of STC, rather than a deferral of tax, which is the intent of the amalgamation provisions.

1 October 2007

Four changes take effect.

The estimated revenue cost of this phase is R2 billion.

2008

Two changes take effect

It is envisaged that the withholding tax will be a final withholding tax and that companies paying dividends will have to determine whether a reduced withholding tax rate applies as a result of the application of a double tax treaty.

ENDS

ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE
PRETORIA



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