SARS BRIEFING NOTE ON THE MINISTER OF FINANCE'S PRESS RELEASE ON MULTINATIONALS AND SECONDARY TAX ON COMPANIES (STC) OF 26 AUGUST 2004

The argument advanced by certain multinationals and their advisers, which is referred to in the Minister's press release is based on-

• one of the two mechanisms the STC legislation provides to prevent the double or multiple taxation of dividends as they flow through a group; and
• an improper reading of the Double Taxation Agreements that South Africa has entered into.

Secondary Tax on Companies

STC is a tax that is triggered by the declaration of a dividend. It is levied at the rate of 12.5% and is payable at the end of the month following the month in which the dividend was declared.

The two mechanisms to ensure that STC is only levied once when a dividend is declared by a South African resident company in a group of companies and passed through to the group's ultimate shareholders work as follows.

1. STC is only levied on the net amount of dividends declared and domestic dividends received that have been subject to STC. This does, however, mean that STC must be paid up front by the first company to declare a dividend.

   Example

   

2. The STC legislation was amended in 1994 to permit a company declaring a dividend to elect not to pay STC on a dividend declared to a group company. The group company receiving the dividend will then not be permitted to deduct the dividend received when calculating its net amount for STC purposes.

   Example

   

   This election is not available where the recipient of the dividend is not a resident. Since STC is only levied on resident companies the non-resident recipient would not be subject to STC and permitting the election would result in a complete and permanent exemption from STC.

   Example

   

Double Taxation Agreements

South Africa has entered into over 50 Double Taxation Agreements (DTAs) with countries around the world. (A full list of these DTAs is available under the Legislation section of the SARS web site.) These DTAs are entered into to prevent double taxation and to address the evasion of taxes. Arrangements to enable the collection of taxes due to the other jurisdiction may also be included.

The multinationals concerned and their advisers have taken the position that the relevant non-discrimination articles of the DTAs South Africa has entered into have the result that they are permitted to make an election not to pay STC on dividends declared to non-resident recipients. This argument is clearly untenable since it places the multinational groups at an advantage compared to their domestic competitors. There is, furthermore, no question of double taxation should the STC be levied. South Africa has reached agreement with all its treaty partners that STC is a creditable corporate tax for double taxation relief purposes. In essence, the multinationals are seeking to invoke non-discrimination articles in order to arrive at a result that discriminates against their domestic competitors.

SARS is of the view that the multinationals and their advisers' argument is not supported by a proper reading of the relevant provisions. SARS will challenge their argument, in Court if necessary, and has briefed senior counsel in this regard.