South African Budget phases out STC
5-May-2008Confirmation that the Secondary Tax on Companies (STC) is to be replaced with a withholding tax on dividends was the key feature of the 2008 budget announced by South African Finance Minister Trevor Manuel on 20 February. It also included a cut in the headline corporate tax to 28% from 29%.
In the first phase of the reform process, STC was reduced from 12.5% to 10% with effect from 1 October 2007. This was coupled with a broadening of the tax base through the closure of a number of loopholes. A further broadening of the base is planned for 2008.
The second phase of reform is the conversion of the STC into a dividend tax on shareholders. As stated in the 2007 Budget Review, the implementation of this second phase is contingent on the revision of international tax treaties that limit withholding tax on dividends to 0%.
These treaties are Australia, Cyprus, Ireland, Kuwait, The Netherlands, Oman, Seychelles, Sweden and the UK. Most of these treaties have been renegotiated and are awaiting signature and ratification. It is anticipated that this phase will be completed by 2009.
Manuel said the new STC regime would be a separate final withholding tax - dividends will not form part of shareholder income and the new tax will apply to distributions during the life of the company as well as in liquidation.
Non-corporate and non-resident shareholders will generally be subject to tax at a 10% rate on the full amount of dividends received, with limited exemptions and deferrals for distributions to exempt entities, beneficiaries of treaty relief where, depending on the proposed renegotiation of treaty rates, a 5% limit may apply, and intra-company dividends.
The company declaring the dividend will be required to withhold the tax upon declaration. Under transitional arrangements, taxpayers can utilise STC credits but these will be forfeit upon implementation of the new system.
Delicious
StumbleUpon
Facebook
Newsvine
Digg