On 31 August 2012, National Treasury and the South African Revenue Service (SARS) issued a joint media statement regarding their intention to pass anti-avoidance legislation to deal with tax-avoidance schemes relating to dividends tax, as well as provisions to prevent the use of STC credits where no tax was paid in respect of these credits.
The media statement described transactions where a South African tax-resident company pays amounts that are linked to dividends, for example "manufactured dividends" paid under share lending agreements.
After industry discussions, the draft legislation has been refined. Contained in the new Section 64EB, it will essentially deem any amount that is paid in terms of the transactions listed to be a dividend paid by the South African resident company. These transactions are:
Where a South African tax-resident company acquires the right to a dividend by way of a cession after that dividend is declared, the amount paid for this cession is deemed to be a dividend paid by that company to the person seeking the right;
Where a South African tax-resident company borrows shares from another person (the lender) after a dividend is declared in respect of those shares, the manufactured dividend amount paid in respect of the borrowed shares is deemed to be a dividend paid by that company to the lender of the shares; and
Where a South African tax-resident company (the purchaser) acquires a share (or any right in respect of that share) from another person (the seller) after a dividend is declared in respect of that share, and the purchaser is under a fixed or contingent obligation to sell (or has an option to sell) that share or a share of the same kind or of the same or equivalent quality to the seller (or to a connected person), the amount of the consideration paid by the purchaser to the seller as does not exceed the amount of the dividend is deemed to be a dividend paid by that South African resident company.
These proposed changes will apply to transactions entered into on or after 31 August 2012 and to payments made on or after 1 October 2012 if the transaction was entered into before 31 August 2012.
As far as the STC amendments are concerned, revised language will ensure that STC credits do not arise from dividends that had not been subject to STC. In addition, the draft legislation will also be revised so that the company paying such dividend becomes liable for any tax shortfall. These changes will take effect retrospectively from 1 April 2012.
Similarly, a 15% withholding tax will be introduced on interest, with effect from January 1 2013, which will substantially impact corporate funding. Often interest payments on foreign funding arrangements will be required to be made net of any taxes, which effectively pushes the cost of the new withholding tax onto the South African borrower.
All companies with foreign funding must consider the impact of the new interest withholding tax on their current funding arrangements, as they may otherwise be in for a nasty surprise.
*Peter Dachs and Bernard du Plessis are directors and joint heads of ENS's Tax department.
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