Dividend tax good news for FDI

The dividends tax, which was implemented on April 1 2012 was described as yet another step in the right direction is the reduction in the tax rate for local branches of foreign companies.

David Warneke, tax partner at accounting, tax and business advisory firm BDO said the dividends tax was arguably the best tax news for foreign investors in a long time.

"When double tax agreements apply, dividends tax is a significantly positive development for foreign investors," he said.

He explained further: "Considering that most potential investors are from developed countries with which SA does indeed have double tax agreements, I think the benefits associated with dividends tax will apply to the majority of foreign investors."

The dividend tax was introduced to replace the secondary tax on companies (STC). The introduction of the tax according to experts would bring SA in line with the international tax regimes of other countries that also implement it in order to encourage investment.

Previously the STC said industry experts had created the impression that SA's corporate tax rate was higher than that of other foreign countries, making it a less attractive destination for investment.

Under dividends tax, the effective tax that investors can expect to pay will be substantially lower than was the case with STC according to Warneke.

"With STC, the effective tax rate for foreign companies was 34.5% (taking into account income tax at 28% and STC at 10%). "With dividends tax of 15%, the effective tax rate on profits would be 38.8% if no double tax agreement applies. If a double tax agreement applies in terms of which the withholding rate on dividends is reduced to 5%, the effective rate of tax on the profits drops to 31.6%," Warneke said.

The tax expert explained that dividends tax was internationally recognised and so investors could usually receive credit in their home countries for dividends tax withheld in SA, where those dividends were taxable in the home country of the investor.

"Dividends tax is a much more foreign investor-friendly tax than STC," said Warneke. "Because of the favourable impact of double tax arrangements, the actual dividends tax payable will usually be a lot lower than the standard 15% rate for dividends tax," he said.