Page 733 - SAIT Compendium 2016 Volume2

BGR 9 INCOME Tax aCT: BINdINg gENERaL RuLINgS BGR 9
• provides speci c commentary on the nature of the now-repealed STC and its replacement, dividends tax; and
• re ects SARS’s view of the recognition of dividends tax as a covered tax under South Africa’s tax treaties when it has
been imposed after signature of a tax treaty.
2. Background
A tax treaty generally provides for relief for —
• speci ed taxes, usually listed under Article 2 of a tax treaty, that are in existence at the time the tax treaty is entered
into; and
• any identical or substantially similar taxes on income that are imposed after the date of signature of the tax treaty in
addition to, or in place of, existing speci ed taxes.
3. Ruling
3.1 Taxes on income
The following taxes as at publication date of this BGR are taxes on income and thus qualify for treaty relief under South Africa’s tax treaties:
• Normal tax on taxable income, which includes a taxable capital gain [section 5]
• Withholding tax on royalties, a nal tax payable by non-residents on income derived from royalties or similar payments
[section 35]
• Withholding tax on interest (effective 1 July 2013) [section 37J (1)]
• Tax on foreign entertainers and sportspersons, a nal tax [section 47B (2)] • Turnover tax on micro businesses [section 48A]
• STC (repealed 1 April 2012) [section 64B(2)]
• Dividends tax [section 64E(1)]
For purposes of the above list, the following are not taxes on income but represent advance payments of normal tax: • Employees’ tax [Fourth Schedule to the Act]
• Provisional tax [Fourth Schedule to the Act]
• Amounts withheld from payments to non-resident sellers of immovable property in South Africa [section 35A]
3.2 Treatment of STC
STC was repealed with effect from 1 April 2012 and has been replaced by dividends tax. While STC was effective, corporate taxes on income were imposed at two stages. Normal tax was (and still is) imposed at the rst stage on an annual basis on corporate pro ts [or more accurately on ‘taxable income’ as de ned in section 1 (1)].
STC was imposed at the second stage on a resident company on the ‘net amount’ as described in section 64B (3) when a dividend was declared by the company. The net amount is the amount by which a dividend declared exceeds the sum of incoming dividends accrued during the ‘dividend cycle’. A dividend cycle begins and ends each time a dividend is declared.
South Africa had reached agreement with all its treaty partners that STC was to be viewed as a creditable corporate tax. The circumstance under which a non-resident was able to secure a tax credit for STC was dependant on the terms of the tax legislation of the non-resident’s country of residence.
STC could result in economic double taxation, which involves two persons being subject to tax on the same amount. This would occur, for example, if a non-resident shareholder’s country of residence imputed the pro ts of a South African company to that non-resident under a controlled foreign company system similar to that found in section 9D, or under a full imputation system for taxing foreign dividends*, and failed to provide a tax credit for the underlying corporate taxes. By granting a tax credit for the pro-rata portion of the underlying corporate income taxes (including STC) the non-resident’s country of residence would prevent economic double taxation.
Since STC was not a tax on shareholders, it was not affected by any limitation imposed on the source state under the dividends article of South Africa’s tax treaties. In Volkswagen of South Africa (Pty) Ltd v C: SARS† a South African- resident wholly owned subsidiary of a German holding company sought to obtain a rate of STC of 7,5% under Article 7 of the tax treaty with Germany. The court found that there are substantial differences between STC and a withholding tax, and STC was therefore not substantially similar to a withholding tax. STC is a tax on a company declaring a dividend and not a tax on the recipient shareholders. It is not a tax on dividends as contemplated in the tax treaty and accordingly fell outside the ambit of the article.
3.3 Dividends tax
Dividends tax came into effect on 1 April 2012 and replaced STC. It is levied as a percentage of dividends paid by any company other than a headquarter company. In the case of a dividend other than a dividend in specie the liability for the tax falls on the person entitled to the bene t of the dividend attaching to a share‡ (usually the shareholder) even though the tax is withheld by the company paying the dividend or by a regulated intermediary. Such a cash dividend falls within
* Under a full imputation system for taxing dividends, the foreign dividend is grossed up to an amount equal to the proportionate share of the underlying pre-tax corporate pro ts.
† [2008] JOL 21746 (T), 70 SATC 195. ‡ Section 64EA (a).
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