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In South Africa Taxation is of great importance as it does promote the economic growth of the country. Taxation affects all individuals, all private and public institutions that earn or spend money in any way.
For South Africa to sustain economy, the taxation of distributed profits is achieved through the Secondary Tax on Companies (STC) and South Africa differ from other countries cause the formal liability for the dividend tax is at the company level as opposed to the shareholder. The reforms take effect in two main phases with advantages as outlined below:
The first phase is were rate of STC was reduced from 12,5% to 10% with effect from 1.October.2001, coupled with a broadening of the tax base
Phase two, entails the actual conversion of the STC into a dividend tax on shareholders and its implementation is contingent on the revision of international tax treaties that limit withholding tax on dividends to 0%. The anticipation was the phase will be completed by 2009.
Benefits to Corporate Taxpayers
Corporate taxpayer have received fair share of tax relief aimed at encouraging further economic growth and fuelling employment. And a host of other measures have also been introduced - especially for small businesses to reduce the cost of compliance and create the space for further growth in this important sector of the economy, for example:
The concept of a small business corporation (SBCs) was introduced in 2000 allowing smaller businesses to enjoy additional tax relief. I mean in 2005/6 SBCs with turnover under R35 000 pay no tax and only pay 10% tax if they have turnover up to R 250 000.
Accelerated depreciation which was introduced for small business corporations with a 100% write-off for manufacturing assets and a 50:30:20 for other assets to encourage investment in these assets.
Businesses with a turnover of R1M annually may now file VAT returns every four months instead of every two months like before.
Introduction of small business helpdesks to assist this sector of the market and will deploying community tax helpers
Neutrality: Applying open door approach, if taxpayer is not happy about the outcome of the case is been giving opportunity to take his or her case to court, for example , the case NO 10746 of Charles Smith Super, in the special income tax court held in Durban. Taxpayer felt that he was been deprived his right of fringe benefits and take the matter to court where it was neutrality was applied with out anyone taking side.
Simplicity: The systems are aligned in such a way that the process become simpler and user friendly and saving time, for example,(1) businesses with a turnover of R1M annually may now file VAT returns every four months instead of every two months like before (2) businesses may even make choice of submitting electronically if not willing to submit manually,(3) small business with turnover under R35 000 pay no tax
Efficiency : ensuring that the system used are more efficient, for example Introduction of small business helpdesks to assist this sector of the market and deploying community tax helpers by conducting outreach programmes as a way of trying to reach taxpayers that are far from SARS office or those don't get enough time, easily assessable.
Equity: all about ensuring fairness, clearly defined policies and procedures are in place.
Difference between Corporate Tax Systems
The Classical System
Is one of several different ways that the movement of income through a company could be taxed. Under this system, a company, as a separate legal entity, is regarded as a taxpayer and pays tax on its taxable income. Dividends paid by a company to shareholders are taxable to the shareholders as income from property. Among OECD countries the classical system is used, to some extent, in the USA and the Netherlands.
Before 1990, South Africa had a modified classical corporate tax system and on the recommendation done by Margo Commission (1987:204) the double taxation of dividends was abolished in 1990 when dividends become tax exempted in the hands of residents' individuals and close corporation. Subsequently the corporate tax system was changed in 1993 as away to reduce corporate tax rate without under revenue loss and encouraging companies to finance themselves through rentation. The corporate tax rate was lowered from 48% to 40% simultaneously secondary tax rate on distributed profits of 15% was introduced resulting in a maximum corporate tax rate on residents of 47,84%. In 1994 the corporate tax rate was lower further to35% and the STC raised to 25%, which marginally increased the maximum corporate tax rate on residents to 48%. Non-residents were subject to an additional non-resident (NRST) shareholders tax on distribution on normal rate of 15%. 1995 October NRST
Double taxation is avoided by the granting of a credit to companies for dividends received from South African companies that have already been subjects to Secondary Tax on Companies; it means STC is effectively imposed on the distribution of operating profits. For example Branches of foreign companies are taxed at 35% and are exempt from secondary tax companies. In 2000 a reduced tax rate of 15% on the first R100, 000 of profit for small companies was introduced and in 2003 budget speech it was clearly outlined that total revenue threshold for qualifying as small corporate was raised from R3M to R5M and also budget introduced double deduction for the first R20,000 start-up costs for new business
The Full Integration
Under full integration system the company is regarded as a tax accounting entity but not as a taxpayer, that means no tax is paid at the company level instead the net income of the company, whether actually distributed to shareholders or not, is included in the assessable income of shareholders on the basis of their proportionate shareholdings. In brief the corporate tax then serve the purpose of a withholding tax, credited in full at shareholders level.
South Africa can look at the possibility of introducing any real incentives or relief measures, apart from deferral of the fringe benefits tax on soft loans advanced to participating employees under the share purchase trust scheme as a way of attracting investors and a way of helping to limit abuse of tax incentives provisions that may be adopted, for a company to qualify for any incentive, a company' independent auditor and chief financial officer would have to (1) certify that he or she had determined that all requirements for qualifying for the incentive are satisfied and (2) identify any issue that has been resolved in the taxpayer's favour that is not specifically addressed in the statute or regulations. Adopt aggressive approach, including an effective audit program, for ensuring that al requirements for qualifying for tax incentives are satisfied.
It will be appropriate to have each incentive provision expire, or sunset, after a number of years unless the provision is extended by Parliament.
South Africa is great and unique. In time South Africa will create the sustainable growth that will permit all of its people to enjoy economic prosperity. Believing that by adopting systems outlined (1) increase number of potential investors; (2) structural improvements in its capital gains and corporate taxes will be of assistance in helping South Africa attain economic prosperity.