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The purpose of this assignment will be to inform and give expert guidance on the way South Africa should proceed in enticing and bringing about the new way of boosting corporates in a manner that are tax compliant and efficient in themselves.
In standardising what other countries are doing today, South Africa must impose a tax on dividends. However, what therefore shall distinguish South African system from the rest is that that formal liability for the dividend tax shall be at the company level as opposed to the share holder level. South Africa can then afford to exempt dividends received by shareholders, there are two countries that have a formal dividend tax liability at the company level and they are Estonia and India.
It goes without say that this system that we can adopt will have an immense impact in the way the global market view South Africa and thereby been attracted to come and invest in the country because of this advantage. International investors can be made more familiar with the with a dividend tax at the shareholder level and often then enjoying double tax treaty limitations on a dividend tax at this level. That is to say, double tax treaties limit the dividend tax imposed at the shareholder level but not at the company level.
Finally, company accounts will show the Secondary Tax on Companies (STC) paid as tax paid by companies.
These announcements should be coupled with the immediate introduction of anti-tax avoidance measure that must be there as a mitigating factor to tax avoidance.
This dividend tax will with immediate bring about these three crucial benefits:
Broadening of tax base to cover all distributions by companies and not just those profits, since the determination of what constitutes profits available can be a complex and uncertain area of South African law.
Provision will be made for the tax free return of capital but anti-avoidance provisions will have to address inflated or transitory capital contributions.
The tax rate will be reduced to 10%, therefore a more targeted exemption for amalgamation transactions shall be introduced depending on the analysis of the transactions concerned.
This document further seeks to clarify a distinct difference between tax evasion and tax avoidance. Tax evasion refers to illegal activities deliberately undertaken by a tax payer to free himself / entity from a tax burden. An example of tax evasion can be wherein an entity omits income from its annual tax return. Tax evasion is therefore an offence and is subject to severe penalties in terms of sections 75 and 76 of the Income Tax Act No. 58 of 1962.
Section 75 (Penalty on default) of this Act provides that; any person who fails or neglects to furnish, file or submit any return or document as and when required by or under this Act; or fails to show in any return prepared or rendered by him on behalf of any other person any portion of the gross income received by or accrued to or in favour of such other person or fails to disclose to the Commissioner when preparing or making such return, any facts which, if so disclosed, might result in increased taxation;
shall be guilty of offence and liable on conviction to a fine or to imprisonment for a period not exceeding 24 months.
Section 76 (Additional tax in the event of default or omission), provides that; a taxpayer shall be required to pay in addition to the tax chargeable in respect of his taxable income - if he makes default in rendering a return in respect of any year of assessment, an amount equal to twice the tax chargeable in respect of his taxable income for that year of assessment or if he omits from his return any amount which ought to have been included therein, an amount equal to twice the difference between the tax as calculated in respect of his taxable income as determined after including the amount omitted,
Tax avoidance by contrast, usually denotes a situation in which a tax payer has arranged his affairs in a perfect legal manner, with the result that he has either reduced his income or has no income on which tax is payable. However, a taxpayer cannot be stopped from entering into a bona fide transaction which, when carried out has the effect of avoiding or reducing a tax liability, provided that there is no provision in the law designed to prevent that avoidance or reduction of tax.
It is again important to note section 103(2) on the Assessed Losses in that there are processes in place that deal with trafficking of losses under tax avoidance. This provision of the Act is made to prevent such a scheme for tax avoidance. There are three fundamental requirements that must be met before a section 103(2) can be applied and those are;
there must be an agreement affecting a company or trust, or a change in the shareholding of the company, members interest of a close corporation or trustees or beneficiaries of a trust
the above must result in a receipt or accrual of income or a capital gain by the company or trust.
the purpose of the agreement or change is solely or mainly to utilise any assessed loss, any balance of assessed loss, any capital loss, any assessed capital loss to avoid or reduce a tax liability. When these requirements are met then the use of assessed loss is denied. In other words, the income that was channelled to the other entity may not be off set against the assessed loss of this other entity.
The roll out of such a system will further bring about the following benefits for the government:
optimisation of compliance and management of risk (this can be achieved through amended Legal and enhance Policy provisions, operations are also going to be improved)
better tax payer and trader experience (Stakeholder education and Service)
improved enforcement (Audit and Investigation)
enhanced human capability (implementation of human resource management framework)
enhanced greater operational efficiency (technological solutions and systems modernisation)
promotion of good governance and administration (enhancement of employee integrity)
There should be a creation of an office that will be referred to as Corporate Relations Office and its functions will be to;
leverage stakeholder resources to achieve greater levels of compliance
communicate relevant South African Revenue Service (SARS) information to key segments of the tax levels
influence "influencers" to achieve greater compliance in the market place
improve consistency and quality stakeholder interaction
obtain stakeholder input to assist in improving the SARS operational efficiency
This office shall aim to encourage voluntary compliance and enhance the South African Revenue Service (SARS) image through:
facilitate credible relationships
creating meaningful two-way communication flows
projecting SARS as a caring contributor to the social and economical needs of the country
In advancing further this assertion to the introduction of Secondary Tax on Companies (STC), the Business Day News, Tuesday, 18 March 2010 noted that; "corporate South Africa's contribution to the tax take has doubled since the late 1990, even though the corporate tax rate has come down significantly".
The same publication further quoted the then Finance Minister Manuel saying, "what has happened to South Africa's tax mix in the past ten years (since 1998 - 1999) is that corporate income taxes (including secondary tax on companies, or STC) have grown from about 13% to 28%, despite the cut in the company tax rate from 35% to 29%".
Already with the current policies that are in place, they have proven without doubt that any tax payer has an opportunity to plead their case regardless of the standing of the company. They also have an opportunity to approach any court of law if they feel hard done by with the decisions taken by the South African Revenue Service (SARS) and they can even their case to an independent arbitrator to hear their case.
One case in point is a case that was between SASOL CHEMICAL INDUSTRIES LTD as an Appellant and THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE (SARS) as the Respondent. The issue was around an assessment that the appellant interpreted as profit / revenue whereas SARS viewed the money in dispute as a capital amount due for taxation.
Section 82 of the Income Tax Act No.58 of 1962 provides that, "the burden of proof that any amount is exempt from or not liable to any tax chargeable under this Act or is subject to any deduction, abatement or set off in terms of this Act, shall be upon the person claiming such exemption, non liability, deduction abatement or set off, and upon the hearing of any appeal from a decision of the Commissioner, the decision shall not be reversed or altered unless it is shown by the Appellant that the decision is wrong".
The onus of this case rested on the Appellant to prove to the court that indeed the expense in question was in fact capital or revenue in nature.
As the Appellant could not convince the court otherwise the assessment was upheld and the company had to comply with the ruling. Therefore, in terms of transparency and application of the policy we are already there.
It is evident that this kind of tax system is sustainable for the betterment of the economy of this country and also in sync with the applicable protocols that South Africa is a signatory. This proposed system has in more than one way the potential to lure more investors in the country as they have a full say in the running of their entities provided they stick to the latter and spirit of the applicable legislations of this country.
It should however be noted that were foreign dividends that are not received from sources in South Africa, they are totally not included in a non-resident gross income. Foreign dividends are therefore only included in a resident's gross income.
Section 64B(5)(c) exempts part of a dividend from STC that is declared in the course of the liquidation of a company. The dividend qualifies for the STC exemption to the extent that it is a distribution of the realised or unrealised profits derived by the company before it became a resident, regardless of whether the unrealised profits have been recognised in the accounts of the company.
Lastly, if a shareholder is an employee of the company and receives remuneration for the services that s/he renders, the amount transferred by the company would not be transferred in relation to his/her shares, but in relation to the services that s/he renders. The remuneration paid to such employee (who is also a share holder) would therefore not constitute a dividend.
So, who would not wan to be a share holder in such a country?