The impact of the introduction of dividends tax in South Africa on foreign and local investors

Abstract

The system used for the taxing of dividends in South Africa (SA) has been subject to constant reform over the past two decades. The stated objective for each reformation process has remained constant since 1986, which is to align SA with international tax norms and to encourage investment into the SA economy.

In the 2007 budget, the Minister of Finance announced that the new dividends tax legislation would replace the Secondary Tax on Companies (STC) legislation. STC was considered to be a complex tax system, which was only used by SA and a handful of other countries. Therefore it was difficult for foreign investors to understand the technical aspects of STC. These complexities deterred foreign investors from investing in South Africa.

Dividends tax, on the other hand, is a withholding tax which is levied at a shareholder level. It is easily understood and internationally recognised.

The South African Government indicated that the objective for the introduction and implementation of dividends tax in SA was to make SA a more attractive investment destination by aligning the South African system used for the taxing of dividends with internationally recognised systems.

The purpose of this study is to determine whether or not there are any tax incentives or benefits included in the dividends tax legislation which will encourage foreign investors to consider SA as a potential investment destination.

The study is based on an extensive literature review, the exploration of STC and dividends tax legislation and also incorporate the views of previous academic research performed on this subject.

This study has established that foreign investors will benefit from the implementation of dividends tax in SA. The benefits for foreign investors are not necessarily embedded in the dividends tax legislation, but there are still benefits that can be enjoyed from applying this type of system for the taxing of dividends declared and distributed.

The objective for the implementation of dividends tax was to align SA with international tax norms and to encourage investment in SA.

This study has revealed that the introduction of dividends tax has achieved this objective. It further established that the legislation is not particularly partial towards one type of shareholder or investor but rather that dividends tax strives to increase investment opportunities in order to stimulate growth in SA.