Dividends which are not dividends; for tax

Those of you who did economics will remember that one of the means of production is enterprise. Employees earn salaries from services they render whilst entrepreneurs reap profits from their business ideas. Some of the entrepreneurs work for their companies, thereby earning both salaries and dividends but some just invest in companies and only earn dividends. For your information, the Income Tax Act (hereinafter Act) requires that tax be deducted whenever dividends are paid to both resident and non-resident shareholders. Throughout this article, words importing the masculine shall be deemed to include the feminine.

Dividends which are not dividends; for tax

Those of you who did economics will remember that one of the means of production is enterprise. Employees earn salaries from services they render whilst entrepreneurs reap profits from their business ideas. Some of the entrepreneurs work for their companies, thereby earning both salaries and dividends but some just invest in companies and only earn dividends. For your information, the Income Tax Act (hereinafter Act) requires that tax be deducted whenever dividends are paid to both resident and non-resident shareholders. Throughout this article, words importing the masculine shall be deemed to include the feminine.

TAX ON DIVIDENDS

Dividends are generally taxed at 7.5% whether paid to residents or non-residents. However, Double Taxation Avoidance Agreements such as those between Botswana and the UK, Seychelles and Zimbabwe cut the tax rate from 7.5% to 5% if the shareholder is a company holding at least 25% in the Botswana entity. The payer of the dividends is mandated with the responsibility of deducting tax from the shareholders.

THE SPECIAL DIVIDENDS

Whilst almost every shareholder is taxed at the above-stated 7.5%, there are some dividends which are not taxed as provided for in the Act. One category of such dividends is those paid to a shareholder from dividends which would have already suffered tax. I know that this does not really make sense until it is demonstrated and I am going to do that just now. Let’s assume that Tiro (Pty) Ltd declares dividends of P10m to Batho (Pty) Ltd and deducts tax of P 0.75m, it ends up paying net dividends of P9.25m. If Batho (Pty) Ltd passes the P9.25m to its shareholders (assuming that that’s all it has in the bank), the Act does not regard the P9.25m as dividends. I know you want me to expand this aspect and make it clear why such amounts are not dividends. The answer to that is a simple, ‘Ooh, sorry, I don’t know.’ But how can a practising tax practitioner not know what such a distribution is? The answer to that is also simple; the Act is silent on what it is, save that it clearly states that the amounts do not constitute dividends. So, its purely up to you and me to give such distributions names since they are not dividends; probably call them profit distributions or dividends which are not dividends.

The Act simply provides that a dividend declared by an investment company (Batho (Pty) Ltd, in this case) out of taxed dividends is not a dividend. This is simply to avoid double taxation of the same income in the same country. Batho (Pty) Ltd is regarded as an investment company simply because it invested in the capital of Tiro (Pty) Ltd.

DEEPER ANALYSIS

Before I complicate things a bit, I must state that if Batho (Pty) Ltd declares more dividends than those which were taxed by Tiro (Pty) Ltd, it should deduct tax just like any other company on the excess of such amount.  For example, if Batho (Pty) Ltd declares dividends of P12m including P10m which would have already suffered tax, only P2m of such distributions will be taxed. The P10m was already taxed and there is no need to tax it again. Therefore, we call them dividends which are not dividends.

There is an issue which is not made clear in the Act, being whether the shareholders of Batho (Pty) Ltd are taxable or exempt on the net-of-tax dividends they receive. Again, this leaves us guessing on the correct treatment of such dividends but considering that the dividends would have suffered tax when paid by Tiro (Pty) Ltd, taxing them when Batho (Pty) Ltd passes them to its shareholders results in double taxation. However, it is clear that dividends which are declared by an investment company out of taxed dividends are not dividends, for tax purposes.

Well folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax Whatsapp group or to know more about our 9 Tax ebooks, send me a text on the cell number below.