Filomena Scalise

The Treasury moved on Friday to close loopholes in legislation relating to the dividends tax that created opportunities for tax avoidance. The dividends tax came into effect on April 1 at 15 percent, replacing the former secondary tax on companies (STC) which was applied at 10 percent.

In an “extra ordinary announcement”, the Treasury said it would close the loopholes and proposed an addition to the 2012 Taxation Laws Amendment Bills expected to be tabled this month.

The original dividends tax legislation provided for tax relief for foreign shareholders via a tax treaty between South Africa and the home countries of companies. But, according to the Treasury, a number of tax advisers have been advocating a scheme for the benefit of foreign shareholders that “arguably reduces the tax rate to zero without any reliance on a tax treaty”.

The scheme provides for the “conversion of rand denominated dividends into amounts denominated in a foreign currency”. The Treasury proposes to close dividend schemes involving foreign shareholders

Another issue raised in the announcement related to STC credits. The original legislation allowed pre-existing credits to be carried into the new dividends tax for a three-year period. STC credits were “designed to prevent the same profits being subject to tax twice if passed along via further dividends”, Treasury said.

However, it noted “longstanding concerns that the mixing of old and new systems could give rise to unintended losses to the fiscus”. It said it had proceeded with a limited transition rule “at the strong insistence of the private sector. Unfortunately a small group of aggressive taxpayers has sought to exploit alleged defects in the transitional rules.”

The “alleged defects” had allowed STC credits to be generated even though no STC was ever paid on the underlying profits. The Treasury said this was in “clear violation of basic tax principles and in clear violation of the stated intention of the proposed relief”.

Interested parties have until Friday to comment.

Ernest Mazansky, the director for tax at Werksmans, said the original legislation should have anticipated the problems.

He said the scheme for foreign shareholders was not based on a new concept but had been brought to South Africa by foreign institutions, adding that tax avoidance schemes were portable. He argued that the drafters of the local legislation should have researched developments in other tax jurisdictions. “They don’t have to reinvent the wheel.”

He said the latest announcement was part of a pattern of amendments designed to address problems created by flaws in initial legislation.

“When it comes to drafting legislation [the] Treasury has limited resources. And every year they try to do too much and they don’t get it done properly. Then they have to resort to amendments.”

Treasury spokesman Jabulani Sikhakhane said he would need details of the continuous amendments before responding to the criticism.

Mazansky also noted that anti-avoidance actions often caught legitimate schemes in the net, a situation that was counter-productive. He suggested the Treasury should simply tax the companies and leave it to them to challenge the assessment in court.