MOGOLA Makola is a director at Bowman Gilfillan, the commercial law firm.

SUMMIT TV: The new dividends withholding tax kicks in this week - we've seen companies delaying dividends or rushing them out in the face of the tax change. What are the main differences between the secondary tax on companies (STC) and the new dividends withholding tax?

MOGOLA MAKOLA: Investors wouldn't have paid the secondary tax because that was payable by companies declaring dividends - so the liability for paying the tax lay with companies. Obviously taxpayers would be affected because their dividend would be slightly less than what they would have received if the tax wasn't payable. The difference with the withholding tax is that the liability falls on the shareholders themselves - the role of the company is simply to withhold where it is required to, with declarations required to justify an exemption or a lower tax rate. So, companies will still be involved in the sense of the compliance that is required by the legislation.

STV: Is it a heavier administrative burden than the STC?

MM: It is for entities such as regulated intermediaries, including collective investment schemes. If you're dealing with a large group of investors, you would have to keep track of each and every one and their tax residency, double tax agreements, lower tax rates and those wanting to claim exemption.

There is a lot of paperwork involved and you have to collect the declarations that serve as the basis of the rates at which you are withholding, for the South African Revenue Service (SARS). Also, there are the STC credits that one can still use for about three years - so if you want to be help your shareholders or investors reduce their liability by applying their STC credits, you need to keep track of how much of your STC credits have been used when you pay dividends to shareholders.

There is a lot of paper and a tax return that you have to submit to SARS when you do the withholding tax, which accompanies the payment you make to SARS as the withholding agent, so there seems to be a lot more paper involved than when you were paying STC.

STV: One of the reasons I believe we introduced the dividends withholding tax was to bring us in line with international practice and make it simpler for international shareholders. Does this make it simpler?

MM: It makes it simpler in the sense that it makes it easier for shareholders to conceptualise. STC was an unusual tax that not many countries had - South Africa and India - so there were few jurisdictions with this type of tax. If an investor needed to know what the tax leakage was in the investment, STC was a difficult tax and confusing in terms of double taxation agreements because one was not really getting a credit because the investor wasn't liable, it being the company declaring the dividend.

There was a trend in the mid-2000s where some of the treaties we entered into made provision for a credit even though STC wasn't the liability of the shareholder. This makes it easier because everyone understands how this tax works and how you claim your credits in terms of the tax agreements, so foreign investors can understand the environment.

STV: Does this make it better for shareholders? Are shareholders going to be penalised or will companies simply increase the dividend, taking into account tax rates, so they come out with the same result they would have with STC?

MM: It depends on the tax profile of the investor. For retirement funds it really doesn't make a difference because the dividends are exempt, so they won't be taxed and will receive the dividend as it is declared. For public benefit organisations it is the same, and with certain government-owned institutions it will be the same. For individuals, it creates an extra level of tax, so that's 15% where in the past there wasn't anything at all. I say tax in the loose sense because income tax and withholding tax are different taxes, so people are feeling the pinch of that 15%, especially South African residents who don't have the double-tax-agreement shield.

STV: Are there legitimate ways to mitigate this?

MM: What I've found with taxpayers is that they can be quite creative - but there is a finite list of exemptions that are available in respect of the dividend withholding tax. If you're an individual investor, the final liability especially with regards cash dividends falls on the owner, so it's just a question of SARS looking at the form and deciding who the beneficial owner is, and if you're the owner, that wouldn't make a difference.

STV: Does this affect shareholders in black economic empowerment special trusts or special purpose vehicles?

MM: It depends on how they invest. There is an exemption on South Africa-resident companies - so if your investment is held indirectly through a South Africa-resident company, that wouldn't be subject to the withholding tax when they receive the dividends - but ultimately the dividend has to leave the company and get into the hands of the shareholder, and that would be the trust and the individuals themselves, so ultimately the tax will be payable.

The only reason they have these exemptions for South African companies is to make sure there aren't too many tax levels. It's not unusual and was also there in the STC where for group companies no STC was payable but it would ultimately be payable once it left the group.