SA's effective corporate tax rate

The global focus on corporate tax rates has reached new heights, with countries like the UK and US proposing reductions while South Africa moves in the opposite direction. National Treasury's decision to increase the dividend withholding tax has pushed the total tax paid by corporations to approximately 42%, a figure some argue is high by international standards. Ian Matthews, Head of Business Development at Bravura, shed light on the implications of this move on investors during a recent interview on CNBC Africa. Matthews explained that while the corporate tax rate in South Africa remains at 28%, the increase in the dividend withholding tax has raised the effective corporate tax rate to around 40-43%. However, he noted that this change primarily impacts small individual investors, as large corporates and international investors are often protected by double tax treaties between South Africa and its major trading partners. Under these treaties, withholding tax rates for international investors can be as low as 5%, limiting the impact of the tax hike on their investments. South African corporates are also unaffected by the change, as they are fully exempt from withholding tax on dividends they receive. As a result, the burden of the increased tax falls on individual shareholders and unit trust holders. When asked about the government's balancing act between revenue growth and development, Matthews emphasized that international investors are unlikely to be significantly affected by the tax increase due to existing treaties. South African investors, on the other hand, may find themselves bearing the brunt of the change. While foreign investors have treaty protections that cap withholding tax rates, local investors may need to explore alternative investment strategies. In response to the new tax landscape, Matthews suggested that South African investors may see a resurgence of capitalization shares as an alternative to cash dividends. By offering shareholders the choice between cash dividends and additional company shares, corporates can sidestep withholding taxes on capitalization shares. While shareholders would eventually incur capital gains tax when selling the shares, this strategy could offer long-term benefits for investors looking to build a retirement portfolio. Matthews also highlighted the differences in tax implications for listed and unlisted companies. While listed companies typically pay withholding taxes on the date of dividend payment, unlisted companies have more flexibility. Unlisted companies can declare dividends but defer payment for extended periods to retain capital within the business. However, the withholding taxes are due upon declaration, requiring careful consideration of timing and structure. In conclusion, the increased corporate tax rate in South Africa may present challenges for individual investors, while larger corporates and international investors remain relatively insulated. As the tax landscape continues to evolve, investors will need to adapt their strategies to navigate the changing terrain.