Court Rules on STC and Double Tax Agreement

One of the widely publicised consequences of the proposed change from secondary tax on companies (STC), to a dividend tax, has been the applicability of South Africa’s double tax agreements to a dividend tax. It had been widely accepted that STC does not fall within the ambit of South Africa’s double tax agreements. Volkswagen South Africa (VWSA) recently challenged this position in the High Court.

VWSA had paid significant dividends to its German holding company. STC had been fully paid on those dividends. The double tax agreement between South Africa and Germany provides that South Africa may only tax dividends declared to a German shareholder of a South African company, at a maximum rate of 7.5%. STC had been paid by VWSA at 12.5% (the rate has subsequently been reduced to 10%).

STC is not specifically mentioned in the double tax agreement and, in fact, was not yet in existence when it was concluded. VWSA contended that STC is a tax on dividends that is substantially similar to taxes that were in existence when the double tax agreement was concluded.

The South African Revenue Service (SARS) stated that STC is not a tax on dividends at all, but is rather a tax on the company declaring the dividend. On this basis, the double tax agreement would not apply. The Court agreed with this statement. It was therefore found that the double tax agreement did not apply and that STC had properly been paid at the full rate.

The Court’s finding on the inapplicability of the double tax agreement meant that certain potential issues did not need to be considered. SARS had stated that because VWSA had fully paid its STC in accordance with a practice generally prevailing at the time, it was precluded from claiming a refund. This is in terms of the refund provisions of the Income Tax Act.

VWSA firstly argued that the full payment of STC could not be regarded as being in accordance with a practice generally prevailing, as the issue had never been properly considered. This would have probably have been a difficult argument. It was then contended that, in addition to the refund provisions of the Income Tax Act, taxpayers can rely on common law principles, such as undue enrichment. This is an issue that may well arise again in the future. It should always be remembered that SARS is subject to legal principles outside the tax legislation.