Long and winding road for company dividends and capital – No end in sight

If you think that companies have had a torrid time trying to keep up with changing developments in the past few years, you should probably take another deep breath because there are no signs that this rollercoaster will slow down very soon.

Accounting standards, company law and tax law continue to conspire to leave companies breathless in their attempt to keep up (or catch up) with the changing landscape. Indeed, one can’t help but have sympathy for the regulators themselves as the developments in one area often cause the other legislation-drafters to sit back and scratch their heads.

The tax law drafters at National Treasury and SARS, for example, have always had to contend with the machinations of creative tax planners and of changes in economic realities. More recently however, they have also had to contend with, for example, far-reaching changes in the Accounting reporting rules. And just as the legislative amendments from the past year or so were starting to suggest that there might be some form of convergence in the tax and accounting treatments of capital and dividend distributions, they are likely to be wrenched apart again.

The notion that the tax treatment of capital and dividend distributions could piggy-back off their accounting treatment is clearly under pressure, given the constant state of flux in the accounting world –and especially in the light of further substantial changes (to the accounting rules) coming into effect in 2009.

Add to this the ground-breaking proposals in the area of company law (proposed to become effective over the next 18 months) and it becomes clear why the tax policy-makers feel that tax can no longer be held hostage by accounting and company law rules.

Earlier this year National Treasury released a discussion document on the separate tax recognition of dividends and capital, and all indications are that the actual draft legislation might be available to the public from the end of July 2008. Essentially, the discussion document proposed to separate the tax concept of contributed capital from the accounting concept. To explain this divergence of tax from accounting, I often use the example of companies’ fixed-asset registers, where companies have to keep separate records of tax and accounting depreciation. So presumably companies may now be expected to employ a similar concept for capital and reserves, i.e. separate accounting and tax records.

For example, whilst straight-forward cash contributions by a shareholder are likely to be treated in an identical fashion for both tax and accounting purposes, there are likely to be substantial differences where shares are issued in return for the contribution of a non-cash asset like shares or fixed property. Whilst the accountants might look to the market value of the incoming asset when recording the share capital and/or premium, the proposed tax rule will most likely focus on the tax base of the asset.

There are also several other dimensions of capital and reserves that will be impacted by the new proposals.

So while companies are already quite vexed by the uncertainty surrounding the implementation-date of the switch from STC (secondary tax on companies) to the new dividend withholding tax, they should also brace themselves for a redefinition of the very concept of a dividend. Many of us consider that a silver lining in the change-over to a withholding tax is that it comes with some certainty, i.e. that it will bring us in line with a stable global phenomenon that is well-understood and likely to stay with us for decades to come. But even as we wait for this transition, the goal-posts are already being shifted. We will know what the tax on dividends is, but what’s the dividend?