Dividend and Interest Withholding Tax for any tax resident type

 

Background and Use Case

The system can automatically withhold the required tax when a distribution or interest is earned, as dividend withholding tax or interest withholding tax. This means the investor pays the tax at the point in time when the dividend or interest is earned, and the system automatically allocates the required amount to the Tax Authorities’ contract on the system. The investor thus gets a net interest/distribution in this case. There are scenarios where this must only be done for resident investors, or only for non-resident investors, or for both.

When adding Split Categories (See help file to Add distribution split categories) you can set it up in such a way that the interest withholding tax or dividend withholding tax is only withheld from the investor’s account when the dividend or interest is earned by a tax resident or only by a non-tax resident or by both. Examples of these could be as follows:

  • Local Interest subject to SA withholding tax must only be withheld for non-residents of South Africa, i.e. their country of tax residency is not South Africa
  • Double Taxation Agreement says that only South African residents should have DWT withheld on dividend earned
Setup Required

In order to set this up you must capture the following when adding a Distribution Split Category:

  1. Choose whether the category is for Dividend or Interest (number 1 in image below).
  2. Choose whether it has withholding tax (this checkbox will change depending on whether Dividend or Interest is selected, i.e. has interest withholding tax or has dividend withholding tax)
  3. To what tax resident does the withholding tax apply, i.e. it always gets applied, irrespective of the investor’s tax residency. Or Applies only for non-residents, or Applies only for residents.
    1. A resident is defined as a person whose Country for Tax Purposes (Entity card -> More Actions -> Tax details) is the same as the product that holds the investment’s Custodian’s Country for tax purposes. I.e if invested in Product A with instrument B and interest is earned on instrument B, then we’ll check Asset Holder Custodian on Product A which is a company, and see the Country for Tax Purposes of that company to determine if the investor is a resident or not.
    2. If these countries are not the same, the investor is a non-resident.

Note that you must select “Has interest withholding tax” or “Has dividend withholding tax” on a category where you want the system to take the tax additionally, and not in a scenario where the tax has already been deducted earlier in the process. I.e. it’s the administrator of the fund’s responsibility to withhold the tax. This also implies, that on whichever category you define “has withholding tax” that we will calculate the tax amount to be withheld on the specific category where it’s selected, and this will create a withholding tax transaction that reduces the dividend or interest earned and writes the tax amount to the tax authority contract.

The additional setting for “Residents” then filters out on which investors this tax must be withheld or not.

 

Transactions written to Tax Authority

If either Has dividend withholding tax or Has interest withholding tax has been selected, the system will automatically calculate the tax amount, create a tax withheld transaction (example below) and write the Amount to the Tax Authority on the configuration. This could be either cash (if a cash distribution or interest on a cash instrument) or units (unit distribution declared). This Withheld Tax transaction is an indication that the tax was withheld on a contract.

 

Determining the Withholding Tax Rate

We check the “Residents” field as explained above, for each split category, to determine whether interest or dividend tax must be withheld and written as a transaction to the Tax Authority contract or not. If tax must be withheld, there is an order of priority to determine what the tax rate should be on an investor.

 

  1. The default is setup on System -> Countries for Dividend withholdings tax percentage and Interest withholdings tax percentage. We use the Nationality or registered country of the Supplier Instrument Account’s Custodian where the Distribution is loaded.
  2. On the Personal Details card -> more actions -> Tax Details -> you can specify a reduced rate  or tax exemption
    1. Double Taxation Agreements -> Met the DTA requirements for a reduced tax rate then new fields appear for Reduced dividend withholdings tax rate and Reduced interest withholdings tax rate. If this is populated, then these reduced percentages will be used to calculate the tax amount to be withheld, instead of point number 1
    2. Dividend withholding tax exempt means no withholding tax on dividends will be withheld
    3. Interest withholding tax exempt means no withholding tax on interest will be withheld
  3. A Tax Percentage Override can be specified on a Distribution, where the Cents per Unit is captured per Category. This will override the above tax rates, and withhold the specified tax percentage and write it as a transaction to the Tax Authority contract, as per that category’s “Residents” specification.

Last Updated on 2 months ago by Debra Hart