Finweek English Edition - - Companies & markets - SIKONATHI MANTSHANTSHA

HOW CRAZY IS IT for a com­pany to al­low nearly two-thirds of share­hold­ers’ prof­its to be wiped out in tax? Surely a tax bill for more than dou­ble the ideal cor­po­rate tax rate can be avoided? At­tract­ing a tax bill equiv­a­lent to 63,2% of a com­pany’s profit be­fore tax “sounds a bit dan­ger­ous and the plan­ning is ir­re­spon­si­ble,” says Boris Pelegrin, tax lawyer and ad­viser at pro­fes­sional ser­vices firm Mait­land in Jo­han­nes­burg. “If so much of your bot­tom line is wiped out by tax it’s dan­ger­ous.”

Ac­cord­ing to the 2006 an­nual re­port of JSE-listed in­dus­trial ma­chin­ery group How­den Africa Hold­ings, the com­pany at­tracted a tax li­a­bil­ity of R35,3m – 63,2% of its R55,9m profit be­fore tax. That whit­tled down its net profit to R16,5m. To fur­ther add to its tax bill, How­den de­clared a spe­cial div­i­dend of 241c plus a fi­nal div­i­dend of 6c/share – a to­tal of R162,3m.

If all the above sounds puz­zling, try this one: How­den used its R71m cash re­source and bor­rowed R100m from Stan­dard Bank to pay the spe­cial div­i­dend. While the spe­cial div­i­dend might have been paid for un­known cor­po­rate rea­sons, Pelegrin says to bor­row money to pay div­i­dends “sounds very in­ap­pro­pri­ate and at best ir­re­spon­si­ble. It’s like cre­at­ing debt to settle debt. It’s quite dan­ger­ous to bor­row money to pay a div­i­dend, as it cre­ates a long-term li­a­bil­ity for the com­pany.”

Pelegrin sug­gests an­other mo­tive for declar­ing a div­i­dend in money that isn’t in the bag: to pull funds out of the coun­try if off­shore share­hold­ers con­trol the com­pany. “There are al­ways two ways to pull money out of SA – in­ter­est on (share­holder) loans and div­i­dends.”

Doug Gaul, tax man­ager at Grant Thorn- ton, be­moans the plan­ning that would at­tract such a high tax li­a­bil­ity in one year, not­ing that the com­pany had a 5,3% prior year tax adjustment. “The prior year tax adjustment is very high. They could have un­der­pro­vided for tax in prior years, which is bad for tax plan­ning.” Gaul says the com­pany could have been sit­ting on cap­i­tal re­serves for a long time and had de­cided to pay div­i­dends that at­tracted the tax for all the years.

Gaul also crit­i­cised the debt in­curred by the com­pany to pay div­i­dends. “It’s not a sound com­mer­cial prac­tice. They should have paid div­i­dends from their own re­sources. In­ter­est on bor­rowed money isn’t tax de­ductible if the money is to be used to pay div­i­dends, among oth­ers.”

If any­thing, it re­ally sounds like a waste of share­hold­ers’ money.

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