Dividend tax

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A dividend tax is an income tax on dividend payments to the stockholders (shareholders) of a company.

History

Collection

Main article: Withholding tax

In many jurisdictions, the government requires the company to withhold at least the standard tax, paying this to the national revenue authorities and paying out only the balance to the shareholders.

Characterization of dividend income

In most jurisdictions worldwide, dividend payments are considered ordinary income and are taxed as such, the same as if the taxpayer had earned the income working at a job. Other jurisdictions separate dividend income and characterize it as something other than ordinary income subject to different tax rates if taxed at all.

Controversy

Depending on the jurisdiction dividend income along with interest income, collected rents, or other "unearned income" may also be taxed and is the subject of recurring debate as to whether or not these taxes should be eliminated.

Arguments against

Abolitionists argue that a dividend tax amounts to unfair "double taxation". Since a company has already paid a corporate tax on these profits, this means that the shareholders, as part owners, have been taxed already.^[1] The term "double taxation" is sometimes used (unconventionally^[2]) by opponents of the dividend income tax for investors.

Others argue that the dividend taxes adds to and serves as a justification for management's built in bias for growth, even when such growth does not add to shareholder returns.^[3]

It is true that a corporation is an independent entity that has a "life of its own".^[vague] However, the logical consequence of that view is that dividends do not represent income to the corporation, but are rather an expense to the corporation (like employee salaries), and thus should be deductible on corporate income tax returns like any other business expense.^{[citation needed]}

Arguments in favor

A corporation is a legal entity that can own property, sue or be sued, and enter into contracts. The corporation is, therefore, separate from its shareholders with a "life" of its own. As a separate entity, a corporation has the right to use public goods as an individual does, and is therefore obligated to help pay for the public goods through taxes.^[4]

Additionally, as described by Professor Confidence W. Amadi:

The greatest advantage of the corporate form of business organization is the limited liability protection accorded its owners. Taxation of corporate income is the price of that protection. This price must be worth the benefits since, according to the Internal Revenue Service (1996), corporations account for less than 20 percent of all U.S. business firms, but about 90 percent of U.S. business revenues and approximately 70 percent of U.S. business profits. The benefits of limited liability independent of those enjoyed by shareholders, the flexibility of change in ownership, and the immense ability to raise capital are all derived from the legal entity status accorded corporations by the law. This equal status requires that corporations pay income taxes.^[5]

Although the above is an argument for corporate taxation as opposed to the taxation of dividends, arguments for the taxation of income from capital would apply to both and on that count it can be argued that from a social policy standpoint it is unfair to tax income generated through active work at a higher rate than income generated through less active means (although it might be said in defense that the ability to generate a material amount of dividend income can depend on years spent in active work pursuits). Proponents make the related point that reducing or eliminating dividend taxes helps the wealthiest individuals who can afford to buy large quantities of stock, as they could feasibly live off the dividend payments without any income tax on their earnings. There are also worries that companies may not have paid their full share of income tax due to legislated tax preferences.

Dividend Tax Policy

United States

In 2003, President George W. Bush proposed to eliminate the U.S. dividend tax saying that "double taxation is bad for our economy and falls especially hard on retired people". He also argued that while "it's fair to tax a company's profits, it's not fair to double-tax by taxing the shareholder on the same profits."[3]

Dividend Taxation in the United States: 2003 - ^[6]

2003–2012					2013 -
	2003–2007		2008–2012		2013 -
Ordinary Income Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate	Ordinary Income Tax Rate	Ordinary Dividend Tax Rate	Qualified Dividend Tax Rate
10%	10%	5%	10%	0%	15%	15%	15%
15%	15%	5%	15%	0%	28%	28%	28%
25%	25%	15%	25%	15%	31%	31%	31%
28%	28%	15%	28%	15%	36%	36%	36%
33%	33%	15%	33%	15%	39.6%	39.6%	39.6%
35%	35%	15%	35%	15%

Soon after, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA"), which included some of the cuts Bush requested and which he signed into law on May 28, 2003. Under the new law, qualified dividends are taxed at the same rate as long-term capital gains, which is 15 percent for most individual taxpayers. Qualified dividends received by individuals in the 10% and 15% income tax brackets were taxed at 5% from 2003 to 2007. The qualified dividend tax rate was set to expire December 31, 2008; however, the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") extended the lower tax rate through 2010 and further cut the tax rate on qualified dividends to 0% for individuals in the 10% and 15% income tax brackets. On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The legislation extends for two additional years the changes enacted to the taxation of dividends in the JGTRRA and TIPRA.^[7]

Canada

In Canada, there is taxation of dividends, but tax policy attempts to compensate for this through the Dividend Tax Credit or DTC for personal income in dividends from Canadian corporations. An increase to the DTC was announced in the fall of 2005 by Liberal finance minister Ralph Goodale just prior to the fall of the Liberal minority government, in conjunction with the announcement that Canadian income trusts would not become subject to dividend taxation as had been feared. Effective tax rates on dividends will now range from negative to over 30% depending on income level and different provincial tax rates and credits.

India

In India, earlier dividends were taxed in the hands of the recipient as any other income. However since 1 June 1997, all domestic companies were liable to pay a dividend distribution tax on the profits distributed as dividends resulting in a smaller net dividend to the recipients. The rate of taxation alternated between 10% and 20%^[8] until the tax was abolished with effect from 31 March 2002.^[9] The dividend distribution tax was also extended to dividends distributed since 1 June 1999 by domestic mutual funds, with the rate alternating between 10% and 20%^[8] in line with the rate for companies, up to 31 March 2002. However, dividends from open-ended equity oriented funds distributed between 1 April 1999 to 31 March 2002 were not taxed.^[10] Hence the dividends received from domestic companies since 1 June 1997, and domestic mutual funds since 1 June 1999, were made non-taxable in the hands of the recipients to avoid double-taxation, until 31 March 2002.^[11]

The budget for the financial year 2002–2003 proposed the removal of dividend distribution tax bringing back the regime of dividends being taxed in the hands of the recipients and the Finance Act 2002 implemented the proposal for dividends distributed since 1 April 2002. This fueled negative sentiments in the Indian share markets causing stock prices to go down.^[12] However the next year there were wide expectations for the budget to be friendlier to the markets^[13] and the dividend distribution tax was reintroduced.

Hence the dividends received from domestic companies and mutual funds since 1 April 2003 were again made non-taxable at the hands of the recipients.^[14] However the new dividend distribution tax rate for companies was higher at 12.5%,^[8] and was increased with effect from 1 April 2007 to 15%.^[8][15] Also, the funds of the Unit Trust of India and open-ended equity oriented funds were kept out of the tax net^{[verification needed]}. The taxation rate for mutual funds was originally 12.5%^[8] but was increased to 20%^[8] for dividends distributed to entities other than individuals with effect from 9 July 2004.^[16] With effect from 1 June 2006 all equity oriented funds were kept out of the tax net but the tax rate was increased to 25%^[8] for money market and liquid funds with effect from 1 April 2007.^[17]

Dividend income received by domestic companies until 31 March 1997 carried a deduction in computing the taxable income but the provision was removed with the advent of the dividend distribution tax.^[18] A deduction to the extent of received dividends redistributed in turn to their shareholders resurfaced briefly from 1 April 2002 to 31 March 2003 during the time the dividend distribution tax was removed to avoid double taxation of the dividends both in the hands of the company and its shareholders^[19] but there has been no similar provision for dividend distribution tax. However the budget for 2008–2009 proposes to remove the double taxation for the specific case of dividends received by a domestic holding company (with no parent company) from a subsidiary that is in turn distributed to its shareholders.^[20]

Other countries

In Australia dividends are taxed at the recipient's marginal tax rate (up to 45% from 1 July 2006). Australia (like New Zealand) has a Dividend Imputation system which allows franking credits to be attached to dividends. This allows recipients of franked dividends to impute (or credit) the corporate tax paid by the paying company. A recipient of a fully franked dividend on the top marginal tax rate will effectively pay only about 15% tax on the cash amount of the dividend.

In Austria the KeSt (Kapitalertragssteuer) is used as dividend tax rate, which is 25% on dividends.

In Belgium there is a tax of 25% (or 15% under certain conditions) on dividends, known as "roerende voorheffing" (in Dutch) or "précompte mobilier" (in French).

In Bulgaria there is a tax of 5% on dividends.

In China, the dividend tax rate is 20%, but since June 13, 2005, 50% of the dividend is taxed. In Hong Kong, there is no dividend tax.

In the Czech Republic there is a tax of 15% on dividends. This was meant to be reduced to 12.5% for 2009. According to Leos Jirasek, Senior Trade & Investment Adviser, British Embassy, Prague - Trade & Investment Section, the Parliament of the Czech Republic will be discussing an amendment to the Tax Act No. 586/1992 as amended on 25 November 2008. If the amendment gets approved, the withholding tax on dividends (part of personal income tax) of physical persons in 2009 will NOT be 12.5%, as specified by the Act No. 261/2007, but will remain 15%.

In Finland, there is a tax of 19.6% on dividends (70% of dividend is taxable capital income and capital gain tax rate is 28%). However, effective tax rate is 40.5% for private person. That's because corporate earnings have already been taxed, so dividends are double taxed. Corporate income tax is 26.0%.

In Japan, there is a tax of 10% on dividends from listed stocks (7% for Nation, 3% for Region) while Jan 1st 2009 - Dec 31 2012, by tax reduction rule. After Jan 1st 2013, the tax of 20% on dividends from listed stocks (15% for Nation, 5% for Region). In case of an indivisual person who has over 5% of total issued stocks (value or number), he/she can not apply the tax reduction rule, so after Jan 1st 2009, should pay 20%(15%+5%). There is a tax of 20% on dividends from Non-listed stocks (20% for Nation, 0% for Region).^[21]

In Iran there are no taxes on dividends, according to article (105).

In Ireland, companies paying dividends must generally withhold tax at the standard rate (as of 2007^[update], 20%) from the dividend and issue a tax voucher to include details of the tax paid. A person not liable to tax can reclaim it at the end of year, while a person liable to a higher rate of tax must declare it and pay the difference.

In Israel there is a tax of 20% on dividends.

In Italy there is a tax of 12.5% on dividends, known as "capital gain tax".

In the Netherlands there is a tax of 15% on dividends. There's also a tax of 1.2% per year on the value of the share, regardless of the dividend, as part of the flat tax on savings and investments.

In Pakistan income tax of 10% as required by the Income Tax Ordinace, 2001 on the amount of dividend is deducted at source. A surcharge of 15% on income tax is withheld and will be duly paid by the company to Government of Pakistan as per Income Tax (Amendment) Ordinance, 2011.

In Poland there is a tax of 19% on dividends. This rate is equal to the rates of capital gains and other taxes.

In Romania there is a tax of 16% on dividends.

In Slovakia, tax residents' income from dividends is not subject to income taxation in the Slovak Republic pursuant to Article 12 Section 7 Letter c) for legal entities and to Article 3 Section 2 Letter c) for individual entities of Income Tax Act No. 595/2003 Coll. as amended. This applies to dividends from profits relating to the calendar year 2004 onwards (regardless of when the dividends were actually paid out). Before that, dividends were taxed as normal income. The stated justification is that tax at 19 percent has already been paid by the company as part of its corporation tax (in Slovak "Income Tax for a Legal Entity"). However, there is no provision for residents to reclaim tax on dividends withheld in other jurisdictions with which Slovakia has a double-taxation treaty. Foreign resident owners of shares in Slovak companies may have to declare and pay tax in their local jurisdiction. Shares of profits made by investment funds are taxable as income at 19 percent.

In Turkey there is an income tax withholding of 15% on dividends.

In the United Kingdom, companies pay UK corporation tax on their profits and the remainder can be paid to shareholders as dividends. Basic rate tax payers have no further tax to pay as the dividend is deemed to have been received net of 10% tax. For higher-rate taxpayers, additional tax must be paid at 22.5% of the net dividend received (32.5% less the 10% deemed tax deduction, calculated on the deemed gross payment of the dividend).

See also

• Corporate tax: company shareholder taxation
• Passive income
• Estate tax (United States)
• State income tax
• Double taxation
• Taxation in the United States
• Withholding tax

References

1. ^ http://www.cato.org/research/articles/edwards-030108.html The Cato Institute
2. ^ Taxation authorities world-wide use the term double taxation to mean that taxation is levied by two or more different jurisdictions on the same gain. This is often mitigated by tax treaty
3. ^ http://www.marshalla.com/articles/doubletax.htm Bob Marshalla
4. ^ http://www.newaccountantusa.com/newsFeat/wealthManagement/TaxPaperDividends.pdf Double Taxation of Dividends: Is the Question Resolved? By Novella Clevenger and Ken Pfannenstiel
5. ^ http://www.westga.edu/~bquest/2002/double.htm Double Taxation of Dividends: A Clarification by Confidence W. Amadi
6. ^ "Tax Law Changes for 2008 - 2017." Kiplinger's. <www.kiplinger.com> Published March 2009. Accessed 28 August 2009.
7. ^ "Two Year Extension of Bush-era Tax Cut Becomes Law Published December 21, 2010. Accessed December 31, 2010.
8. ^ ^{a b c d e f g} Indian dividend distribution taxes are subject to a surcharge since 2000 and an education cess since 2004 — as of 2007^[update] the effect is to increase the tax to 1.133 times the rate, as per the sub-sections (4), (11) and (12) of the section 2 of the Finance Act 2007PDF (245 KiB)
9. ^ Section 115-O of the Income Tax Act in India as of 2002, added by the Finance Act 1997, modified by the Finance Acts 2000, 2001 and 2002
10. ^ Section 115R of the Income Tax Act in India as of 2002, added by the Finance Act 1999, modified by the Finance Acts 2000, 2001 and 2002 [1][2]
11. ^ Sub-section (34) of the section 10 of the Income Tax Act in India as of 2002, added by the Finance Act 1997, modified by the Finance Act 1999 and removed by the Finance Act 2002 — The tax on dividends from companies was excluded since the tax assessment year 1 Apr 1998–31 Mar 1999, i.e. for income received since the financial year 1 Apr 1997–31 Mar 1998, however the section 115-O was introduced only with effect from 1 June 1997. Similarly for dividends from mutual funds the tax was excluded since the assessment year 2000-2001, i.e. for income received since 1 June 1999. The tax was brought back for the assessment year 2003-2004, i.e. for income received since 1 April 2002.
12. ^ rediff.com: How the Budget affects the Sensex, slide 3
13. ^ rediff.com: How the Budget affects the Sensex, slide 2
14. ^ Sub-sections (34), (35) of the section 10 of the Income Tax Act in India as of 2007^[update], added by the Finance Act 2003 — The tax was excluded since the tax assessment year 2004–2005, i.e. for income received since 1 Apr 2003.
15. ^ Section 115-O of the Income Tax Act in India as of 2007^[update], modified after 2002 by the Finance Acts 2003 and 2007
16. ^ Section 115R of the Income Tax Act in India as of 2004, modified after 2002 by the Finance Act 2003 and Finance (No. 2) Act 2004
17. ^ Section 115R of the Income Tax Act in India as of 2007^[update], modified after 2004 by the Finance Acts 2006 and 2007
18. ^ Section 80M of the Income Tax Act in India as of 1997, added by the Finance (No. 2) Act 1967, modified by various Finance Acts and removed by the Finance Act 1997 — The deduction was removed since the tax assessment year 1998–1999, i.e. for income received since 1 Apr 1997.
19. ^ Section 80M of the Income Tax Act in India as of 2003, added by the Finance Act 2002 and removed by the Finance Act 2003
20. ^ Budget 2008–2009: Speech of Minister of Finance
21. ^ Japan National Tax Agency's web site

External links

United States

• Double Taxation Double Speak: Why Repealing Dividend Taxes Is Unfair from Dollars & Sense magazine
• The new U.S. dividend tax cut traps from Tennessee CPA Journal
• IRS Publication 17 on taxation of dividends

India

• The Hindu Business Line : How FMs have been spraying Budgets with DDT