SL told to revisit dividend tax policy to rectify double taxation

• JB Securities MD and Advocata Chairman Murtaza Jaffejee say dividend tax policy inhibits risk-taking, entrepreneurship and timely restructuring activities in corporate sector 
• “Dividend tax is a double taxation on profits; it discriminates against incorporated body corporates”- Jafferjee
• Proposes franking credits as best and most viable solution to rectify double taxation on dividend payments

By Nishel Fernando
As Sri Lanka’s dividend tax policy is inhibiting risk-taking, entrepreneurship and timely restructuring activities in the corporate sector, a top investment professional called upon the government to take corrective actions to rectify the unfair double taxation on profits when distributing dividends to investors.

“Dividend tax is a double taxation on profits; it discriminates against incorporated body corporates. Further, by taxing dividends, you are disadvantaging risk capital – this does not make sense if you want to encourage greater risk-taking and entrepreneurship,” JB Securities Limited Managing Director and Advocata Institute Chairman Murtaza Jafferjee pointed out.

He proposed franking credits as the best and most viable solution to rectify the double taxation on dividend payments distributed among shareholders.

“As in Australia, we should introduce franking credits, i.e., the receiver can claim credits for taxes already paid on the underlying earnings and only pay for the difference,” he added.

Franking credits support to promote long-term equity ownership and have led to an increase in dividend payouts to investors in Australia and other countries that grant franking credits.

He also underlined that corporates are inhibited from undertaking restructuring activities such as spin-outs and carve-outs that are required time-to-time due to limited cash resources alongside the existing taxes. 

Therefore, he opined that dividend by species should be exempted from the dividend tax.

“This drives up the cost of spin-outs and carve outs – like horses for courses, a business needs different owners during its lifetime. Dividends by species should be exempted from dividend tax for it permits corporate reorganisations, e.g. spin-outs and carve-outs. Currently, transactions don’t happen, so there is no real loss of revenue,” he said.

Further, he questioned the basis of imposing the dividend tax on the controlling shareholder when dividends are upstreamed to the holding company.

“Even dividends are up streamed to the holding company is taxed – we don’t have an exemption for the controlling shareholder,” he added.