Shareholders will be disappointed to learn that the tax rate reduction to 32 per cent will not be applied to their dividends.
The Inland Revenue Department is adjusting the tax credit so that shareholders would get the same amount of refund that they would have done if the dividend was declared before the reduction in the 35 per cent tax rate.
The adjustment is being done to “eliminate the additional tax refund that would result from the tax rate reduction so as to avoid substantial loss in revenue and ensure that the individual tax rate reduction is sustainable”, according to an IRD document seen by The Sunday Times of Malta.
The IRD was left with little choice in the matter because of the fact that the tax may have been paid to the department by the company many years before it actually paid out the remaining profits as dividends, a vast-reaching implication – potentially worth tens of millions of euro – that was not taken into consideration when the tax reduction was announced by the then Nationalist government.
However, shareholders are hardly going to sympathise with a measure aimed at protecting government tax revenue paid by companies. In fact, the Malta Association of Small Shareholders (MASS) has already asked for a meeting with the Finance Ministry to object to the measure, saying it would unfairly affect thousands of shareholders in local equities.
“This would create an anomaly as those in the 25 per cent tax bracket will get a 10 per cent rebate, but those in the 32 per cent bracket will lose out as the tax refund will only be calculated on a 35 per cent rate.
“And it is not clear whether the IRD will make further adjustments in tax year basis 2014 and 2015 when the 32 per cent rate is reduced to 29 per cent and then 25 per cent,” the MASS committee said.
“Fiscal legislation makes no distinction between the origin of income – whether dividends or earned income, for example. Why should the reduction in tax not apply to dividends as it does to income?”
Shareholders receive their dividends from companies already net of tax, as the 35 per cent corporate tax is deducted at source.
In their tax return, people then declare their gross dividends along with any other income and, depending on the tax band into which they fall, get a rebate for the difference between the 35 per cent tax deducted from the dividends and their tax band.
However, a new tax band was created for those who earn between €19,501 and €60,000 – and the tax rate for it is 32 per cent, which will eventually be reduced to 25 per cent.
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Adjustment to tax credit = €31,300 x (35% - 32%) = €939
A. Applying the 2012 tax rates (i.e. without the 32% reduced rate) the tax refunded would be €6,775.
B. With the introduction of the reduced 32% tax rate the tax refund will increase by €939.
C. Taking into account the suggested adjustment to the available tax credit the tax refund will amount to €6,775, having the effect of eliminating the additional €939 tax refund resulting from the reduced tax rate of 32%.