With its passion for Namibian products and services, and by implication Namibian Business, Team Namibia recently engaged Tax Specialist, Cameron Kotze, for his view on the current considerations around dividend tax, and its implications for Namibia.
Team Namibia: Mr. Kotze, what is your view on the proposed dividend tax in Namibia?
Kotze: The Government has indicated that it intends to impose a withholding tax on dividends earned by residents from local investments (so called resident dividend withholding tax). The Namibian economy has been battling over the last few years and the introduction of this tax is rather punitive for those entrepreneurs who would like to invest in the local economy. The last thing an investor wants to hear when making an investment decision is another tax that must be paid on the return on their investment.
The tax morale in Namibia must be at an historical low. Those who are already paying taxes are targeted for further taxes, whilst there are many individuals who are not contributing to the tax collections of Namibia, because they devise plans specifically to not do so. Others have lost their jobs because of the steep decline in economic activity over the last few years and are not able to contribute any taxes to the State.
The proposed resident withholding tax on dividends is a tax on the business profits that has already been subject to income tax through the corporate tax system. Namibia has a high effective rate of income tax for both natural persons and corporate taxpayers compared to other countries in Southern Africa. The standard corporate income tax rate for a Namibian company is 32%, compared to 27% for South Africa and 22% for Botswana.
The local economy has steadily declined since 2015 when it grew by 4,3%. The decline in economic growth bottomed out in 2020 when it contracted by 8,5%. At the same time unemployment has reached an alarmingly high level of 36,8% in 2021. It is expected that the unemployment rate will stabilise in the mid-30 range over the next few years.
Dividends can only be declared by a company that has successfully navigated the local business environment (which is very challenging) and made a profit after paying income tax that is due on profits in terms of domestic tax legislation. For some years Namibia has had the edge of its competitors in Southern Africa as far as dividend withholding tax is concerned. This benefit will be lost should the resident dividend withholding tax become law in Namibia.
A dividend to a shareholder can be seen as a reward for taking the risk to part with hard earned capital and risk it in a business venture. Namibia needs many individuals to have the courage to part with their hardearned income and to invest it in business activities that will grow the economy, as opposed to investing it passively to earn interest. The advantages of investing in a business activity are significant. More jobs are created and the multiplier effect of an increase in economically active citizens are many. Local investors must be “rewarded” for the risk that they are prepared to take to start up a business by not imposing a dividend withholding tax on profits that are distributed to investors by way of dividend.
The Minister of Finance should seriously consider whether the timing is right to introduce the resident dividend withholding tax. The benefits of a larger economy – therefore growing the number of persons who contribute to the tax collections of Namibia – outweigh the additional tax that will be collected from those who are already paying taxes in some other way.
The resident dividend withholding tax should not be introduced at all in the future. The absence of the tax should encourage locals to invest in potential business ventures with the knowledge that they are rewarded for taking the risk to invest in such ventures.