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Dividend Tax

In general simple terms, dividend tax is an income tax imposed on the dividends paid to stockholders. Dividends on the other side are payments made by a company to its stockholders; it is the portion of profit shared out to stockholders of a specific corporation.

Description of double dividend

Double dividend is whereby a jurisdiction imposes tax to increase its economic efficacy. For instance, if a particular good is associated with negative externalities in that it has negative effects to the consumer although the consumer doesn’t feel the effect, it means that the free market will gladly trade too much of the good. Therefore, the jurisdiction imposes a tax on the good, to not only enhance the welfare of the society but also raise revenue on taxation.

Impact of dividend Tax

Dividend tax as a whole has changed the general behavior of corporations passing surplus profits to their shareholders as they must account for the tax. Thus, the succinct description of dividend income helps corporations structure and plan distribution of dividends to its shareholders to attain a characterization with the least possible tax impact. It is in light to this that some jurisdictions apply withholding tax to see to it that rightful revenue is collected from dividend tax.

Dividend Tax Collection

Governments in many jurisdictions require corporations passing dividends to shareholders to withhold at the least amount the standard tax, to pay to the taxation authorities and passing only the remainder to shareholders as dividends.

Withholding Tax

In very simple terms, it is the amount of money withheld by the payer while making payment to the payee and pays the withheld amount to taxation authorities. The withheld tax hugely varies depending on type of service or product being paid for. Typically, the payee, in this case the company’s stakeholder is levied on the gross amount, and the withheld tax is calculated based on that levy.

Withholding tax is aimed at facilitating tax collection from the payers instead of the cumbersome work of collecting from the numerous payees. It equally accelerates tax collection from payers who are found within the jurisdiction, than payees who maybe outside the jurisdiction where the taxation authorities maybe required to employ International withholding tax. Still on point, withholding tax while passing out dividends helps counteract tax avoidance and tax evasion.

Description of dividend income

Dividend income is taxed differently depending on the jurisdiction. While in many jurisdictions around the world, dividend payments are categorized as normal income thus the dividend tax is applied as such, it is applied exactly the same way the taxpayer would be taxed if the income was earned working at an employment. Further, some jurisdictions draw a line between dividend income and normal income, exemplifying it as something different from ordinary income and hence the income becomes subject to a different taxation rate, if at all it is subject to taxation according to the jurisdiction in question.

Conclusion

Opponents argue dividend tax undergoes unwarranted ‘double taxation’ citing that the company, through corporate taxation on the profits, had already paid on behalf of the shareholders. Others argue that dividend tax creates a vicious reason for a corporation to ‘waste cash’ on poor investments instead of returning it to shareholders in form of dividends.

Proponents nonetheless argue that the usage of the term ‘double taxation’ is not legally correct because the same cash flow is repeatedly taxed every time it exchanges hands such as the sales tax paid by retailers and end users of goods purchased. Equally, they argue that some companies may have evaded paying full income tax and thus, dividend tax will compensate for the lost tax.

Tags: cash, government, Income, Legal, market, money, revenue, tax, Taxation

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