Section 9D(2A) of the Income Tax Act forces the CFC to calculate its net income as if the CFC is a resident for purposes of the gross income definition, which includes foreign dividends, per paragraph (k) of the definition of gross income. The net income arrived at under Section 9D(2A) is then included in the income of the relevant South African resident shareholder in terms of Section 9D(2). Under current law, having regard to the way in which a CFC's tax is computed for a shareholder who is a natural person, foreign dividends received by such a CFC are regarded by Treasury as giving rise to an effective tax rate of 21%.

The effective tax rate of 21% is arrived at as follows:

Assume that a CFC receives a taxable foreign dividend of R1 million.

As the CFC is taxed as if it were a South African taxpayer, it would apply the Section 10B(3) exemption of 13/28 to the R1 million dividend, which results in an exempt portion of ZAR464 285.71. The individual then calculates his tax liability on a taxable foreign dividend of ZAR535 714.29 (ie R1 million less the exempt portion of R464 285.71). His marginal tax rate of 40% would then be applied to the taxable amount of ZAR535 714.29, resulting in tax payable of ZAR241 285.72. Accordingly, the ZAR1 million dividend would have suffered tax at an effective rate of 21%.

The effective rate, however, should be 15% and it has accordingly been proposed that this anomaly be corrected.