Why SACCOs Want Dividend Tax Reduced
SACCOs have proposed a uniform tax rate for rebates on members’ savings and dividends on share capital. In proposals presented to the National Treasury through KUSCCO, SACCO leaders have suggested harmonizing the tax rates for interest and dividends paid by SACCOs to 5%.
They argue that this change will reduce the administrative burden on SACCOs and make it easier for members to predict their net returns. Currently, the tax provisions specify different rates for withholding tax: 5% for qualifying dividends and 15% for qualifying interest on the gross amount payable. This discrepancy leads to administrative complexity for both SACCOs and the government, causes confusion among members, creates integration issues within systems, raises equity concerns, and discourages investment in SACCOs.
Members also find it challenging to understand why different tax rates are applied to their interest and dividend earnings. The union notes that this confusion can lead to dissatisfaction and a lack of trust in the management of SACCOs.
The proposed tax reforms aim to promote equity for SACCOs and protect the financial well-being of their members. If implemented, these reforms would expand tax relief for low-income earners and ensure fair tax treatment for SACCOs with both individual and group memberships.
Furthermore, these amendments would enable tax authorities to efficiently monitor and enforce tax compliance with a standardized rate. This would lead to more effective oversight and reduced administrative costs for the government, according to KUSCCO.
KUSCCO notes that SACCOs have a unique business structure as they primarily trade with their members. SACCOs receive deposits from members as core share capital and withdrawable deposits. The funds from these deposits are then lent to some members, and at the end of the year, surplus earnings are distributed to members as either rebates or dividends. Both rebates and dividends are derived from the members’ investments, similar to how company shareholders receive returns. The dividends paid depend on the member’s share of core capital, while the rebates depend on the member’s share of deposits.
KUSCCO emphasizes that harmonizing the tax rates will provide members with a clearer understanding of the tax implications of their investments. This transparency could enhance trust and satisfaction among SACCO members, as they would no longer be confused by different tax rates for interest and dividends.
Additionally, a uniform tax rate will ensure that all forms of income are treated equally, which could stimulate more investment in SACCOs, thereby increasing the capital available for their operations and contributing to a better economic outlook for the country. Arnold Munene, KUSCCO Group Managing Director, states, “By addressing these issues and harmonizing the withholding tax rates for interest and dividends, we can create a more streamlined, fair, and efficient system for both SACCOs and their members.”
Citing best practices from other jurisdictions, KUSCCO highlights that in Tanzania, the withholding tax rate on interest is set at 10% for both residents and non-residents, which applies to interest payments made by SACCOs to their members. Similarly, the withholding tax rate for dividends paid out by SACCOs is generally 10%. In Uganda, the withholding tax rate on interest payments is set at 15%.
Since the amendment of the Cooperative Societies Act in 2009, which distinguished between share capital and members’ deposits, and formalization under Section 35 of the Income Tax Act, SACCOs in Kenya are required to withhold tax on dividends and interest paid to members at rates of 5% and 15%, respectively. This change negatively impacted SACCO members, as they were subject to a higher withholding tax rate on interest earned from their deposits while the rate for dividends remained unchanged.
The different withholding tax rates present several challenges for both SACCOs and their members. SACCOs face significant difficulties in managing and applying the varying tax rates for interest and dividends, leading to higher administrative costs and the need for more sophisticated financial systems. Consequently, having two tax rates creates an overall higher tax burden for SACCO members. This, in turn, reduces the net returns on investments and savings, making it less attractive to save or invest in SACCOs.
The higher withholding tax rate diminishes the incentive to invest or save with SACCOs, potentially driving members to seek alternative investment opportunities. The decline in attractiveness could lead to a reduction in the industry’s growth, limiting the capital available for SACCO operations.
“Since SACCOs primarily serve individuals and small to medium enterprises (SMEs), higher tax rates would ultimately negatively impact these groups. SMEs, in particular, depend heavily on SACCOs for affordable financing and investment opportunities. Increased tax rates could decrease their profitability and hinder their growth potential, making it more difficult for them to succeed in a competitive market,” states KUSSCO.
Members also find it challenging to understand why different tax rates are applied to their interest and dividend earnings. The union notes that this confusion can lead to dissatisfaction and a lack of trust in the management of SACCOs.
According to various SASRA Sacco Supervision Annual Reports, SACCOs typically offer higher annual investment returns than other financial institutions.
