Dividendimputations

Dividend Imputation Explained: Process and Global Impact

Key Takeaways

Dividend imputation eliminates double taxation on cash payouts from companies to shareholders via tax credits.
Australia and a few other countries still practice dividend imputation, providing tax credits for corporate-paid taxes on dividends.
Double taxation of dividends can deter companies from issuing shares and encourage debt financing.
After repealing imputation, some countries have reduced corporate tax rates, but others continue high taxation on dividends.

What Is Dividend Imputation?

Dividend imputation is a tax policy used primarily in Australia and some other countries to prevent the double taxation of company earnings distributed to shareholders as dividends. The policy ensures that shareholders can claim a tax credit for the taxes already paid by the corporation, effectively eliminating the double taxation of dividends. This tax credit can then be used to reduce the shareholder's tax liability on their dividend income.

We'll explain how dividend imputation works, its benefits and drawbacks, and its current usage around the world, providing insights from various countries' experiences and the effects on both corporations and shareholder taxation policies.

How Dividend Imputation Works

Double taxation is managed through tax credits. Through the use of tax credits called franking credits or imputed tax credits, the tax authorities are notified that a company has already paid the required income tax on the income it distributes as dividends.1 The shareholder does not then owe taxes on the dividend income.

For example, on the Australian Gov. Taxation Office website, it states, "Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity."2

The distribution comes with the franking credits and is then used to offset the taxes.

Important

The dividend statement will detail the amount of the dividend imputation, stating the tax credit, and will be deducted from an individual's annual taxable income.

The policy is known as imputation because it attributes, or "imputes," taxes owed by the corporation to its shareholders.

Australia, Canada, Chile, Korea, Mexico, and New Zealand have enacted dividend imputation systems.3

Proponents of imputation argue that this double taxation causes corporations to prefer taking on debt over issuing stock shares when they want to raise cash. They also may make companies more likely to retain their cash rather than distributing it to shareholders. The effect, they contend, is to drag down economic growth.4

Global Practices in Dividend Imputation

In countries where dividend imputation is offered, it is typically offered as a tax credit.5 That is, the shareholder's taxable income on the dividends is reduced by a credit that reflects the taxes paid by the company on the cash that was distributed.

Dividend imputation has had a mixed history among nations, as the circumstances of each country’s tax system prompt varying applications. Nine countries that once offered such an arrangement have either changed or ended the practice.6 These countries include the following:

United Kingdom

Ireland

Germany

Singapore

Italy

Finland

France

Norway

Malaysia

The United Kingdom and Ireland, for example, previously offered partial imputation with tax credits that effectively reduced taxation on the dividends by 12.5% to 25%.7

The partial imputation in the United Kingdom provided a 20% refund against a 33% corporate tax rate. Starting in 1997, however, the government moved away from this policy, first by eliminating the refund to tax-exempt shareholders that included pension funds. In 1999, the refund rate was cut to 10%.7

Germany, Finland, Norway, and France all previously offered full dividend imputation.6 France offered tax credits equal to 50% of the face value of the dividend.8

Germany did away with its dividend imputation program with the intent of reducing the nation’s corporate tax rate. Finland, likewise, lowered its corporate tax rate after dividend imputation was repealed. Norway, on the other hand, did not lower its corporate tax rate when dividend imputation ended.9

After repealing imputation, most of these countries taxed dividends at a rate of 50% or greater.

Australian Government Taxation Office. "Imputation." Accessed Nov. 5, 2020.

Australian Taxation Office. "Imputation" Accessed Nov. 5, 2020.

Organisation for Economic Co-Operation and Development. "Table II.4. Overall Statutory Tax Rates on Dividend Income." Accessed Nov. 5, 2020.

Congressional Research Service. "Corporate Tax Integration: In Brief," Page 4. Accessed Nov. 5, 2020.

Organisation for Economic Co-Operation and Development. "Glossary of Tax Terms: Imputation System." Accessed Nov. 5, 2020.

Analysis & Policy Observatory. "Centre for International Finance and Regulation: Research Working Paper Series, Dividend Imputation: The International Experience," Page 3. Accessed Nov. 5, 2020.

Analysis & Policy Observatory. "Centre for International Finance and Regulation: Research Working Paper Series, Dividend Imputation: The International Experience," Page 4. Accessed Nov. 5, 2020.

Analysis & Policy Observatory. "Centre for International Finance and Regulation: Research Working Paper Series, Dividend Imputation: The International Experience," Page 5. Accessed Nov. 5, 2020.

Analysis & Policy Observatory. "Centre for International Finance and Regulation: Research Working Paper Series, Dividend Imputation: The International Experience," Pages 4 - 6. Accessed Nov. 5, 2020.

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