Page 270 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Preamble
In this Note unless the context indicates otherwise –
• ‘CFC’ means a controlled foreign company as de ned in section 9D(1) of the Act;
• ‘foreign-source amount’ means an amount derived from a source* outside South Africa;
• ‘normal tax’ means South African income tax;
• ‘qualifying foreign taxes’ means foreign taxes qualifying for a foreign tax rebate or deduction; • ‘Schedule’ means a Schedule to the Act;
• ‘section’ means a section of the Act;
• ‘South African-source amount’ means an amount derived from a source† in South Africa;
• ‘the Act’ means the Income Tax Act 58 of 1962;
• ‘the TA Act’ means the Tax Administration Act 28 of 2011;
• ‘tax treaty’ means an agreement (including a convention) for the avoidance of double taxation; • the terms ‘South Africa’ and ‘the Republic’ are treated as having the same meaning; and
• any other word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note explains the scope, interpretation and application of sections 6quat, 6quin and 64N.
2. Background
Residents of South Africa are subject to income tax on their worldwide taxable income regardless of the source of the income. Foreign-source amounts derived by a resident of South Africa may sometimes be taxed by the country of source and by South Africa, resulting in international juridical double taxation. International juridical double taxation is the imposition of similar taxes by two or more sovereign countries on the same item of income (including capital gains) of the same person.
Relief from double taxation resulting from the imposition of tax by a residence country and a source country on the same amount is normally granted by the residence country. Thus, the source country’s right to tax generally has priority over the residence country’s right to tax. In many instances, countries provide for relief from international juridical double taxation by way of a tax treaty, although many countries (including South Africa) also provide unilateral tax relief in their domesticlaw.
One of the main purposes of a tax treaty is to protect taxpayers against juridical double taxation by allocating the exclusive right to tax the amount of income (or capital) to one of the contracting states. However, in some instances both states are allocated the right to tax such income or capital, thus requiring relief from double taxation to be provided for by the state of residence of the taxpayer.‡ A tax treaty also provides, amongst other things, a framework for resolving cross-border tax disputes and assisting in curtailing tax evasion.
Countries seek to resolve double taxation under their domestic tax laws by applying one or more of the following methods of relief:
• The credit method (also referred to as the rebate method)
• The exemption method
• The deduction method
The following comments in the General Report of the 65th Congress of the International Fiscal Association§ are relevant: ‘For obvious reasons, the exemption method is widely applied by countries taxing on a territorial basis, whereas the credit method seems better designed for countries taxing on a worldwide basis. But a closer look at the applicable rules leads to a less clear-cut distinction. As a matter of fact, no country operates a pure credit system or a pure exemption system. Almost all countries mix both methods. The credit method nds its way into territorial taxation systems, as does the exemption method into worldwide taxation systems. Therefore, beyond conceptual differences between worldwide
taxation and territorial taxation, all applicable systems have a hybrid character.’
The comments in paragraph 19 of the Introduction to the Commentaries on the OECD Model Tax Convention on
Income and on Capital are also relevant in this regard:¶
‘For the purposes of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence [...] In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, the exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one.
[...] Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief so as to avoid double taxation; this is the purpose of Articles 23A and 23B. The Convention
* See 4.2.1 for the principles applicable to the determination of the source of an amount.
† Same as footnote 1.
‡ This may be achieved through domestic legislation or the tax treaty itself.
§ Authored by Gauthier Blanluet and Philippe J. Durand - Key Practical Issues to Eliminate Double Taxation of
Business Income, Cahiers De Droit Fiscal International, Volume 96b, Sdu Uitgevers, The Hague, The Netherlands, 2011 at page 21.
¶ Condensed version, dated 15 July 2014 at page 11.
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