Page 271 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) leaves it to the Contracting States to choose between two methods of relief, i.e., the exemption and the credit method.’
(Emphasis added.)
South African approach
South Africa provides relief to its residents from double taxation in its domestic law mainly by way of three different rebate methods for foreign taxes payable on income that is subject to South African normal tax or a deduction for foreign taxes payable on income that is similarly subject to South African normal tax. The rebate and deduction methods are supplemented by a number of exemptions for foreign-source amounts received by or accrued to residents.
The rebate methods of relief for foreign taxes
The following rebate methods are employed in South Africa:
• Section 6quat(1) which is the principal mechanism used to provide relief for foreign taxes proved to be payable on
income derived from a foreign source that is included in a resident’s taxable income. Foreign taxes falling within this
category do not qualify for the section 6quat(1C) deduction or the section 6quin rebate (see below).
• Section 6quin which provides for relief for foreign taxes paid on South African- source service income included in a resident’s taxable income. Foreign taxes falling within this category may also qualify for a deduction under section 6quat(1C) (see below) – in these circumstances the taxpayer may choose the rebate under section 6quin or the
deduction under section 6quat(1C), not both.
• Section 64N which provides for relief from foreign taxes paid on foreign dividends paid by a foreign company listed
on the Johannesburg Stock Exchange to a resident.
Sections 6quat(1) and 6quin provide for the deduction of foreign taxes against normal tax payable. The sections are mutually exclusive. Section 64N provides for a deduction of foreign taxes against dividends tax levied under section 64E.
The deduction method of relief for foreign taxes
Under section 6quat(1C) a resident may claim foreign taxes, that do not qualify for the section 6quat(1) rebate, as a deduction in determining taxable income. That is, essentially, foreign taxes payable on South African-source amounts.
A resident qualifying for a section 6quat(1C) deduction may also qualify for a rebate under section 6quin when foreign taxes are paid on South African-source service income. In these circumstances the resident can elect to claim the foreign taxes as a deduction under section 6quat(1C) or as a rebate under section 6quin, not both.
Section 6quin is narrower than section 6quat(1C) as it only caters for foreign taxes paid on South African-source income from services, while section 6quat(1C) caters for foreign taxes proved to be payable on any amounts of South African-source income.
In contrast to sections 6quat(1) and 6quat(1C), section 6quin provides for a foreign tax rebate even if a resident has a right of recovery of the foreign tax payable by the resident. However, should the resident receive a refund of the foreign tax withheld, or be discharged from a liability to pay such foreign tax, the amount refunded or discharged is treated as an amount of normal tax payable by the resident.*
A resident that earns multiple amounts during a particular year of assessment, each with its own foreign tax liability, could possibly apply a combination of the methods of relief provided for in sections 6quat(1), 6quin, 64N and 6quat(1C), depending on the nature of the particular amount.
Example 1 – Alternative methods of relief for foreign taxes proved to be payable
Facts:
A South African resident derives the following income in the year of assessment:
Nature of income item
(A) Trading income derived from Country A
(the income constitutes a foreign-source amount).
(B) Fees received for managerial services rendered
in South Africa to a person resident in Country B (the income constitutes a South African-source amount).
(C) Royalty income received from a person resident in Country C (the income constitutes a South African-source amount).
(D) Foreign dividends received from a dual listed foreign company on shares listed on the Johannesburg
Stock Exchange (the income constitutes a foreign-source amount).
* Section 6quin(5).
saIT comPendIum oF Tax LegIsLaTIon VoLume 2
Foreign taxes paid or proved to be payable
R 15 000
20 000 30 000
20 000
263