Page 273 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) paragraph (ii) of the proviso to section 6quat(1B)(a) speci cally provides that the excess foreign taxes may sometimes
be carried forward to the next year of assessment to potentially qualify for a foreign tax rebate in that year (see 4.8).
A comparison of the rebate methods and the deduction method
Foreign taxes taken into account as a tax rebate reduce a resident’s liability for normal tax. However, if taken into account as a deduction from income, the foreign taxes merely reduce a resident’s taxable income. In most cases, it will bene t a resident if the foreign taxes payable qualify for a tax rebate rather than a deduction because a rebate reduces the normal tax payable on a rand-for-rand basis.
Example 2 – Comparison of tax payable under deduction and rebate methods
Facts:
A resident company derives foreign income of R100 on which foreign taxes of 25% (R25) are proved to be payable. The South African corporate rate of tax is 28%.
Result:
Taxable income from a foreign source
Less: Foreign taxes qualifying for deduction Taxable income after deduction of foreign taxes Normal tax (28%)
Less: Foreign tax rebate
Final normal tax payable
Total tax (normal tax and foreign tax)
Deduction Rebate Method Method8 RR
100,00 (25,00) 75,00 21,00
(Nil) 21,00 46,00
100,00 (Nil) 100,00 28,00
(25,00) 3,00
28,00
Grossing-up of foreign-source amounts
The requirement to include the gross foreign-source amount in gross income, and not the amount which is net of the foreign tax liability incurred on that gross foreign- source amount, is fundamental to any foreign tax rebate system. The amount subject to tax is the gross foreign-source amount before the deduction of foreign taxes.
The foreign taxes would incorrectly be taken into account twice if only the net foreign- source amount were to be included in gross income, rst, as a deduction and, secondly, as a foreign tax rebate.
3. The law
The relevant sections of the Act are quoted in Annexure C.
4. Section 6quat(1) – Rebate in respect of foreign taxes on income
4.1 Introduction to the foreign tax rebate method of relief under section 6quat(1)
Section 6quat(1) is South Africa’s primary mechanism for avoiding double taxation. The term ‘rebate’ means ‘a deduction from an amount to be paid’ and, more speci cally, under section 6quat refers to a deduction of foreign taxes from normal tax otherwise payable.
South Africa grants this relief unilaterally through domestic legislation and bilaterally through most of its tax treaties.
Section 6quat provides detailed rules covering, amongst others, the following:
• The receipts and accruals that potentially qualify for a rebate [section 6quat(1)].
• The amount of the rebate and the person entitled to the foreign tax rebate [section 6quat(1A)].
• Limitations on the amount of foreign tax qualifying for a foreign tax rebate, for example, the overall limitation
[section 6quat(1B)].
• Carry-forward of a balance of excess foreign taxes [section 6quat(1B)].
• The deduction of certain foreign taxes [section 6quat(1C) and (1D)].
• The interaction with tax treaties [section 6quat(2)].
• The exclusion of speci c compulsory payments from a tax on income [section 6quat(3)]
• The conversion of amounts of foreign tax from a foreign currency to rand [section 6quat(4)].
• Revision of previous assessments in order to allow for the rebate or deduction of the correct amount of foreign taxes
payable [section 6quat(5)].
The application of the foreign tax rebate results in a foreign-source amount only being subject to normal tax when the foreign tax is less than the normal tax. The net normal tax generally equals the difference between the two tax rates multiplied by the foreign-source amount. The foreign taxes are ‘topped up’ by normal tax so that the combined normal and foreign tax on the foreign-source amount is equal to the normal tax which would, but for the rebate, be due under the
* Under section 6quat(1).
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