Page 274 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) Act. Under this principle the residence country effectively only has a residual right to tax income derived by its residents
from a foreign source.
Example 3 – Rebate method when the normal tax rate exceeds the foreign tax rate
Facts:
A resident company earns foreign-source income of R100 000. No other income is earned by the resident company. In the country of source the income is subject to foreign tax at a rate of 10% which results in a tax liability of R10 000. No South African deductions are available against the foreign-source income.
For South African tax purposes the full amount of R100 000 is included in the resident’s taxable income. Normal tax is payable at a corporate rate of 28%, that is, R28 000.
Result:
The foreign tax rebate reduces the normal tax payable on the foreign-source income to R18 000 [(28% – 10%) × R100 000].
See Example 35 for an example where the foreign tax rate exceeds the normal tax rate.
The impact of a residence basis of taxation is thus that the residence country generally taxes any amount sourced in that country* irrespective of the residency status of the recipient and also taxes residents of that country on foreign-source amounts to the extent that the domestic tax exceeds the foreign tax of the country where the foreign amount is sourced and taxed.
Under section 6quat(1) a foreign tax liability can only be set off against a liability for normal tax and cannot be rebated against other domestic taxes applicable to residents, for example –
• turnover tax on micro businesses [section 48A]; or
• dividends tax [section 64E(1)].
The obligation to provide double tax relief diminishes to the extent that a resident is the recipient of a bene t resulting in the reduction of double taxation (for example, through the application of a tax treaty or the receipt of a foreign rebate) or receives a refund of foreign taxes. These aspects are taken into account in determining the amount of the foreign tax which quali es for a section 6quat(1) rebate.
4.2 Foreign-source amounts included in taxable income [section 6quat(1)]
Under section 6quat(1) the following foreign-source amounts (see discussion of the term ‘source’ in 4.2.1) that are included in a resident’s taxable income will, subject to section 6quat(2),† qualify for a foreign tax rebate:
• Any income received by or accrued to a resident from a source outside the Republic [section 6quat(1)(a)].The
term ‘income’ means ‘income’ as de ned in section 1(1), that is, gross income less exemptions. This generally means that foreign taxes which are attributable to exempt income will not qualify for a foreign tax rebate under section 6quat(1). There is, however, an exception for foreign taxes attributable to foreign dividends that are partially exempt under section 10B(3). The full amount of the foreign taxes applicable to the exempt portion of the foreign dividends under section 10B(3) will potentially qualify for a foreign tax rebate under section 6quat(1).
(See 4.5.3 and Annexure B for examples.)
• Any portion of the net income of a CFC as contemplated in section 9D which is attributed to a resident under section
9D(2) [section 6quat(1)(b)].
• Any taxable capital gain as contemplated in section 26A from a foreign source [section 6quat(1)(e)].
• Any amount dealt with in section 6quat(1)(a), (b) and (e) which is received by or accrued to another person, for
example, a trust, but which is deemed to be derived by a resident under section 7 or paragraph 68, 69, 70, 71, 72 or 80
of the Eighth Schedule [section 6quat(1)(f)(i) and (ii)].
• Any amount dealt with in section 6quat(1)(a), (b) and (e) which forms part of the capital of a trust established in a
foreign country and which is regarded as income under section 25(2A) or a capital gain or loss under paragraph 80(3) of the Eighth Schedule derived by a resident [section 6quat(1)(f)(iii)].
A resident will not qualify for a foreign tax rebate under section 6quat(1) when tax has been levied by a foreign country on a South African-source amount of income.‡
4.2.1 Meaning of the term ‘source’ for purposes of the section 6quat(1) rebate
Source is a crucial concept in a residence-based tax system like South Africa when –
• determining taxes levied on non-residents; and
• applying the rules for foreign tax rebate relief applicable to foreign-source amounts included in a resident’s taxable
income.§
This is consistent with the ndings of research conducted on behalf of the International Fiscal Association as is apparent from the opening paragraph of the General Report of the 34th Congress of the International Fiscal Association:¶
* Unless it is speci cally exempt.
† See 4.9.3.
‡ Paragraph (ii) of the proviso to section 6quat(1A).
§ South African-source amounts may qualify for a rebate in limited circumstances under section 6quin (see 7).
¶ Authored by Robert J. Patrick jr. – Rules for determining income and expenses as domestic or foreign, Cahiers De
Droit Fiscal International, Volume LXVb, (1980), Kluwer, Rotterdam, The Netherlands, at page 15.
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