Page 275 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
‘While they are of relatively greater or lesser signi cance in individual country tax systems, all of the tax regimes examined have rules found either in internal laws or treaty practice, involving distinctions as to whether income and expenses of taxpayers are domestic or foreign. There are two basic purposes for which such distinctions are made. First in importance is the fact that whether income is domestic or foreign is frequently a stated basis for determining whether a taxpayer is liable for tax on such income. Even where the rule is not stated in terms of source, the basis for taxation is usually stated in terms of an economic or factual connection of activities or property with a geographical location. A second purpose for using rules of geographic origin is a tool for relieving double taxation. While some countries relieve double taxation of their residents through the foreign tax credit method and others through exemption, in fact most countries employ in their domestic laws and/or treaties a mixture of these approaches.’
Although the Act contains speci c source rules for certain types of income, ‘source’ is not de ned in the Act and there is no universal de nition or understanding of the meaning of ‘source’. The question whether an amount arises from a South African-source (alternatively referred to as a source within South Africa) or a foreign source (alternatively referred to as a source outside South Africa) is critically important in the context of section 6quat as South African residents, who are subject to tax on a worldwide basis, will only potentially qualify for a section 6quat(1) rebate on foreign-source amounts. In South Africa when determining the source of an amount the approach adopted is to consider –
• domestic tax legislation, namely, section 9(2) and (4);
• common law as formulated by the South African courts; and
• the application of the articles of relevant tax treaties.
A tax treaty may override the position which would otherwise be reached under sections 9(2) and (4) or common law. See Example 4.
This approach is relevant for purposes of determining the source of gross income* and for purposes of calculating foreign tax rebates under sections 6quat(1) and 6quin, and the deduction of foreign taxes under section 6quat(1C).
In applying this approach, if the source of an amount is South Africa, it will be treated as South African-source for South African tax purposes irrespective of whether it originates from a foreign jurisdiction and is treated as being foreign-source under the foreign jurisdiction’s legislation.
(a) Section 9(2) and 9(4)
Sections 9(2) and 9(4) contain speci c source rules for certain items of income and capital gains. The provisions of section 9(2) and 9(4) will override the common law position [see 4.2.1(b)] in the case of a con ict. However, the articles of a tax treaty [see 4.2.1(c)] override the provisions of section 9(2) and 9(4) and common law in the case of a con ict.
The source rules contained in section 9(2) and 9(4) do not cover all types of income. For example, neither section 9(2) nor section 9(4) have a source rule for income derived from independent and dependent professional services.
The source of items of income which are not speci cally covered by the Act will be determined under common law principles as formulated by the South African courts and possibly a tax treaty (if one is applicable in the particular circumstances).
(b) Common law as formulated by the South African courts
The particular items of income received by or accrued to a taxpayer and the facts and circumstances applicable to these items of income need to be considered when applying common law principles to determine the source of the income. The facts are critical. In Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes, Southern Rhodesia Stratford CJ quoted with approval that:†
‘ ‘Source, means, not a legal concept, but something which a practical man would regard as a real source of income’, ‘the ascertainment of the actual source is a practical hard matter of fact.’ (see Ingram’s work, p.66).’
The purpose of this Note is not to provide an in-depth source analysis of particular items of income. However, the source of income has generally been de ned by the courts in terms of a two level analysis, rstly, the identi cation of the originating cause of the income (as opposed to the quarter from which it was received) and, secondly, the location of that originating cause.‡ The courts have also noted that the originating cause may occur in different places and may even occur in different countries.§
For example, a resident company manufactures teapots, which are sold internationally, in two factories. One factory is located in South Africa and the other factory is located in Country B. South Africa does not have a tax treaty with Country B. Assume that based on the speci c facts and circumstances of the case the originating cause of the income is the manufacturing activity which is conducted in two locations. The source of the income arising from the sale of the teapots would therefore need to be apportioned between South Africa and Country B in terms of an appropriate method.
The same approach applies for purposes of determining the source of gross income for non-residents¶ and for purposes of calculating foreign tax rebates for residents under sections 6quat(1) and 6quin, and the deduction of foreign taxes under section 6quat(1C). Accordingly, the South African jurisprudence in relation to determining source for purposes of gross income remains valid for determining source for purposes of section 6quat and the other aforementioned sections.
Some tax commentators have suggested that the word ‘source’ should be interpreted differently for the purposes of section 6quat than from the way in which it is interpreted in relation to the de nition of ‘gross income’.** They argue that
* As de ned in section 1(1).
† 1938 AD 282, 9 SATC 363 at 379.
‡ CIR v Lever Brothers & Unilever Ltd 1946 AD 441, 14 SATC 1 at 8; Overseas Trust Corporation v CIR 1926 AD
444, 2 SATC 71.
§ CIR v Lever Brothers & Unilever Ltd 1946 AD 441, 14 SATC 1 at 10. ¶ De nition of ‘gross income’ in section 1(1).
** As de ned in section 1(1).
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