Page 277 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Result:
Section 9(2) does not contain a speci c source rule for income derived from the manufacture of goods. However, under common law, based on the originating cause being in South Africa, the income is determined to be from a source in South Africa. The common law position is, however, overridden by the tax treaty in circumstances where the business pro t article of the tax treaty gives Country X a right to tax the pro ts attributable to the permanent establishment in Country X, the income underlying the attributable pro ts will effectively be treated as being from a foreign source. This means that the resident will potentially qualify for relief under section 6quat(1) for the taxes paid on such income in Country X.
4.2.2 The source of income from services
The term ‘services’ is not de ned in the Act and should, therefore, be interpreted according to its ordinary meaning as applied to the subject matter with regard to which it is used. The Merriam-Webster dictionary* de nes the word ‘service’ as:
‘1 a: the occupation or function of serving b: employment as a servant 2 a: the work performed by one that serves
....
4: the act of serving: as
...
b: useful labor that does not produce a tangible commodity —usually used inplural .’
‘Services’ include independent professional services such as scienti c, literary, artistic, educational or teaching activities as well as the activities of physicians, lawyers, engineers, architects, dentists and accountants.
(a) General approach
Determining the source of service income can be complex, particularly as the type of service and the fact that it may be rendered in multiple locations may impact on the determination of the location(s) of source. Despite the possible complexities, the approach to be followed is the same as that discussed in 4.2.1.
Section 9(2) has source rules for some types of service income, but not all, and in considering the application of section 9(2) taxpayers will need to consider the particular service rendered and whether it falls into one of the provisions of section 9(2).
In the absence of section 9(2) applying it will be necessary to apply common law principles. Consequently the concept of ‘originating cause’ remains valid for purposes of determining the true source of income derived from services. In COT v Shein† the court held that the true source of income derived from managerial service fees is where the services are rendered.
In addition, taxpayers will need to consider whether a tax treaty applies to their particular circumstances and, if so, the effect of any applicable deemed tax treaty source rules. For example, a number of South Africa’s tax treaties have a deemed source rule for income derived from independent professional services.‡
Example 7 – Distinction between services and goods
Facts:
X is employed by ABC (Pty) Ltd, a company which manufactures washing machines.
ABC (Pty) Ltd sells the washing machines to local and international customers and also provides a repair service to domestic clients in the unlikely event that the washing machine breaks down.
Result:
X renders employment services to ABC (Pty) Ltd and ABC (Pty) Ltd renders repair services to its customers. The repair services are distinguishable from the goods that ABC provides to its customers.
Example 8 – Tax treaty providing for a deemed-source rule for service income
Facts:
A resident company provides technical consulting services to a company resident in Swaziland under an agreement negotiated and concluded in South Africa. The services are rendered in South Africa. The company in Swaziland does not have a presence in South Africa and vice versa for the resident company.
Under Swaziland’s domestic tax law a withholding tax of 15% is imposed on fees derived from independent professional services remitted to South Africa. The tax treaty reduces the rate of the withholding tax to 10%.
Result:
The true source of the fees is where the services are rendered, that is, South Africa.
However, article 13(5) of the tax treaty between South Africa and Swaziland, which deals with technical fees,
provides as follows:
* www.merriam-webster.com/dictionary/service [Accessed 12 February 2015]. † 1958 (3) SA 14 (FC), 22 SATC 12 at 15.
‡ Article 13(1) of the tax treaty between South Afric and Swaziland.
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