Page 278 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
‘Technical fees shall be deemed to arise in a Contracting State when the payer is a resident of that State...’
Article 13(5) overrides the true source for the service fees and deems the fees to be from a source in Swaziland for purposes of the Act and the tax treaty. As a result, article 13(2) gives Swaziland a right to tax the income subject to the limitation that the tax charged may not exceed 10% of the gross amount of the fees. South Africa also has a right to tax the income in the hands of the resident company24 but article 22 imposes an obligation on South Africa to provide relief for the tax suffered in Swaziland. This obligation is met by South Africa potentially providing a foreign tax rebate under section 6quat(1). In order to qualify for the rebate all the requirements of section 6quat must be met. For example, although Swaziland imposed the withholding tax at the domestic rate of 15%, the 5% withholding tax above the permitted rate of 10% will not meet the ‘proved to be payable’ requirement (see 4.3.2) and will accordingly not qualify for the rebate.
Note: In the absence of article 13(5), the amount would be South African-source irrespective of whether Swaziland’s domestic tax law treated the amount as being sourced in South Africa or Swaziland.
(b) Dominant originating cause versus subsidiary causes
In considering the facts and circumstances of a particular item of service income, taxpayers must consider whether the service itself is the dominant originating cause or whether in the particular case the service is incidental to and part of another activity which is the dominant originating cause. The principle of determining the dominant originating cause in cases where there is more than one originating cause is not unique to service income. It has, however, been speci cally mentioned here as it is an issue which taxpayers frequently need to consider in the context of service- related income.
Example 9 – Subsidiary and separate originating cause
Facts:
A, a resident, manufactures factory equipment in South Africa. As part of the sale of the equipment, A provides on-site assistance with the installation of the equipment. Most, but not all, of A’s clients are located in South Africa.
During the year A sold equipment to C in Zimbabwe and sent a technician to Zimbabwe to assist with the installation. A does not have a permanent establishment in Zimbabwe.
In addition to the manufacture and sale of the equipment, A concludes contracts with some clients to provide on-site monthly maintenance services.
A has concluded a maintenance contract with three South African clients and C.
Result:
Sale and installation
In this case, the manufacturing of the equipment, and not the installation thereof, is the dominant originating cause and the source of the income is accordingly South Africa.It is incorrect to treat the service as the dominant originating cause or to split out the installation services and treat them separately. This is the case irrespective of whether multiple invoices are issued or whether the equipment and installation are itemised separately on the invoices. The installation services are merely an incidental part of the composite supply and installation of the equipment.
Maintenance contracts
The monthly service contract is separate from the manufacture and sale of the equipment. The true source of the income will be where the services are rendered (see 4.2.2(c) for the need to apportion service income between locations).
(c) Apportionment of service income between different locations
The location of the source of the income is, in the absence of section 9(2), section 9(4) or an article in a tax treaty providing otherwise, where the service is physically rendered if the originating cause of income is the rendering of the service. This may be in more than one location in which case an apportionment of the source of the income will be required (assuming the locations are in different countries).
For example, a single invoice may be issued for services carried out partly in South Africa and partly outside South Africa. In these situations it is necessary to consider what services were conducted in which location and to apply an appropriate basis to apportion the source of the income to its appropriate location. This is critically important because, for example, in the case of a resident it will impact on whether that resident is entitled to relief from double taxation under sections 6quat(1), 6quat(1C) or 6quin.
The appropriate basis of apportionment will depend on the facts and circumstances of the particular case. For example, if the same service is rendered in two countries and the same hourly rate is charged then time may be an appropriate basis of apportionment. However, if a different rate is charged then a pure time basis would not be appropriate. Further, if the nature of the service rendered in the two locations is different that would also need to be taken into account in the apportionment.
4.3 Requirements that must be met in order for foreign taxes to be regarded as qualifying foreign taxes [section 6quat(1A)]
Foreign taxes must meet all the requirements set out in 4.3.1 to 4.3.4 in order to potentially qualify for a rebate under section 6quat(1). In addition, if the foreign tax relates to a capital gain or to attributed income of a CFC, the total amount of foreign taxes which potentially quali es for a rebate is limited. These limits, as well as a general limitation, are discussed in 4.5, 4.6 and 4.7.
4.3.1 The taxes must be payable on income
In determining whether or not a particular foreign tax quali es as a tax on income, the basic scheme of application of the foreign tax must be compared with that of the Act. The foreign tax will only be accepted as a tax on income if the basis of taxation is substantially similar to that of the Act.
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