Page 279 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
The United States Supreme Court in Biddle v. Commissioner* established the principle, uniformly followed in subsequent case law and enshrined in the regulations,† that, in deciding whether a foreign tax is an ‘income tax’ for purposes of section 901,‡ the term ‘income tax’ will be given meaning by referring to the income tax system of the United States of America and measuring the foreign tax against the essential features of that system:
‘The phrase ‘income taxes paid,’ as used in our own revenue laws, has for most practical purposes a well-understood meaning to be derived from an examination of the statutes which provide for the laying and collection of income taxes. It is that meaning which must be attributed to it as used in section 131.’
To a certain extent it is immaterial that the detail of a foreign tax law differs from South Africa’s domestic tax law. The important consideration is whether the basis of taxation is substantially similar. For example, a foreign tax law may include certain items of income or may allow certain exclusions or deductions not included or allowed under South African domestic tax law, however it could still be considered a tax on income.
In contrast, the mere fact that a foreign tax is regarded as a tax on income by the country levying the tax or that the same term is used is not suf cient. The precise nature of the foreign tax and the meaning of particular terms must be determined and considered. That is, the foreign tax liability must be a tax on income within the South African concept thereof. SARS levies the following taxes on income:§
• Normal tax on taxable income, which includes a taxable capital gain [section 5]
• Withholding tax on royalties, a nal tax payable by non-residents on income derived from royalties or similar payments
[section 49A-G]
• Withholding tax on interest (effective 1 March 2015) [section 50(B)(1)]
• Withholding tax on service fees (effective 1 January 2016) [section 51(B)(1)]
• Withholding tax on foreign entertainers and sportspersons, a nal tax [section 47B(2)] • Turnover tax on micro businesses [section 48A]
• Dividends tax [section 64E(1)]
Any foreign taxes which are substantively similar in nature to the aforementioned taxes will be considered a tax on income. The aforementioned withholding taxes are all imposed as a nal withholding tax. Withholding taxes which constitute an advance payment on an ultimate foreign tax liability would not qualify as a foreign tax on income, however the underlying ultimate foreign tax liability may itself qualify as a tax on income. For example, foreign taxes similar to employees’ tax, provisional tax and section 35A withholding tax levied on payments made to non-resident sellers of immovable property in South Africa would not qualify as a tax on income. (See ‘Advance payments’ in 4.3.2 for more detail.)
Taxes covered by a tax treaty
Taxes covered in a tax treaty between South Africa and another country will often, but not necessarily, qualify as a tax on income. For example, the French wealth tax is covered in the tax treaty between South Africa and France,¶ however it will not qualify as a tax on income because it is levied on unrealised increases in the market value of a person’s assets which is not a basis that is similar to South Africa’s capital gains tax regime (which is a tax on income). Accordingly, if a resident is subject to a wealth tax in France, the resident will not be entitled to a foreign tax rebate under section 6quat(1) for that tax.
Taxes levied on gross receipts
Taxes levied on a gross receipts basis are similar to taxes levied on a turnover basis. The term ‘gross receipts’ generally has a wider meaning than the term ‘turnover’ and includes gross sales and capital gains whereas ‘turnover’ would generally only include gross sales. Both bases are concerned with taxing receipts, often at a xed percentage, and it is irrelevant whether the recipient makes a net pro t or loss.
Although South Africa primarily taxes taxpayers on a taxable income basis, certain taxpayers are taxed on a turnover basis when qualifying as and electing to register as a micro business. As noted, turnover tax on micro businesses is a tax on income which means taxes levied by foreign tax jurisdictions on gross receipts or turnover will also constitute a tax on income provided the basis issimilar.
Clearly, the amount subject to tax on a gross receipt or turnover basis will not be equal to the amount subject to tax on a net pro t basis but this does not mean that the full amount of the foreign tax will not potentially qualify for a rebate. For example, if Country X taxes an amount on a gross basis and South Africa taxes it as part of taxable income, the amount subject to tax in Country X will be more than the amount subject to tax in South Africa. The amount of foreign tax could be greater than or less than the amount of South African tax depending on the rate at which it is levied. The amount of foreign tax will qualify for a section 6quat(1) rebate assuming it meets all the requirements and will be subject to the limitation formula in section 6quat(1B)(a) (see 4.5).
* 302 U.S. 573,579 (1938).
† Treasury Regulation § 1.901-2(a)(2)(i) supports the doctrine established in the Biddle case.
‡ Of the relevant legislation of the United States of America.
§ See Binding General Ruling No. 9 (Issue 2) dated 19 February 2013 ‘Taxes on Income and Substantially Similar
Taxes for Purposes of South Africa’s Tax Treaties’ – available on www.sars.gov.za. Withholding tax on service fees is not referred to in the Binding General Ruling as it was only introduced after the ruling was published.
¶ See paragraph 3(a)(iv) of article 2 of the tax treaty between South Africa and France.
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