Page 280 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 10 – Limiting foreign taxes levied on gross receipts
Facts:
Company Z, a resident, earns income from independent professional services rendered in Country A. The presence of Company Z in Country A does not create a permanent establishment for Company Z in that country.
In year 1 Company Z earned gross income of R100 000 and incurred operating expenses of R80 000 for services rendered in Country A. Country A levies tax on independent professional services at a rate of 10% on gross receipts. The tax payable in Country A is R10 000 (R100 000 × 10%) for year 1. Company Z has other taxable income of R50 000 sourced in South Africa. Normal South African tax totals R19 600 [(R50 000 + R20 000) × 28%].
Result:
From a South African tax perspective the full amount of the foreign tax of R10 000 potentially quali es for the rebate but will be subject to the limitation in section 6quat(1B)(a).
Calculation:
Taxable income derived from all foreign sources (A) ___________________________________________ × Normal tax payable on (B)
Taxable income derived from all sources (B)
= R20 000 / R70 000 × R19 600 = R5 600
Therefore, the amount of the rebate in year 1 will be limited to R5 600 but the excess of R4 400 (R10 000 – R5 600) may be carried forward to year 2 under paragraph (ii) of the proviso to section 6quat(1B)(a) to potentially qualify for a foreign tax rebate in that year.
Liability for interest, additional foreign taxes, nes and penalties
A liability for interest, additional foreign taxes, nes, penalties or any other similar obligation imposed under the tax laws of a foreign country is not regarded as a tax on income and does not qualify for a foreign tax rebate.
Furthermore, the aforementioned expenses, except possibly for interest depending on the facts, are generally not deductible for tax purposes under section 11(a) read with section 23(g) as all the requirements for deduction are unlikely to be met. (See 4.5.2 for a discussion regarding why taxes on income do not qualify for a deduction under section 11(a) read with section 23(g).)
In addition, section 23(o)(ii) prohibits the deduction of nes andpenalties.
Foreign taxes that do not constitute taxes on income
Examples of taxes that are not considered to be a tax on income include – • commodity or consumption taxes;
• value-added tax;
• sales tax;
• customs and excise duties;
• import and export duties;
• estate and inheritance taxes;
• annual wealth taxes;
• net worth taxes;
• environmental taxes such as a greenhouse gas tax or carbon tax;
• resource royalties;
• mineral export levies;
• company duties;
• business licence and other trade taxes;
• stamp duties or security transfer taxes;
• transfer duties;
• registration duties;
• franking credits;*
• skills development levies and unemployment insurance fund contributions;
• property or real estate taxes;
• gift or donation taxes;
• purchase tax, similar taxes and employers’ contributions collected for the nancing of a social insurance scheme; • capital transfer taxes; and
• capital taxes.†
* For example in Australia dividends paid to shareholders by Australian resident companies are taxed under a system known as imputation. The tax paid by the company is allocated to shareholders by franking credits attached to the dividends they receive. Detailed information available from www.ato.gov.au/Business/Imputation/In-detail/ Refunding-franking- credits/Refunding-franking-credits---individuals/ [Accessed 12 February 2015].
† Capital taxes include, for example, taxes levied at irregular and infrequent intervals on the values of the assets or net worth owned by institutional units or on the values of assets transferred between institutional units as a result of legacies, gifts inter vivos or other transfers.
272 saIT comPendIum oF Tax LegIsLaTIon VoLume 2