Page 281 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) Section 6quat(3) speci cally excludes compulsory payments to a foreign government which constitute consideration for
the right to extract any mineral or natural oil from being considered a tax on income.
Production sharing agreement for the extraction of minerals and natural oil
Different governments have different scal regimes which effectively ‘charge’ third parties for the right to extract minerals and oil. In addition to traditional income taxes, two common methods of ‘charging’ are the payment of royalties on the minerals and natural oil extracted, and entering into production sharing contracts.
As noted previously, the term ‘taxes on income’ speci cally excludes any compulsory payment made to the government of any other country which constitutes consideration for the right to extract any mineral or natural oil.* This would include royalty payments which are made in cash or kind.
The particular production sharing contract is critical but, as a generalisation, production sharing contracts are often structured in such a way that they stipulate the percentage of the resources that the government is entitled to and the percentage of resources to which the contractor is entitled. The right to and ownership of the speci ed resources is established upfront and as such even when the resources are transferred to the government or sold on their behalf there is no payment per se by the contractor to the government which requires consideration. The agreement will also stipulate which costs the different parties will incur and may stipulate that the contractor will be responsible for all third party costs. The contractor is often responsible for providing the capital, services and technical knowledge.
If the production sharing agreement is structured in such a way that the contractor is required to make a payment to the government in return for extracting the related resources and to settle that payment through product (not cash), the payment will not be considered to be a payment of a tax on income† and accordingly will not qualify for a rebate under section 6quat(1).
4.4.2 The taxes must be proved to be payable to any sphere of government of any country other than South Africa in respect of an existing foreign tax liability
Proved to be payable
A tax will be ‘proved to be payable’ if the resident has an unconditional legal liability to pay the tax and the resident has either paid the tax or will have to pay the tax in the future. An unconditional legal liability to pay the foreign tax only arises once all the events that x the amount of the foreign tax, and the resident’s liability, have taken place.
Given that the relevant foreign tax will only qualify to be dealt with under section 6quat if it is ‘proved to be payable’ and the resident does not have ‘any right of recovery’ of the tax (see 4.3.3), it is apparent that an unconditional legal liability in the context of section 6quat means that the foreign tax must have been levied legitimately under the foreign jurisdiction’s tax law and tax treaty (if applicable) before it can qualify for a rebate under section 6quat. If the foreign tax has not been levied legitimately under the domestic law of the foreign jurisdiction or has been levied contrary to the clear provisions of a tax treaty (if applicable), it cannot be said that the foreign tax is ‘proved to be payable’ or that the resident does not have a ‘right of recovery’. For example, if a foreign jurisdiction imposes a tax that is clearly not in accordance with the foreign jurisdiction’s tax law or tax treaty (if applicable), but it is paid, with or without prejudice or challenge, by the resident, that foreign tax will not be regarded as ‘proved to be payable’ and the resident will not be regarded as not having a ‘right of recovery’ for purposes of section 6quat. Such foreign tax will accordingly not qualify for a foreign tax rebate under section 6quat(1) or a deduction under section 6quat(1C).
Practically this situation tends to arise in the context of withholding taxes when tax treaties often provide for a rate of tax which is lower than the domestic rate provided for in domestic tax legislation. Under section 6quat(1) the amount of foreign tax potentially qualifying for a rebate is limited to the tax which may be levied under the tax treaty. The resident has the option of seeking a refund of the excess withholding tax from the foreign tax authorities. The excess withholding taxes do not qualify for a deduction under section 6quat(1C), section 11(a) or any other section.
Example 12 – Foreign country imposing withholding tax at domestic rate instead of lower rate speci ed in the tax treaty
Facts:
South Africa has concluded a tax treaty with Country X under which the latter may levy a withholding tax of 10% of the gross amount of interest being remitted from Country X. However, Country X insists on levying its domestic tax rate of 25% on interest income remitted to a resident of South Africa. The source of the interest is located in Country X.
* Section 6quat(3). † Section 6quat(3).
Example 11 – Whether a foreign tax on securities quali es as a tax on income for purposes of the section 6quat(1) rebate
Facts:
A resident invests in interest-bearing bonds issued in Country A. Country A levies a tax on bonds issued in that country which is payable by the issuers of the bonds but recoverable from the bondholders. The tax is imposed at a rate based on the taxable value of the bonds.
Result:
The tax is levied on the issue of the interest-bearing bonds and is not linked in any way to the income earned of either the issuer or holder. The tax is not regarded as a tax on income for South African tax purposes.
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