Page 282 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Result:
The resident only has an unconditional legal obligation to pay 10%, even though 25% was withheld. Accordingly, the resident may only claim a rebate to the extent of 10% as speci ed in the tax treaty under section 6quat(1). The remaining 15% may not be claimed as a rebate under section 6quat(1).
Example 13 – Withholding taxes levied on services rendered in a foreign country, no permanent establishment in the foreign country
Facts:
A, a resident, renders services to B (Pty) Ltd (B) in Country D. A does not have a permanent establishment in Country D. B withholds and remits 10% withholding tax to Country D’s tax authorities. The income is foreign source. South Africa has a tax treaty with Country D. The tax treaty does not contain a technical services article. This means that irrespective of Country D’s domestic law, the tax treaty gives South Africa the sole taxing right and does not permit Country D to charge any tax, for example, a withholding tax, on the service fees paid by B to A.
Result:
The foreign withholding tax will not qualify for a tax rebate under section 6quat(1) because under the tax treaty Country D should not have withheld the withholding tax and accordingly it cannot be ‘proved to be payable’ as there is no unconditional legal obligation to make the payment. The foreign taxes will also not qualify for a section 6quat(1C) deduction or a section 6quin rebate as the service income is foreign source.
A can approach County D’s tax authorities for a refund and, if that fails, can follow a mutual agreement procedure under the tax treaty.
Example 14 – Withholding taxes levied on services rendered in a foreign country with a technical services article that permits withholding taxes to be levied, no permanent establishment in the foreign country
Facts:
C, a resident, renders services to D (Pty) Ltd (D) in Country E. C does not have a permanent establishment in Country E. D withholds and remits 10% withholding tax to the tax authorities of Country E. The income is sourced in Country E. South Africa has a tax treaty with Country E. The tax treaty contains a technical services article which permits Country E to tax the amount but the tax charged may not exceed 10%.
Result:
The foreign withholding tax is validly withheld under the tax treaty and will qualify for a tax rebate under section 6quat(1) assuming the other detailed requirements of the section are met.
The disputed amount of a foreign tax liability, for example, when a resident exercises a right to contest a foreign tax liability by lodging the equivalent of an objection or taking a matter to alternative dispute resolution or to court, will not be allowed as a rebate while the tax is in dispute and not yet nally determined. The amount of the foreign tax liability under dispute will only be taken into account for purposes of determining the foreign tax rebate as and when the dispute is nally resolved. The dispute will be regarded as being resolved when, taking into account all the facts, all reasonable legal remedies relating to the tax liability have been exhausted or a decision in the matter is no longer open to such remedies, subject to what is said in the paragraph below. Taxpayers may be called upon to provide evidence to support a claim that all reasonable legal remedies have been exhausted or extinguished. SARS will not allow a rebate on the disputed amount even if the resident has paid the amount pending resolution of the dispute.
There could be cases where the taxpayer has decided not to commence or continue with the dispute process or the decision is no longer open to dispute but the foreign government’s treatment is nevertheless clearly incorrect. The relevant tax in these circumstances is not considered to be ‘proved to be payable’. Thus, for example, if a foreign government, in contravention of the tax treaty with South Africa, incorrectly withholds foreign tax from payments to residents, that foreign tax will not be considered to be proved to be payable notwithstanding that the dispute process was, for example, commenced but not completed.
The section refers to an amount which is payable. This means that actual payment need not yet have taken place. However, if an amount remains outstanding for an extended period of time this may call into question whether there is indeed an unconditional obligation to pay the amount.
Foreign taxes that are waived or rebated by a foreign government, for example, in tax sparing arrangements,* do not qualify for a foreign tax rebate under section 6quat(1). The reason being that the amount of tax waived or rebated represents an amount of tax which is not payable to a foreign government. This position may, however, be altered by the provisions of a tax treaty. For example, refer to article 22(2) of the tax treaty with Botswana which provides that in certain circumstances the term ‘Botswana tax paid’ is deemed to include the amount of tax which would have been paid in Botswana but for the tax sparing arrangement.
Payable to any sphere of government of a foreign country
The taxes must be payable to any sphere of government of a foreign country, for example, it includes taxes paid at a national, state, provincial, local and municipal level. A foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes. Taxes on income imposed at a supra- national level, for example, tax imposed by the European Union on pensions paid to its former employees, do not qualify for a foreign tax rebate under section 6quat(1) because it is not a tax levied by a sphere of government of a foreign country.
* Tax sparing arrangements are often used to incentivise foreign investment in a country and may involve a residence country giving a tax credit not only for foreign taxes paid to the source country but also on tax spared or waived by the host country.
274 saIT comPendIum oF Tax LegIsLaTIon VoLume 2