Page 283 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Advance payments
Many countries impose some form of advance payment for a tax liability that is only nally determined and becomes unconditional at a future date. The speci c terms of these systems vary but are generally based upon the taxpayer’s tax liability for the preceding year of assessment or an estimate of its liability for the current year of assessment. An advance payment of an income tax liability imposed by a foreign tax jurisdiction, which is similar to South Africa’s employees’ tax or provisional tax payments, is made on an estimated tax liability rather than an unconditional nal tax liability. Accordingly, advance payments of tax are not taxes which are proved to be payable to a foreign government, they are merely advance payments of taxes which may ultimately be proved to be payable to a foreign government.
Example 15 – Foreign withholding taxes on foreign-source royalty income
Facts:
R, a resident company, derives royalty income derived from a source in Country S. Country S levies a withholding tax on royalty payments made by its residents to non- residents at a rate of 15%. The withholding tax levied on royalty payments made to non-residents is not a nal withholding tax. A nal tax determination is made on an annual basis based on taxable income which is subject to a corporate tax rate of 20%.
Result:
The tax withheld does not represent taxes proved to be payable and, therefore, the taxes withheld do not qualify for a foreign tax rebate under section 6quat(1).
Example 16 – Foreign withholding taxes on foreign-source service income
Facts:
A natural person resident in South Africa takes up employment in Country Z with a foreign employer for 12 months commencing on 1 June 2013. The resident’s remuneration for the above-mentioned period is subject to a payroll withholding tax in Country Z. The payroll withholding tax is similar to South Africa’s employees’ tax system and represents an advance payment of the resident’s tax liability in Country Z. The resident’s tax liability in Country Z is determined on an assessment basis. The resident discloses the foreign-source income in the resident’s South African tax returns for the 2014 and 2015 years of assessment respectively. South Africa does not have a tax treaty with Country Z.
Result:
The payroll withholding taxes levied on the service income sourced in Country Z do not constitute foreign taxes that are proved to be payable without a right of recovery. The nal foreign tax proved to be payable is only determined upon assessment. Therefore these withholding taxes do not qualify for a foreign tax rebate under section 6quat(1).
The nal foreign tax liability, which may only arise months after the advance payments have been made, is the amount which will be regarded as being ‘proved to be payable’ for purposes of the section 6quat(1) rebate and the section 6quat(1C) deduction. Part of the nal foreign tax liability may have been paid through means of the advance tax system and part of it may still be payable in the future. In contrast, the excess of the advance payments above the nal foreign tax liability is generally refunded to the taxpayer and does not qualify for a rebate under section 6quat(1). SARS recognises that cash ow timing mismatches will occur if the foreign tax year ends after the South African tax year. As a result, SARS may regard the advance or provisional tax payment as being ‘proved to be payable’ for purposes of the section 6quat(1) rebate and section 6quat(1C) deduction to the extent that the resident taxpayer can satisfy SARS that such payments correspond to and do not exceed the nal foreign tax liability. This should minimise the cash ow impact.
An understanding of the foreign tax is critical in determining whether or not the foreign tax payment is an advance payment which is similar to South Africa’s employees’ tax or provisional tax. For example, in some self-assessment countries, although called provisional payments, the payment is in substance a nal payment which is based on actual taxable income for the particular year of assessment, not an estimate, and is not an interim partial payment made during the year which is subject to change based on the nal amount submitted by the taxpayer. It is called provisional because it may be amended if the taxpayer is reviewed or audited and the calculation that the taxpayer submitted is amended. In this situation, and subject to obtaining a detailed understanding of the foreign tax, SARS may treat the payment as a nal tax payment and not a provisional tax payment.
(See 6.4 for a discussion regarding the treatment of foreign provisional tax payments when calculating South African provisional tax payments.)
Person who is potentially entitled to claim a foreign tax rebate
The person who is potentially entitled to claim a foreign tax rebate under section 6quat(1) is the person who is liable to pay the foreign tax. In the context of withholding taxes, although the payer of an amount is required to withhold and remit an amount of tax to the government, the tax itself is generally levied on the amount which is received by or accrues to the payee and the payee is the person who is liable to pay the foreign tax, not the payer. The speci c wording of the legislation is always important but the withholding and remittance of the tax are often just the means of collection under which the payer makes the payment on behalf of the payee. Withholding taxes are generally triggered at the point in time at which the payer makes the payment to the payee and thus this is also the point in time at which the foreign tax is ‘proved to be payable’.
4.3.3 The taxes must be payable without any right of recovery by any person
The obligation to provide double tax relief diminishes to the extent that a resident receives or is entitled to receive a refund of foreign taxes or is the recipient of a bene t which effectively results in the removal (or reduction) of double taxation. These aspects are taken into account in determining the amount of foreign tax that potentially quali es for a rebate.
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