Page 284 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
A resident is only entitled to claim a section 6quat(1) rebate for a foreign tax on income to the extent that the amount of the foreign tax is proved to be payable to a sphere of government of a foreign country without a right of recovery by any person (other than a right of recovery in terms of any entitlement to carry back losses arising during any year of assessment to any year of assessment before such year of assessment).
The term ‘right of recovery by any person’ is interpreted very broadly and includes any form of relief against a foreign tax liability. For example, a refund, credit, rebate, remission, or deduction, is considered to be a right of recovery. Any other form of economic bene t to which a person becomes entitled to in consequence of the payment of the relevant tax is also considered to be a ‘right of recovery by any person’. Examples of economic bene ts include:
• Goods
• Services
• Fees or other payments
• Rights to use, acquire or extract any resources or other property
• Discharge of contractual obligations*
The right of recovery may be held by the taxpayer or by any other person and it therefore includes situations in which a shareholder of a company receives a refund for the tax paid by the company. The amount which the company could potentially claim as a rebate under section 6quat(1) would be reduced by the amount of the refund the shareholder receives.
If the resident is entitled to but chooses not to seek a refund, the excess will still not qualify for a rebate under section 6quat(1) because the existence of a right of recovery and not the enforcement thereof is the relevant factor. A resident must disclose relevant information to SARS when any person becomes entitled to a right of recovery on a foreign tax liability incurred by that resident.
Example 17 – Recovery of foreign tax liability by means of a government subsidy
Facts:
Two resident retail companies formed a joint venture in Country A to distribute and sell products owned by the government of Country A. In Country A the joint venture is regarded as a taxable entity. The joint venture sold the products at in ated prices which resulted in an increase in its liability for tax. The government of Country A in turn gave the joint venture a subsidy as a form of economic incentive to compensate for the extra taxes paid due to the in ated sale prices. In South Africa each company claimed a foreign tax rebate based on its proportionate share of the total amount of foreign taxes paid by the joint venture without taking into account the amount of the government subsidy.
Result:
The treatment adopted by the two resident retail companies is incorrect. In determining the rebate available under section 6quat(1), the foreign tax liability must be reduced by the amount of the government subsidy. The amount of the government subsidy must be apportioned between the companies based on each company’s interest in the joint venture.
4.3.4 The taxes must be payable on amounts included in a resident’s taxable income [section 6quat(1)]
The inclusion of foreign-source amounts in taxable income is also discussed in 4.2. The term ‘taxable income’ is de ned in section 1(1) to mean the aggregate of –
‘(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of
Chapter II to be deducted from or set off against such income; and
(a) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;’
It is evident from this de nition that taxable income can be a positive or negative gure, that is, result in an ‘assessed loss’ as de ned [section 20(2)]. Paragraph (a) would become negative when the amounts allowed under Part I of Chapter II exceed the income of a person. Furthermore, Part I of Chapter II includes section 20 which deals with assessed losses.
Accordingly, even if the taxpayer has an assessed loss it does not mean that the foreign-source income has not been included in taxable income. It may have been included in taxable income in which case, assuming all the other requirements are met, the foreign tax would potentially qualify for a rebate although not in that particular year. The reason therefore is that section 6quat(1B)(a) provides that the rebate shall not exceed an amount which bears to the total normal tax payable the same ratio as total foreign taxable income bears to total taxable income (see 4.5). An assessed loss means that normal tax for that year is nil and accordingly the amount of the foreign tax rebate in that year of assessment is also nil. However, it will be possible for the taxpayer to carry forward the balance of excess qualifying foreign taxes to the succeeding year of assessment under paragraph (ii) of the proviso to section 6quat(1B)(a) (see 4.8) to potentially qualify for a foreign tax rebate in that year.
* In Klaus Vogel on Double Taxation Conventions, 3 ed, 1997, Kluwer Law International Ltd, London, United Kingdom in paragraph 154 at page 1223, the author remarks that ‘[i]f any of the tax collected is returned to the taxpayer in the form of a (non-repayable) subsidy – as it is in certain cases under Brazilian law – the allowable credit is restricted to the amount of tax remaining after the deduction of the subsidy...’
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