Page 285 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 18 – Set off of local trading losses against foreign trading pro ts
Facts:
A resident company derives foreign-source income from Country S of R100 000 in year 1. Country S allowed deductions of R40 000 and levied tax of 10% on the taxable pro t of R60 000. The income was also taxable in South Africa at a rate of 28%, however deductions of only R30 000 were allowable under the Act. The resident company also conducted other operations in South Africa which gave rise to income of R250 000 and deductions of R350 000.
Result:
Calculation of South African taxable income/assessed loss:
Foreign trade
Gross income
Less:
Deductions
South African trade
Gross income
Less:
Deductions
Assessed losses for current year
RR 70 000
100 000 30 000 250 000 350 000
(100 000)
(30 000)
The existence of an assessed loss does not mean that the foreign income of R100 000 has not been included in taxable income. It has been included in taxable income and therefore the foreign tax of R6 000 (R60 000 × 10%) potentially quali es for a foreign tax rebate but not in year 1 due to the application of the limitation in section 6quat(1B)(a) and paragraph (ii) of the proviso thereto.
Example 19 – Effect of foreign trading losses on the determination of a section 6quat(1) rebate
Facts:
A resident company conducts its primary trading operations in South Africa. It also has a branch in Country N.
Year 1
The company derives trade income from a South African source amounting to R100 000. Corporate income tax is levied in South Africa at a rate of 28%. Its branch in Country N incurred an assessed loss of R300 000.
Year 2
The company derives trade income from a South African source amounting to R100 000. South Africa’s corporate income tax rate remains unchanged at 28%. Its branch in Country N derived taxable income of R400 000. Foreign tax is levied in Country N at the rate of 5%.
Result:
Year 1
Tax position in Country N
In Country N the branch has an assessed loss of R300 000 which is carried forward to year 2 under that country’s domestic tax legislation.
Tax position in South Africa
For South African tax purposes the foreign assessed loss of R300 000 is ring-fenced under paragraph (b) of the proviso to section 20(1) and is carried forward to year 2. The local trade income of R100 000 will be subject to normal tax in South Africa at the rate of 28%.
Year 2
Tax position in Country N
Taxable income for year 2
Less: Assessed loss brought forward from year 1 Taxable income
Tax levied at 5%
R
R400 000
(300 000) 100 000 5 000
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