Page 287 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Transactions’ between a South African resident’s head of ce and its own foreign permanent establishment
A resident’s South African presence (for example, a head of ce in Cape Town) may ‘transact’ with its own foreign permanent establishment (for example, a branch in Country A) and for accounting purposes charge a fee including a mark-up on those ‘transactions’ (for example, accounting services in the form of the relevant portion of the related employees’ salaries plus consumables plus a mark-up). However, from a South African tax perspective when calculating taxable income and attributing pro ts to the South African presence and the foreign permanent establishment, transactions within one legal entity are not recognised. Accordingly, the fee payable by the foreign branch to the head of ce is not recognised in the resident’s hands (that is, there is no gross income) and the foreign branch may only be allocated a relevant portion of the external costs excluding any internal mark-up.
Assuming the services are rendered in the foreign country, it means that if, for example, the foreign government levies a foreign withholding tax on the payments by the foreign branch to the head of ce, the South African resident will not qualify for a section 6quat(1) rebate. The reason therefore is that the accounting fee ‘charged’ by the foreign branch is not recognised for tax purposes and there is no foreign-source income which has been included in the resident’s taxable income. This applies irrespective of whether the withholding tax was levied on the cost portion of the ‘fee’ or the full ‘fee’ including the mark-up and irrespective of whether or not the withholding tax was permitted under a tax treaty (if one was applicable).*
Foreign taxes payable in respect of exempt dividends
As noted in 4.2, foreign taxes which are attributable to exempt income will generally not qualify for a foreign tax rebate under section 6quat(1) as the foreign taxes must be payable on amounts included in a resident’s taxable income. However, in the case of foreign taxes attributable to foreign dividends that are partially exempt under section 10B(3), the full amount of the foreign taxes applicable to the exempt portion under section 10B(3) will potentially qualify for a foreign tax rebate under section 6quat(1).† While the full amount of the exempt foreign dividends must be included under paragraph (ii) of the proviso to section 6quat(1A) in the resident’s taxable income for the purpose of determining the amount of foreign taxes which potentially qualify for the rebate available under section 6quat(1), those foreign taxes will still be subject to the limitation formula provided for in section 6quat(1B) - see 4.5.3.
4.4 Person liable for the qualifying foreign tax liability [section 6quat(1A)]
4.4.1 General remarks
Generally speaking, 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.
However, in certain circumstances, section 6quat(1A) permits a resident to take an amount of foreign tax into account notwithstanding that another person was liable for the amount of foreign tax. For example, in calculating the rebate under section 6quat(1) a resident must take into account an amount of foreign tax which that resident’s spouse was liable for, provided the amount is deemed to have accrued to the resident under section 7(2).‡
It should also be noted that in respect of withholding taxes, the payee is the person who is liable to pay the tax even though the tax is withheld by and physically paid over to the foreign government by the payer of the amount. The physical payment is done on behalf of the payee and the payee is the person who is liable for the tax (see 4.3.2).
4.4.2 Application of section 6quat(1A)
The qualifying foreign tax liability taken into account in calculating the section 6quat(1) rebate must be payable by any of the following persons –
• that resident in respect of –
o any income received by or accrued to that resident from a foreign source; or
o any taxable capital gain as contemplated in section 26A derived from a foreign source; or
• a CFC in respect of the portion of the CFC’s net income as contemplated in section 9D which is attributed to that
resident under section 9D(2); or
• a person in respect of the amounts mentioned in the rst bullet point if the amount is deemed to have accrued to that
resident under section 7 or paragraph 68, 69, 70, 71, 72 or 80 of the Eighth Schedule [section 6quat(1)(f)(i) and (ii)];
or
• a person in respect of the amounts mentioned in the rst bullet point which represents the capital of a trust established
in a foreign country and which is included in that resident’s income under section 25B(2A) or is taken into account in determining that resident’s aggregate capital gain or aggregate capital loss under paragraph 80(3) of the Eighth Schedule [section 6quat(1)(f)(iii)].
In addition, when the resident is either a member of a partnership or a bene ciary of a trust and the partnership or trust is liable for tax as a separate entity in a foreign country, a proportional amount of tax payable by that entity is deemed to be payable by that resident member or bene ciary for purposes of section 6quat. The proportional amount must be determined with reference to the resident’s interest in the entity in relation to the total interest held in that entity.
Examples of circumstances when foreign tax, which must be taken into account in calculating a resident’s section 6quat(1) rebate, is payable by someone other than the resident include –
• a resident’s spouse when the underlying income is deemed to have accrued to that resident under section 7(2);
* South Africa has reserved the right to use the version of Article 7 of the OECD Model Tax Convention, and the relevant commentary, immediately prior to the July 2010 update. See Model Tax Convention on Income and on Capital, condensed version, 15 July 2014 page 464.
† Paragraph (ii) of the proviso to section 6quat(1A). ‡ Section 6quat(1A)(f).
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