Page 289 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) based on any method which gives a fair and reasonable apportionment appropriate to the circumstances of the particular
case (for example, turnover, gross pro t or value of xed assets).*
Example 21 – Domestic expenses attributable to foreign-source income
Facts:
A resident company obtains advice from a South African legal adviser on the operations of a foreign branch located in Country A.
Result:
Although the expenses are incurred locally it relates directly to the resident company’s foreign operations and may be deducted from the foreign branch’s income when calculating the taxable income derived from foreign sources.
Example 22 – Foreign expenses attributable to South African-source income
Facts:
A resident company obtains advice from a solicitor based in London for a deal it is concluding for the sale of various products manufactured in South Africa to a person resident in London. The resident company also has a branch in London which manufactures a different line of products to those manufactured in South Africa.
Result:
The expense relates directly to the sale of products manufactured by the resident company in South Africa and may not be deducted from income when calculating the taxable income which arises from a foreign source (that is, the United Kingdom in which the foreign branch is located).The expense may be deducted from South African-source income when calculating the resident’s taxable income from all sources.
The Act requires† that taxable income be calculated per trade and then brings taxable income from a taxpayer’s various trades together whilst taking into account that foreign trading losses may not be set off against domestic trading pro ts.‡ Consequently an expense item attributable to a particular trade must be deducted in determining that trade’s taxable income and may not be deducted in determining the taxable income derived from another trade. The trades (local and foreign) of a resident that trades in and outside South Africa are regarded as two separate trades for purposes of the Act as a whole. This will be the case even if the operations conducted inside South Africa and outside South Africa are identical in nature, for example, a retail operator with retail shops in South Africa and outside South Africa.
The need to attribute expenses between South African-source income and foreign- source income in the context of foreign tax limitations has been discussed in the General Reports of two Congresses of the International Fiscal Association.§
Example 23 – Classi cation of expenses relating to South African-source income and foreign-source income in calculating a foreign tax rebate
Facts:
A resident company with a local trade and a foreign trade derives the following income in year 1:
R
Taxable income derived from a South African source1 000
Taxable income derived from a foreign source which is attributable to a foreign permanent establishment 100
The above-mentioned amounts do not take into account transactions in terms of which the foreign branch borrowed R100 from a nancial institution in South Africa at 10% interest and invested the money borrowed in a bank deposit in the foreign country where the branch is located. The deposit earned interest at 11%. The corporate tax rate is 40% in the foreign country and 28% in South Africa.
Result:
The interest expense of R10 relates to the earning of the foreign-source interest income of R11 and accordingly it must be claimed as a deduction in the calculation of the foreign-source taxable income.
* This approach is endorsed in International Tax Primer, 2 ed, 2002, Kluwer Law International, The Hague, The Netherlands at page 48 where Brian Arnold advocates two methods for allocating expenses, namely tracing and apportionment.
† See, for example, the preamble to section 11 which provides that for the purposes of calculating the taxable income from carrying on any trade certain deductions are permitted and section 20(1)(b) which refers to the set off of an assessed loss from one trade against the income of another. See also related comments in A P de Koker & R C Williams Silke on South African Income Tax [online] (My LexisNexis: January 2015) in § 2.8 and C v Commissioner of Taxes, 1966 (3) SA 6(RAD) 28 SATC 127.
‡ Paragraph (b) of the proviso to section 20(1).
§ General Report authored by Gauthier Blanluet and Philippe J. Durand - Key Practical Issues to Eliminate Double Taxation of Business Income, Cahiers De Droit Fiscal International, Volume 96b, Sdu Uitgevers, The Hague, The Netherlands, 2011 at page 33 to 35 and the General Report authored by Robert J. Patrick jr - Rules for Determining Income and Expenses as Domestic or Foreign, Cahiers De Droit Fiscal International, Volume LXVb, Kluwer, Rotterdam, The Netherlands at page 15 to 18.
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