Page 293 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 26 – Foreign taxes qualifying for rebate
Facts:
A municipality in Country Z levies two forms of taxes, namely –
(1) a tax on pro ts; and
(2) municipal rates and taxes based on the value of properties owned.
Result:
The tax on pro ts is an appropriation of pro ts already earned and, depending on the detailed facts, will potentially qualify for a rebate under section 6quat(1). A tax on pro ts is not considered to be incurred in the production of income and will not qualify for a deduction under section 11(a).
The municipal rates and taxes are a charge against pro ts and not a tax on pro ts; the expense will not qualify for a rebate under section 6quat(1). However, a charge against pro ts may, depending on the detailed facts, be incurred in the production of income (for example, if the property was a rental property) and the taxpayer could therefore qualify for a deduction under section 11(a) if all the other requirements of the section are met.
4.5.3 The treatment of foreign taxes payable in respect of exempt foreign dividends in the limitation formula As noted in 4.2 and 4.3, foreign taxes which are attributable to exempt income will generally not qualify for a foreign tax rebate under section 6quat(1). 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).*
This ‘special treatment’ does not extend to the limitation formula speci ed in section 6quat(1B).† Accordingly, the method of calculation of the limitation formula as set out in 4.5 is not directly impacted by the foreign tax payable on the portion of a foreign dividend which is exempt under section 10B(3). Paragraph (ii) of the proviso to section 6quat(1A) does not therefore create a separate limitation formula or basket for foreign dividends subject to section 10B(3). The terms ‘taxable income’ and ‘normal tax payable’, as used in the limitation formula,‡ have their ordinary meaning as per the Act and the inclusion provided for in paragraph (ii) of the proviso to section 6quat(1A) accordingly has no application. In calculating taxable income and normal tax for purposes of the limitation formula speci ed in section 6quat(1B) the portion of foreign dividends which are exempt under section 10B(3) is therefore excluded.
To the extent that the amount of qualifying foreign taxes payable, including the foreign taxes payable on the exempt portion of foreign dividends, exceed the amount of the rebate (after applying the limitation formula in 4.5 and the limitations in 4.6 and 4.7), the excess may be carried forward to the next succeeding year of assessment and will potentially qualify for a rebate in that year. See 4.8 for detail.
Example 27 – Foreign taxes qualifying for rebate
Facts:
X (Pty) Ltd, a South African company, derives income from both local and foreign sources.
Foreign-source income:
Foreign dividends
X (Pty) Ltd owns 5% of the equity share capital of a company in Country F. On 20 February 2015 the foreign company declared a dividend of $120 000 (amount before withholding tax) of which X Pty Ltd received $5 400 ($6 000 less withholding tax payable of $600). For the 2015 year of assessment ending 28 February the average exchange rate was $1 : R10.9515.
Losses derived by a foreign branch
X (Pty) Ltd’s foreign branch yielded a taxable loss for the year of R30 000.
South African-source income:
During the 2015 year of assessment X (Pty) Ltd received consulting fee income of R1 000 000 and interest income of R100 000. No deductible expenses were incurred in the production of the consulting fee income or the interest income.
* Paragraph (ii) of the proviso to section 6quat(1A).
† Paragraph (ii) of the proviso speci cally says that it is ‘for the purposes of this subsection’, ‘this subsection’ being section 6quat(1A). The application of the proviso is therefore limited to section 6quat(1A) and does not extend to the other provisions of section 6quat.
‡ See the limitation formula in 4.5.
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