Page 301 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) ratio of 1/3. The difference of R2m was never included in the income of the resident under section 9D(2) and the foreign
tax on it will therefore not qualify for a foreign tax rebate under section 6quat(1) and (1A). (See Examples 33 and 34)
Step 2 – Determine if the proportional amount of foreign tax determined in step 1 is further limited to the relevant amount of South African normal tax [paragraph (iA)(bb) of the proviso to section 6quat(1B)(a)]
To the extent that the proportional amount of net income, and hence the proportional amount of foreign taxes, includes an amount which is attributable to a CFC’s foreign business establishment and which did not qualify for exclusion from attribution under section 9D(9A)(a) or 9D(9)(b), the amount of foreign taxes which potentially quali es for a foreign tax rebate is limited. Broadly speaking, this includes amounts attributable to a foreign business establishment which are not determined on an arm’s length basis or which are speci cally required to be taken into account as a result of the application of section 9D(9A)(a)(i) – (vii). These amounts are referred to in this paragraph of the Note as ‘tainted income’. The amount of foreign taxes, as calculated under step 1, in respect of the tainted income is what is further limited to the amount of normal tax attributable to the inclusion of that tainted income in the resident’s income under section 9D(2). That is, foreign taxes on tainted income equals:
Proportionate share of tainted income __________________________________ × Step 1 amount
Proportionate share of net income of CFC
Limited to:
Proportionate share of tainted income
_______________________________ × Normal tax Total South African taxable income
Any excess is forfeited and may not be carried forward to the next tax year.* In addition, the excess does not qualify for a deduction under section 6quat(1C) or any other section. In a number of circumstances the limitation will be applicable and must be calculated but it will not have an impact because the normal tax on the comparable amount will be greater than the foreign tax on that amount. This arises because, amongst other reasons, the CFC provisions exclude high taxed jurisdictions from attribution (see paragraph (i) of the proviso to section 9D(2A) under which the net income of a CFC is deemed to be nil when its foreign taxes are at least 75% of the amount of normal tax that would have been payable had attribution been required).
Example 33 – Limitation for an amount attributable to a CFC which is not excluded from attribution under section 9D
Facts:
Resident A holds 75% of the participation rights in CFC B. CFC B’s net income of R500 000 includes R150 000 of interest income which, although attributable to CFC B’s foreign business establishment, did not qualify for the foreign business establishment exclusion and was required to be taken into account as a result of section 9D(9A)(a)(iii)(cc). CFC B’s taxable income under the tax laws of its country of residence amounted to R490 000 while the foreign tax liability in respect thereof equalled R100 000. Resident A’s taxable income for South African tax purposes was R1 000 000 (which included 75% × R500 000 CFC B net income) and normal tax was R280 000.
Result:
CFC
Step 1: Foreign taxes attributable to the proportional amount of net income included in taxable income (X)
X = [Foreign taxes × (net income under South African tax principles / taxable income under foreign tax principles)*]
× participation interest
X = [R100 000 × (n/a*)] × 75% X = R75 000
* not applicable as taxable income under foreign tax principles is less than net income under South African tax principles.
Step 2:
The limitation in paragraph (iA)(bb) of the proviso to section 6quat(1B)(a) is applicable because the R150 000 is attributable to a foreign business establishment and was included under section 9D(9A)(a)(iii)(cc).
(a) Calculation of foreign taxes attributable to non-tainted income
Proportionate share of non-tainted income __________________________________ × Step 1 amount
Proportionate share of net income of CFC
= [((R500 000 – R150 000) × 75%) / (R500 000 × 75%)] × R75 000 = R52 500
(b) Calculation of foreign taxes attributable to tainted income
Proportionate share of tainted income __________________________________ × Step 1 amount
Proportionate share of net income of CFC
* Paragraph (ii) of the proviso to section 6quat(1B)(a).
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