Page 303 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) See Annexure A for a comprehensive three-step limitation example including foreign branch operations, foreign
dividend income and income attributed to a CFC.
4.8 The carry-forward of a balance of excess foreign taxes
To the extent that the amount of the qualifying foreign taxes payable exceeds the amount of the rebate (calculated after applying the limitations discussed in 4.5, 4.6 and 4.7), the excess amount is carried forward to the immediately succeeding year of assessment in which it will potentially qualify as a foreign tax available for set off against the normal tax payable on taxable income derived from foreign sources in that year of assessment [paragraph (ii) of the proviso to section 6quat(1B)(a)].
Any balance of excess foreign taxes may not be carried forward for more than seven years, calculated from the year of assessment in which the balance was carried forward for the rst time [paragraph (iii) of the proviso to section 6quat(1B) (a)]. The excess amount of foreign taxes does not relate to any taxes overpaid to SARS. It relates solely to taxes paid to foreign tax jurisdictions and SARS will not refund any part of that excess to the relevant taxpayer or transfer it to another taxpayer such as a company in the same group of companies. Section 6quat does not provide for the carry-back of a balance of excess foreign taxes to previous years of assessment.
The amount of the foreign tax rebate relating to the taxable foreign income derived during a year of assessment must rst be used against the normal tax payable in that year. Thereafter, any balance of excess foreign taxes brought forward from the preceding year may be set off against the remaining balance of normal tax payable on taxable income derived from foreign sources [paragraph (ii)(bb) of the proviso to section 6quat(1B)(a)]. The balance of excess foreign taxes may not be used against normal tax payable on taxable income derived from South African sources (see Example 3 in Annexure B).
In circumstances where the balance of excess foreign taxes includes amounts carried forward from more than one year of assessment, the excess amount determined for each year of assessment must be recorded separately and applied on a rst-in- rst-out basis against the normal tax payable in future years ofassessment.
Example 35 – Foreign tax rate exceeds the normal tax rate
Facts:
A resident company derives income of R100 000 from a source in Country S. No other income is derived by the resident company from either a local or foreign source.
The income is subject to tax at a rate of 30% in Country S and 28% in South Africa.
Result:
R
South African taxable income 100 000 Normal tax (R100 000 × 28%) 28 000
Less: Section 6quat(1) rebate (see note below) South African tax payable Nil
Note:
Qualifying foreign taxes = R100 000 × 30%
= R30 000
Calculation of the limitation of the rebate:
(28 000)
Taxable income derived from all foreign sources _______________________________________ × Normal tax payable
Taxable income derived from all sources
= R100 000 / R100 000 × R28 000 = R28 000
Therefore, the rebate for the current year is R28 000 and the excess of R2 000 (R30 000 – R28 000) may be carried forward to the next year of assessment.
This means that in situations where the foreign tax rate exceeds the domestic tax rate and there is other foreign income which is taxed at a lower tax rate, South Africa is effectively giving a rebate for the double taxation and subsidising the tax base of another country. In this example, South Africa is giving a rebate equal to R28 000 for double taxation and is potentially subsidising Country S’s tax base to the extent of R2 000.
See Example 3 for an example where the normal tax rate exceeds the foreign tax rate.
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 295