Page 305 - SAIT Compendium 2016 Volume2

IN 18 (3)
IN 18 (3)
Income Tax acT: InTeRPReTaTIon noTes
‘[Operation of the credit] Article 23B sets out the main rules of the credit method, but does not give detailed rules on the computation and operation of the credit. This is consistent with the general pattern of the Convention. Experience has shown that many problems may arise. Some of them are dealt with in the following paragraphs. In many States detailed rules on credit for foreign tax already exist in their domestic laws. A number of conventions, therefore, contain a reference to the domestic laws of the Contracting States and further provide that such domestic rules shall not affect the principle laid down in Article 23B’.
On the question whether tax treaty relief provisions are complete or require further reliance on domestic law, Vogel says the following:*
‘The details of both the exemption method and the credit method must be shaped by reference to domestic law, viz. in regard to reference gures – what positive and what negative elements should be included in the ‘foreign items of income’ and what in the ‘domestic’ ones, etc. – and in regard to procedures. In this connection the credit method is, however, by far the more complicated of the two, and that is why it is shaped and supplemented to a much greater extent by domestic law.’
Vogel also states the following on the relationship between domestic law and the article of a tax treaty (DTCs) dealing with the elimination of double taxation:†
‘Where DTCs apply, the latter’s rules – being special provisions – take precedence over unilateral domestic arrangements But, to a certain extent, such unilateral rules remain applicable next to those of DTCs. For one thing, treaties provide exemption or credit only in principle while failing to arrange for their implementation, In such cases, domestic rules, if any, ... become applicable to close the gaps...Treaties quite frequently do in fact expressly refer to domestic tax law in regard to implementation – particularly of the credit method (see synoptic table re Art. 23 A (2) / 23 B (1), infra m.no. 178). Moreover, where treaties fail to eliminate double taxation or do so no more than partially, it remains permissible under treaty law to resort, as a supplementary means, to domestic legislation on unilateral elimination of double taxation. Here again, the treaty is designed to do no more than restrict national law and is not meant to preclude application of favourable rules of domestic law. However, such resort to unilateral measures in addition to, and for supplementing, a DTC must, of course, not result in relief being claimed twice. ... Apart from that, resort to unilateral measures may be excluded by domestic law in cases where a DTC becomes applicable.’
The abovementioned principle is supported by Arnold:‡
‘The treaty provisions establish the general principle of exemption or credit. Each country is left to establish detailed rules for the implementation of the general principle.’
Thus each country is free to apply its own legislation and technique in calculating foreign tax rebates. In the South African context, section 6quat(2) speci cally provides the taxpayer with a choice of the relief under section 6quat or the relief provided under a tax treaty (if applicable) (see 4.9.3).
4.9.3 Choice between the tax treaty credit method and section 6quat(1) rebate method
As noted in 4.9.2, section 6quat(2) provides a resident with a choice between the relief provided for in the tax treaty (if applicable) and the relief provided for under section 6quat(1) or (1C) as appropriate. A resident is not entitled to claim both the section 6quat(1) rebate (or the deduction under section 6quat(1C) if applicable) and the relief provided for in the tax treaty in respect of the same taxable income derived from a country with which South Africa has concluded a tax treaty. In addition, a resident may not elect tax treaty relief and at the same time seek to apply the more favourable elements of section 6quat such as the carry forward of excess taxes.
The choice of relief, that is, section 6quat(1)§ or tax treaty relief, can be exercised annually per taxable income per country. The resident is not bound by a choice made in a previous year of assessment. In circumstances where more than one treaty applies to a resident during a particular year of assessment, the resident may elect different methods of relief for each tax treaty. SARS will apply section 6quat(1) if the resident does not elect which form of relief must be applied.
4.9.4 Tax treaty credit method – effect of wording of relevant articles
The wording of the relevant article in the tax treaty will determine how the tax treaty credit method must be applied in a speci c case. Tax treaty articles can be divided into –
• those that provide for relief from double taxation under the credit method without any reference to the provisions of
domestic law relating to the granting of a credit for foreign taxes (that is, section 6quat), and
• those that are ‘subject to’ the provisions of the law of South Africa regarding the deduction of foreign taxes from
normal tax payable in South Africa (that is, section 6quat).
4.9.5 The tax treaty credit method – articles that are not ‘subject to’ section 6quat
Some tax treaties providing for the credit method of relief are not stated to be ‘subject to’ the provisions of domestic law relating to the granting of a credit for foreign taxes (that is, section 6quat). In these circumstances a resident may elect to apply the tax treaty credit method of relief instead of the section 6quat rebate method of relief (assume the income is foreign-source). This election is sanctioned under section 6quat(2). The election is made in its entirety which means that if a resident elects the relief provided under the tax treaty, none of the provisions of section 6quat (including the
* Klaus Vogel on Double Taxation Conventions in paragraph 38 at page 1131.
† Klaus Vogel on Double Taxation Conventions in paragraph 48 at page 1174.
‡ Brian Arnold International Tax Primer 2 ed (2002) Kluwer Law International, The Hague, The Netherlands at page
47.
§ For the rest of 4.9 and its subparagraphs assume the income is foreign source and accordingly that section 6quat(1C)
is not applicable.
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