Page 306 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
additional relief measures) apply. For example, a person electing to use a tax treaty credit method will not be entitled to carry forward any excess foreign taxes under paragraph (ii) of the proviso to section 6quat(1B)(a). An example of a tax treaty that is not ‘subject to’ section 6quat is the tax treaty between South Africa and Australia.* The relevant part of article 23 of the tax treaty with Australia, which deals with the elimination of double taxation, reads as follows:
‘3. In the case of South Africa, Australian tax paid by a resident of South Africa in respect of income taxable in Australia in accordance with the Agreement, shall be deducted from the taxes due according to South African scal law. The deduction shall not, however, exceed an amount which bears to the total South African tax payable the same ratio as the income concerned bears to the total income.’ (Emphasis added.)
The provisions of section 6quat are not applicable when calculating the relief provided under the tax treaty. Taxpayers must refer to the wording of the particular tax treaty, or, if applicable, a separate agreement with the particular country, to determine how to calculate the tax treaty relief. For example, per the tax treaty with Australia, the wording of which is common to most treaties, the following points are relevant in calculating the tax treaty relief:
• Australian tax paid refers to the tax paid in Australia as calculated under Australian domestic law and the provisions of the tax treaty.
• ‘In respect of income taxable in Australia’ – practically the source of the income will often be Australian, however this wording does not limit the source of the income to Australia, the income could be sourced in Australia, South Africa or even a third country. The important requirement is that the income must be taxable in Australia.
• ‘In accordance with the Agreement’ means that a credit is only available for the foreign tax paid on items of income correctly taxed under the tax treaty.
• Taxes due according to South African scal law refers to the tax payable in South Africa as calculated under the Act and the provisions of the tax treaty. This requires the calculation of taxable income under the Act (that is, South African tax law).
• The deduction from South African normal tax is limited and that limit is calculated on a ‘per country’ basis rather than on a ‘per income item’ or an ‘overall’ basis. That is, the maximum deduction is limited to:†
(Taxable) Income concerned Total South African tax payable × _________________________________‡
Total (taxable) income
o ‘Income’ is interpreted to mean taxable income (see 4.9.8 – ‘Meaning of ‘income’ in the article dealing with the elimination of double tax in tax treaties’).
o ‘Total South African tax payable’ is and can only be calculated under the Act (that is, South African tax law) taking into account the provisions of the applicable tax treaty. This requires, amongst other aspects, the calculation of taxable income under the Act. Total South African tax is normal tax before the section 6quat(1) rebate but, in the case of natural persons, after the primary, secondary, tertiary and medical tax credits under sections 6A and 6B.
o ‘Taxable income concerned’ refers to taxable income in respect of the income which is taxed in South Africa and is also taxed, in accordance with the provisions of the tax treaty, in the other country (that is, Australia in this example).
o It is therefore clear that in calculating the pro rata portion of the South African tax which is attributable to the income that is taxed in both countries, both the taxable income concerned and total taxable income must be calculated in accordance with the Act. SARS disagrees with the view that the limitation may be calculated with reference to the taxable income as determined under the tax laws of the other contracting state.
o The calculation of taxable income in accordance with the Act requires an allocation of the appropriate expenses to the income concerned.
o Notwithstanding the formula, the maximum deduction, across all countries applicable to a particular taxpayer, is limited to the total South African tax payable in the particular tax year and any excess foreign tax is forfeited.
Example 37 – Maximum deduction under treaty relief
Facts:
A resident company conducts its trading operations in South Africa, Country A and Country B. The South African operations yielded a tax loss of R100 000, the operations in Country A yielded taxable income of R200 000 and the operations in Country B yielded taxable income of R300 000.
The resident company paid R58 000 tax in Country A and R75 000 tax in Country B.
The tax treaty between South Africa and Country A and the tax treaty between South Africa and Country B are not subject to section 6quat. The resident company elects under section 6quat(2) to use the treaty relief for the elimination of double taxation, rather than the section 6quat method of relief.
Result:
Normal tax payable = South African normal tax – tax treaty credit
= [(R100 000) + R200 000 + R300 000) × 28%] – R112 000 (see working 1) = R112 000 – R112 000
= Rnil
* The wording of the speci c treaty must be considered as it can vary and differences in wording can impact on the interpretation thereof.
† Words in brackets are added for clari cation ‡ See bullet points below for further detail.
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