Page 307 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Working 1:
The maximum foreign credit = maximum Country A foreign tax credit (working 2) + maximum Country B foreign tax credit (working 3)
= R56 000 + R75 000
= R131 000.
The maximum foreign tax credit in respect of all countries is, however, limited to the total normal tax payable in the particular year of assessment. Therefore, the maximum foreign tax credit under the applicable treaties is R112 000. The excess of R19 000 (maximum deduction of R131 000 – South African normal tax of R112 000) is effectively forfeited as it is not refundable and may not be carried forward to the next tax year.
Working 2: Calculation of the maximum foreign tax credit in respect of Country A tax paid under the tax treaty on a country-by-country basis
Country A tax paid = R58 000
Maximum treaty credit
(Taxable) Income concerned = Total South African tax payable × _______________________
= R112 000 × R200 000 / R400 000 = R56 000
Therefore, maximum credit for Country A tax is R56 000.
Working 3: Calculation of the maximum foreign tax credit in respect of Country B tax paid under the tax treaty on a country-by-country basis
Country B tax paid = R75 000 Maximum treaty credit
(Taxable) Income concerned = Total South African tax payable × _______________________
= R112 000 × R300 000 / R400 000 = R84 000
Therefore, the full amount of Country B tax of R75 000 quali es as a credit.
4.9.6 The tax treaty credit method – articles that are ‘subject to’ section 6quat
In providing for the credit method of relief, some tax treaties stipulate that the credit must be determined – ‘subject to the provisions of the law of South Africa regarding the deduction from tax payable
in South Africa of tax payable in any country other than South Africa’. (Emphasis added.)
The words ‘subject to’ make it clear that the credit must be determined under the provisions of the Act dealing with the deduction of foreign taxes from tax payable, which in effect means section 6quat. In the context of foreign-source income, the whole of section 6quat applies and not merely certain elements of it. For example, a taxpayer may not just apply the subsection dealing with carry forward of excess foreign taxes. Depending on the wording of the particular tax treaty, the tax treaty could place additional limitations on the relief granted, that is, additional limitations over and above the requirements of section 6quat. For example, a number of the tax treaties which include the ‘subject to’ wording also include the same wording as discussed above in relation to tax treaties without the ‘subject to’ wording. This means
that the article also contains the following additional limitation:
‘Such deduction (the deduction calculated in terms of section 6quat) 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.)
In these cases it would not generally make sense for a taxpayer to elect that the tax treaty method of relief apply as it would require them to calculate the relief available under section 6quat and then potentially further limit that relief under a per country limitation calculation as required under the tax treaty. Accordingly, it is likely that taxpayers would practically elect the relief provided under section 6quat in order to avoid being exposed to an additional limitation in the tax treaty. An article of this nature therefore effectively means that section 6quat(1) is often practically the only method available for determining a foreign tax rebate in respect of foreign-source income under a tax treaty which contains a ‘subject to’ provision. An example of a tax treaty that is ‘subject to’ section 6quat is article 22 of the tax treaty between South Africa and Turkey* which deals with the elimination of double taxation and provides that double taxation shall be eliminated as follows:
‘in South Africa, subject to the provisions of the law of South Africa regarding the deduction from tax payable in South Africa of tax payable in any country other than South Africa (which shall not affect the general principle hereof), Turkish tax paid by residents of South Africa in respect of income which, in accordance with the provisions of this Agreement, may be taxed in Turkey shall be deducted from the taxes due according to South African tax law. Such 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 wording of the speci c treaty must be considered as it can vary and differences in wording can impact on the interpretation thereof.
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Total (taxable) income
Total (taxable) income