Page 308 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Assuming the amount which has been subject to double tax is foreign-source, the following points are relevant to interpreting the tax treaty relief provided under article 22(a) of the tax treaty:
• The taxpayer has a choice between the relief provided under section 6quat(1) and the relief provided under the tax
treaty between South Africa and Turkey.
• Assuming the taxpayer selects the tax treaty relief, the ‘subject to the provisions of the law of South Africa’ indicates
that the provisions of section 6quat must be applied when calculating the relief provided by the tax treaty. Support for the principle that a resident country’s domestic tax law must be applied when the treaty relief is subject to the provision of domestic law can be found in the technical explanation document released by the Treasury Department of the United States of America on the tax treaty between the United States of America and South Africa which discusses the meaning of ‘in accordance with the provisions and subject to the limitations of the law of the United States’.*
• The wording ‘in respect of income which may be taxed in Turkey’ does not limit the source of the income to a foreign source (Turkey or a third country). However in the context of section 6quat(1) the income must be foreign- source.
• Turkish tax paid refers to the tax paid in Turkey as calculated under Turkish domestic law and the provisions of the
tax treaty.
• ‘In accordance with the provisions of this 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 tax law refers to the tax payable in South Africa as calculated under the Act and
the provisions of the tax treaty. This requires, amongst other things, the calculation of taxable income under the Act
(that is, South African tax law).
• Having calculated the deduction from South African normal tax under section 6quat, there is an additional tax treaty
limitation to consider. The tax treaty limitation is the same as that discussed in 4.9.5 and 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 things, 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 credit under section 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, Turkey 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.
4.9.7 Application of the tax treaty credit method and section 6quat rebate method in the same year of assessment
A resident that derives foreign-source amounts from both –
• a foreign country with which South Africa has concluded a tax treaty which provides for a credit method of relief that
is effectively subject to section 6quat, and
• a foreign country with which South Africa has concluded a tax treaty which provides for a credit method of relief that
is not subject to section 6quat,
within the same year of assessment and elects to follow the tax treaty credit method of relief in respect of the tax treaty that is not subject to section 6quat, must perform two separate credit limitation calculations for that year.
Example 38 – Determination of section 6quat rebate and a tax treaty credit
within the same year of assessment
Facts:
A resident company conducts its trading operations in South Africa. It also has branches in Country L and Country M. South Africa has a tax treaty with each of these countries. The tax treaty with Country L provides for the credit method of relief and is expressly subject to section 6quat while the tax treaty with Country M provides for the credit method of relief without any express reference to section 6quat. The company elects the tax treaty credit method of relief on income derived from Country M.
For its 2015 year of assessment the following results are relevant:
* Department of Treasury Technical Explanation of the Convention between the United States of America and the Republic of South Africa for the avoidance of double taxation and the prevention of scal evasion with respect to taxes on income and capital gains, article 23, available from www.irs.gov/pub/irs-trty/safrtech.pdf [Accessed 12 February 2015].
† Words in brackets are added for clari cation.
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