Page 309 - SAIT Compendium 2016 Volume2

IN 18 (3)
Result:
Description
Taxable income
Foreign taxes proved to be payable Normal tax payable at 28%
Result:
Description
(a) Calculation of the section 6quat rebate
[R20 000 / R150 000 × R42 000]
Under the carry-forward rules of section 6quat the balance of R3 400 (R9 000 – R5 600) may be carried forward to the following year of assessment
(b) Calculation of the tax treaty credit
[R30 000 / R150 000 × R42 000]
The balance of R3 600
(R12 000 – R8 400) is forfeited and may not be carried forward as the tax treaty does not provide for the carry-forward of excess foreign taxes
(c) Calculation of nal normal tax payable
Normal tax payable before rebates Less: Section 6quat rebate
Tax treaty credit rebate
Final normal tax payable
Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) South Africa Country Country Total
LM
RRRR
100 000
South Africa
20 000 9 000
Country L
30 000 12 000
Country M
150 000 21 000 42 000
Total
RRRR 5 600
8 400
5 600
8 400
42 000 (5 600) (8 400) 28 000
4.9.8 Meaning of ‘income’ in the article of a tax treaty dealing with the elimination of double taxation
The word ‘income’, as used in the article of a tax treaty dealing with the elimination of double taxation when determining the limitation on the amount of the rebate available under the tax treaty, must be interpreted to mean ‘net income’ or ‘taxable income’. It does not mean ‘income’ as de ned in section 1(1) of the Act.
This is in alignment with the OECD commentary on the maximum credit which provides that –*
‘... the deduction which the State of residence (R) is to allow is restricted to that part of the income tax which is appropriate to the income derived from the State S, or E (so-called ‘maximum deduction’). Such maximum deduction may be computed ... by apportioning the total tax on total income according to the ratio between the income for which the credit is to be given and the total income...’.
South Africa levies income tax on taxable income and not on ‘income’ as de ned in section 1(1) (that is, the end result of gross income less exempt income). Accordingly, a ratio which is based on taxable income of the income concerned (that is, the foreign-source taxable income) to total taxable income achieves the objective of restricting the credit to that part of the tax which is appropriate to the foreign- source taxable income. Given that South Africa does not impose tax on ‘income’ as de ned in section 1(1), basing the apportionment on income or gross income is not appropriate. By way of example, in article 22 of the tax treaty with Turkey which deals with the elimination of double taxation, the italicised ‘income’ must be interpreted to mean taxable income as there is a clear nexus between the taxable income referred to and the tax payable in respect of that taxable income. The relevant part reads asfollows:
‘Double taxation shall be eliminated as follows:
a) 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.)
In the OECD commentary the meaning of the term ‘income’ in article 23B of the OECD Model Convention is explained as follows when stating that the amount of foreign tax that may be deducted shall not exceed that part of the tax which is attributable to the income which may be taxed in the other state:†
‘63. The maximum deduction is normally computed as the tax on net income, i.e. on the income from State E (or S) less allowable deductions (speci ed or proportional) connected with such income.’
* Commentary on article 23B paragraph 62 at page 342.
† Commentary on article 23B in paragraph 63 at page 343.
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