Page 310 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
4.9.9 Payment of foreign tax under the tax treaty credit method
Under the tax treaty credit method, foreign taxes must be paid before the relief can be granted. In contrast, section 6quat merely provides that the foreign taxes must be proved to be payable. In circumstances where the foreign tax is payable but has not yet been paid, SARS will not limit the application of the credit relief provided for in the tax treaty to the foreign taxes actually paid but will include the amount which is proved to be payable.
4.10 Recalculation of the section 6quat(1) rebate under section 6quat(5)
The entitlement to a foreign tax rebate under section 6quat(1) arises in the year of assessment in which a foreign-source amount (in respect of which foreign taxes are payable) is included in the resident’s South African taxable income. This is apparent from the wording of section 6quat(1) which provides that where the taxable income of a resident includes the types of foreign-source income speci ed in that section, that the rebate calculated under section 6quat(1) must be deducted from the normal tax payable in respect of that taxable income. The foreign taxes may, however, be incurred in an earlier year of assessment, the same year of assessment or in a subsequent year of assessment to that in which the foreign-source amount is included in the resident’s taxable income. The entitlement to the rebate does not arise in the year of assessment in which the foreign taxes are payable but arises, as noted above, when the foreign-source income is included in taxable income.
Foreign taxes that become payable in an earlier or the same year of assessment can and must be taken into account in the calculation of the rebate under section 6quat(1). However, a question arises as to what happens when the foreign tax liability only becomes payable, or is increased or reduced, in a later year of assessment and the foreign tax rebate has already been calculated and claimed in an earlier year of assessment based on an amount of foreign tax which subsequently proves to be inaccurate.
The answer lies in section 6quat(5) which provides that notwithstanding sections 99(1)* or 100 of the TA Act, an additional or reduced assessment may be made within six years from the date of the original assessment under which the taxpayer was entitled to the rebate in order to give effect to an increased or reduced foreign tax credit in respect of that year.
Section 6quat(5) can also be applied to correct an overstatement or understatement error in the calculation of the amount of the rebate even if all the facts were known at the time of issue of the original assessment.
The onus rests with the taxpayer to immediately notify SARS in writing when that taxpayer claimed a rebate or deduction (or could have claimed a rebate or deduction) for purposes of section 6quat in a previous year of assessment and it is subsequently established that the actual amount of foreign tax payable exceeds or is less than that previously taken into account. The taxpayer must also provide SARS with suf cient information to be able to correct the relevant assessment assuming the timing requirements under section 6quat(5) are met.
The six-year limit does not apply if SARS is satis ed that the amount of tax proved to be payable was incorrectly re ected due to fraud, misrepresentation or non- disclosure or material facts.†
Example 39 – Foreign taxes paid in a year subsequent to the years in which the related income accrued
Facts:
A resident derives remuneration for management services from a foreign source under a three-year management contract. For South African tax purposes the income accrues as and when the services are rendered over the period of the contract even though payment only takes place at the end of the contract (that is, at the end of year 3). A nal withholding tax is levied by the source country as and when payment is made (that is, in year 3).
Thus the contract income is included in the resident’s taxable income in each of the three years on an accrual basis while the related foreign tax liability only arises in year 3.
Result:
The foreign tax paid in year 3 must be allocated across the three years in which the management fees were earned. Revised assessments must accordingly be issued for years 1 and 2.
Example 40 – Refund of foreign taxes in a subsequent year of assessment
Facts:
In year 1 a resident company realises a capital gain on disposal of rental property in Country R. The capital gain is taxed in Country R in year 1 and payment is made to the tax authorities of Country R at the end of year 1. For South African tax purposes the amount is taxed in year 1. The date of issue of the original assessment for year 1 is 1 February of year 2. During year 6 the resident company discovered that it had incurred some additional expenses in connection with the disposal of the rental property that it had neglected to claim when submitting its tax return in Country R in year 1. The resident company submitted a request for a reduced assessment in Country R. Country R’s tax authorities approved the request in year 6 and as a result the tax paid for year 1 was reduced in year 6. This resulted in a refund on 31 December of year 7.
* Refers to a three-year prescription period.
† The exceptions to the prescription periods under section 99(2) of the TA Act also apply to the period prescribed under section 6quat(5).
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