Page 311 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Result:
The reduction in foreign taxes means that the section 6quat(1) rebate originally allowed in year 1 must be reduced. This will result in a corresponding increase in the South African normal tax payable and the Commissioner will have to issue an additional assessment to rectify the matter. The Commissioner must raise the additional assessment within six years from the date of the assessment in which the rebate was originally allowed. The six-year period ends six years from 1 February of year 2, that is, on 31 January of year 8. The resident taxpayer is obliged to inform SARS immediately that its foreign tax liability has been reduced. SARS must revise the relevant assessment on or before 31 January of year 8. Failure by the taxpayer to disclose that the amount of the foreign tax liability was reduced will be regarded as the non-disclosure of a material fact. Consequently, SARS will not be bound by the six-year period limitation in section 6quat(5) and may revise the relevant assessment at any time.
Example 41 – Taxes payable in foreign jurisdiction determined in a year subsequent to the year in which the related foreign-source amount is taxed in South Africa
Facts:
A resident company holds 100% of the participation and voting rights in a CFC. A portion of the income of the CFC did not qualify for any of the exemptions in section 9D(9) and an amount equal to the ‘net income’ of the CFC was accordingly included in the resident company’s income. The CFC was also subject to tax on the income included in the resident company’s taxable income in the foreign jurisdiction where it carries on its operations. Consequently, the resident company is entitled to claim a rebate under section 6quat(1). However, because of the timing of the submission of tax the returns and payment of the taxes in the country of residence of the CFC, it was not possible to determine the amount of the foreign taxes due when the resident company submits its tax return in South Africa.
Result:
The resident company’s assessment which included the CFC’s net income may be reopened within six years under section 6quat(5) to allow a tax rebate when the foreign taxes become payable.
5. The deduction of foreign taxes on income under section 6quat(1C)
Section 6quat(1C) provides for the deduction of foreign taxes from the income of a resident taxpayer (as opposed to the claiming of a tax rebate). Its application is limited to foreign taxes other than taxes contemplated in section 6quat(1A). Section 6quat(1A) refers back to section 6quat(1). Broadly speaking, section 6quat(1) considers income and capital gains from a foreign source and accordingly the deduction under section 6quat(1C) is essentially limited to foreign taxes levied in respect of South African-source income derived from trade operations [the trade requirement is included in section 6quat(1C)].
Under section 6quat(1C):
• The sum of any foreign taxes on income not contemplated in section 6quat(1) and (1A) (see 4.2 and 4.3) may qualify
as a deduction [under section 6quat(1C)] in determining the taxable income derived by any resident taxpayer from
carrying on any trade.
• Taxes must be proved to be payable by that resident to any sphere of government of any country other than South
Africa, without any right of recovery by any person other than a right of recovery in terms of any entitlement to carry back losses arising during any year of assessment to any previous year of assessment.
The following aspects should be noted:
• A resident may not choose between the rebate method of relief under section 6quat(1) and the deduction method of
relief under section 6quat(1C). The deduction method only applies to taxes which are not contemplated in section 6quat(1). Therefore, if the income has a foreign source, the resident can only consider the availability of a rebate under section 6quat(1) – a deduction under section 6quat(1C) is not available.
• Excess foreign taxes which result from the limitation calculation in section 6quat(1B)(a) (see 4.5) do not qualify for a deduction under section 6quat(1C).
• A resident may choose between the rebate method of relief under section 6quin and the deduction method of relief under section 6quat(1C) when foreign taxes are paid on South African-source service income.
• The foreign taxes are only deductible against taxable income derived from the carrying on of any trade. In other words, no deduction is permissible against passive income.
• The deduction under section 6quat(1C) is subject to the provisions of section 23 which deny a deduction in certain circumstances notwithstanding that the expenditure may have met the requirements for deduction under any other section. Sections 23(f) and 23(g), for example, deny a deduction if the expense was incurred in the production of an amount which does not constitute income or to the extent the expense was not laid out for purposes of trade (see preceding bullet point).
• The fact that the foreign taxes must be proved to be payable implies that the foreign tax jurisdiction must have a legal right under its laws to tax a particular item of income.
• A deduction will not be allowed when the resident, or another person, may exercise a right of recovery on the foreign tax liability, under, for example, the foreign domestic law or an applicable tax treaty.
• The foreign taxes are only deductible in the year that it is proved to be payable. It may not be deducted in an earlier or subsequent year of assessment. For example, if the foreign tax is proved to be payable in year 2 then it may only potentially qualify for a deduction in year 2 notwithstanding that the income to which it relates may have been partly included in taxable income in year 1 and partly in year 2.
• The amount of foreign taxes that may be deducted under section 6quat(1C) is limited to the taxable income [before taking into account any deduction contemplated in section 6quat(1C)] attributable to income which is subject to
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