Page 312 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
taxes as contemplated in that subsection.* Thus the deduction under section 6quat(1C) may not create or increase an assessed loss attributable to that income. For example, South African-source service income is subject to foreign tax in Country X of R150. Taxable income from that service income is R100. The taxpayer has a current year assessed loss from other sources of income of R500. Section 6quat(1D) limits the section 6quat(1C) deduction to R100 such that the taxable income from the South African-source service income is equal to Rnil (R100 – limited section 6quat(1C) deduction of R100 as an assessed loss may not be created or increased for that particular income stream due to the section 6quat(1C) deduction). The taxpayer’s assessed loss of R500 from other sources may be carried forward and is not impacted by the application of section 6quat(1D). The application of section 6quat(1D) in relation to a natural person is also demonstrated in Example 5 of Annexure B.
• In determining the amount of the taxable income attributable to that income, any allowable deductions contemplated in sections 11(n) and 18A must be deemed to have been incurred proportionately in the ratio that the income bears to total income [section 6quat(1D)].
• Any excess foreign taxes under section 6quat(1C) is forfeited and will not qualify for a deduction in that year under any other section [section 23B(3)]. In addition, any excess foreign taxes may not be carried forward to the following year of assessment.
Example 42 – Deduction sought for foreign taxes under section 6quat(1C) when a right of recovery exists under a tax treaty
Facts:
A resident provides managerial and technical support services to a client situated in Nigeria. All the work is performed in South Africa. The resident does not have a permanent establishment in Nigeria. Despite the work being done in South Africa, Nigeria levies a withholding tax on fees paid for managerial and technical support services. Acting under its domestic law Nigeria withheld the tax from the amount remitted to the resident.
Result:
The tax treaty between South Africa and Nigeria does not speci cally deal with income derived from rendering managerial and technical support services. As a result article 7, which deals with business pro ts, must be applied. The article provides that the pro ts of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. Under South Africa’s source rules (see 4.2.1 for more detail) the real source of income derived from the rendering of managerial and technical support services is located in the country where the work is done. In this case the work is done in South Africa and the income is therefore from a South African source.
Despite the fact that Nigeria’s tax laws may support its right to tax the income, article 7 in effect confers an exclusive taxing right on South Africa. The resident therefore has a right of recovery which must be exercised by approaching the Nigerian tax authorities. No deduction under section 6quat(1C) will therefore be allowed. The foreign taxes will however qualify for the section 6quin rebate as it applies notwithstanding that there is a right of recovery.
6. Section 6quat(1) and section 6quat(1C) – general matters 6.1 The translation of foreign taxes to rand [section 6quat(4)]
A resident’s liability for normal tax is determined in rand. For purposes of this determination any foreign-source amount and underlying foreign tax (which quali es either for the rebate or the deduction) in respect thereof must be translated to rand.
Any foreign taxes proved to be payable for purposes of the section 6quat(1) rebate or the section 6quat(1C) deduction must be translated to rand on the last day of the year of assessment in which the foreign-source amount is required to be included in the taxpayer’s taxable income by applying the average exchange rate for that year of assessment.† The average exchange rate that must be used in translating the foreign tax liability is the average exchange rate for the year of assessment in which the foreign-source amount is included in the taxpayer’s taxable income.
The average exchange rate is de ned in section 1(1) in relation to a year of assessment to mean the average determined by using the closing spot rates at the end of daily or monthly intervals during that year of assessment. The chosen interval (daily or monthly) must be consistently applied per currency within a year of assessment. The spot rate is de ned in section 1(1) as the appropriate quoted exchange rate at a speci c time by any authorised dealer in foreign exchange for the delivery of currency.
Average exchange rates for a range of foreign currencies are also available on the SARS website www.sars.gov.za. These may be used to translate foreign taxes to rand. Average exchange rates may also be –
• obtained from an authorised dealer in foreign exchange;
• compiled using spot rates obtained from an authorised dealer; or
• compiled using spot rates from www.oanda.com.
* Section 6quat(1D). † Section 6quat(4).
Example 43 – Translation of foreign taxes to rand
Facts:
During year 1 a resident derives interest income from Country A on a monthly basis which is denominated in euros. The interest income is subject to a withholding tax in Country A.
Result:
The foreign taxes expressed in euro must be translated to rand by applying the average exchange rate between the rand and the euro for year 1.
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