Page 313 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Multiple foreign tax liabilities denominated in different currencies must each be translated separately into rand using the applicable average exchange rate.
Fluctuations in the exchange rate may cause a difference between –
• the rand equivalent of the amount of the foreign tax liability determined on the date that the liability is incurred; and
• the rand equivalent of the amount (or amounts) paid, determined on the date (or dates) of payment of the tax liability.
Any such difference has no bearing on the determination of the rand equivalent value of the taxpayer’s foreign tax liability for purposes of section 6quat. Section 6quat(4) only permits the foreign tax liability to be translated at the average exchange rate that applies in the year of assessment in which the foreign–source amount is required to be included in the taxpayer’s taxable income. Section 24I, which is not dealt with in this Note, governs the tax treatment of these differences. The spot rate at the date the foreign tax liability is incurred is an important exchange rate in calculating the foreign exchange gain or loss which arises on translation and on realisation of the foreign tax liability for purposes of section 24I. There will be a difference between this rate and the average rate which section 6quat(4) permits. This difference, gain or loss, is not be taken into account for tax purposes.
Example 44 – Translation of foreign taxes to rand at the average exchange rate
Facts:
A resident earns income of €100 in Country B in year 1 and becomes liable for income tax in Country B in that year of assessment. The tax is only payable in year 2. The average exchange rate for year 1 equalled R14 while the spot exchange rate when the foreign taxes were paid equalled R12.
Result:
The foreign taxes are translated to rand for the purposes of section 6quat by applying the average exchange rate of R14, being the average exchange rate in year 1 in which the resident was obliged to include the income earned in Country B in taxable income (year 1). The difference of R2 between the average exchange rate and the spot rate at the date of payment (R14 – R12) is ignored in determining the amount of the foreign tax liability for purposes of the section 6quat rebate. The resultant movement in the exchange rate between the date the foreign tax liability was incurred, the end of the year of assessment and the date the foreign tax liability is settled must be determined under section 24I and does not impact the section 6quat rebate determination.
6.2 Rounding off to nearest R1 [section 6quat(4A)]
An amount translated in accordance with section 6quat(4) (see 6.1) must be rounded off to the nearest rand if it includes a number of cents that is less than one rand. By convention, amounts of less than 50 cents are rounded down, while amounts of 50 cents or more are rounded up. Thus R100,50 would be rounded up to R101 but R100,49 would be rounded down to R100.
6.3 Application of section 66(13A) to section 6quat
Section 66(13A) deals with the situation in which a person (other than a company) cannot conveniently return income for a year of assessment. In such event, the Commissioner may grant permission for the person to draw accounts to a different agreed date. The agreed date may fall before or after the end of the year of assessment. There is no need to apportion the corresponding foreign tax liability between more than one South African year of assessment when the Commissioner grants permission for business income derived by a person (other than a company) from a foreign source to be returned over a period other than a year of assessment. Refer to Interpretation Note No. 19 (issue 3) dated 9 October 2013 ‘Year of Assessment: Accounts Accepted to a Date other than the Last Day of February’ for guidance regarding the practical application of section 66(13A).
Example 45 – Determination of section 6quat(1) rebate when foreign tax year does not match the year of assessment
Facts:
A resident individual derives business income from the USA during the calendar year ending 31 December 2014. The foreign tax year of an individual in the USA ends on 31 December. Under section 66(13A) SARS grants permission for the individual to return the business income for the calendar year ending 31 December 2014 in the 2015 return of income (that is, in the year of assessment ending 28 February 2015).
Result:
The USA tax liability for the calendar year ending 31 December 2014 must be taken into account in the individual’s 2015 year of assessment in determining the section 6quat(1) rebate. The tax liability must be translated into rand at the average exchange rate for the 2015 year of assessment. In the absence of SARS granting permission under section 66(13A), the resident would have included the business income from the USA for the period 1 March 2014 – 30 December 2014 and 1 January – 28 February 2015 in the 2015 tax year. In considering the foreign tax rebate under section 6quat the appropriate portion of the USA tax liability for the year ended 31 December 2014 and 31 December 2015 would be taken into account assuming it satis ed all the requirements discussed earlier in this Note.
6.4 Calculation of provisional tax payments with reference to foreign tax liabilities
In determining the amount of provisional tax payable for South African income tax purposes, a provisional taxpayer may take into account any tax proved to be payable to the government of any other country on foreign-source income provided it will qualify as a rebate under section 6quat(1).* In practice SARS may allow provisional taxpayers to take foreign provisional tax payments (or similar advance payments) legally due and payable into account when determining
* Paragraphs 21(1)(a)(ii), 21(1)(b)(ii) and 23 of the Fourth Schedule.
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