Page 315 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Result:
A’s taxable income will include the taxable income which is attributable to services rendered in South Africa. Notwithstanding that Country D is prohibited under the tax treaty from imposing the withholding tax on the service fees paid by B to A, A will, assuming the other requirements of the section are met, be entitled to claim the rebate under section 6quin.
‘Transactions’ between a South African resident’s and its own foreign permanent establishment
See 4.3.4 (paragraph headed ‘Transactions’ between a South African resident’s head of ce and its own foreign permanent establishment). For example, in the context of section 6quin, if a resident taxpayer’s head of ce renders services in South Africa to its own permanent establishment in a foreign country (for example, a foreign branch) and the foreign government levies a foreign withholding tax on the payments by the foreign branch to the head of ce, the resident will not qualify for a rebate under section 6quin. South Africa does not recognise services between a head of ce and a foreign branch and as such there is no underlying service income which has been included in taxable income. This applies irrespective of whether the withholding tax was levied on the cost portion of the ‘fee’ or the full ‘fee’ including the mark-up and irrespective of whether the withholding tax was permitted under a tax treaty (if one was applicable).
7.2.1 Meaning of the term ‘source’ for purposes of section 6quin(1)
The source of an amount is determined with reference to the provisions of a tax treaty (if applicable), domestic law provisions [sections 9(2) and 9(4)] and common law as formulated by the South African courts, in that order (see 4.2.1). The principles discussed in 4.2.1(a), (b) and (c), and 4.2.2(a), (b) and (c) are also relevant when determining source of service income for purposes of section 6quin.
Example 47 – Source of service income under section 6quin
Facts:
A resident company provides technical consulting services to a company resident in Country A under an agreement negotiated and concluded in South Africa. The services are rendered in South Africa. The company in Country A does not have a presence in South Africa and vice versa for the resident company. Under its domestic law Country A levies a withholding tax of 15% on the consulting fees remitted to South Africa. Under the tax treaty the rate of the tax is reduced to 10%.
Result:
The true source of the fees is where the services are rendered, that is, South Africa.
Example 48 – Source of service income under section 6quin, deeming source rule in tax treaty applies
Facts:
A resident company provides technical consulting services to a company resident in Swaziland under an agreement negotiated and concluded in South Africa. The services are rendered from South Africa. The company in Swaziland does not have a presence in South Africa and vice versa for the resident company. Under the domestic tax law of Swaziland a withholding tax of 15% is imposed on fees derived from independent professional services remitted to South Africa. Under the tax treaty the rate of the tax is reduced to 10%.
Result:
The true source of the fees is where the services are rendered, that is, South Africa. However, article 13(5) of the tax treaty between South Africa and Swaziland overrides the true source and deems the fees to be from a source in Swaziland. Accordingly, the resident company will not qualify for a rebate under section 6quin because the source of the underlying income is deemed to be from a foreign source. This applies to the full amount of the withholding tax withheld irrespective of whether 10% was correctly or 15% was incorrectly withheld under the treaty. The resident company may qualify for a rebate under section 6quat(1) – see Example 8.
Example 49 – Source of service income under section 6quin – potential contravention of a tax treaty
Facts:
A resident company provides technical consulting services to a company resident in Country A under an agreement negotiated and concluded in South Africa. The services are rendered in South Africa. The company resident in Country A does not have a presence in South Africa and vice versa for the resident company. Under its domestic tax laws Country A’s tax authorities withhold tax on payments made to the resident company on the above-mentioned service income. Assume the tax treaty gives South Africa sole taxing rights.
Result:
The true source of the fees is where the services are rendered, that is, South Africa and South Africa has the right under the tax treaty to tax the service income. This is consistent with the tax treaty between South Africa and Country A which provides that pro ts or remuneration for personal (including professional) services performed in one of the territories shall be deemed to be pro ts from sources within that territory. Thus, the source is where the services are rendered, that is South Africa.
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