Page 316 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Accordingly, Country A’s withholding tax represents a foreign tax on South African- source service income and therefore potentially quali es for a section 6quin rebate provided the detailed requirements of the section are met. The fact that Country A may have contravened the tax treaty does not breach the requirements of section 6quin. The reason being that section 6quin(1)(a) requires that the foreign tax must have been levied by a foreign government with which South Africa has concluded a tax treaty and withheld when payment was made to the resident. These requirements have been met notwithstanding that it may be in contravention of the tax treaty.
7.2.2 Meaning of the term ‘services’ for purposes of section 6quin See 4.2.2.
7.3 Amount of the section 6quin rebate
Section 6quin(2) provides that the amount of the rebate is equal to the lesser of –
• the amount of foreign tax levied and withheld or imposed, as appropriate, by the foreign government under section
6quin(1) (see 7.2 and 7.3.1(a)); and
• the amount of normal tax which is attributable to the amount contemplated in that section (that is, a South African-
source amount which was received or accrued for services rendered) (see 7.3.1(b)).*
The amount of foreign tax that is greater than the attributable amount of normal tax is forfeited as, unlike section 6quat,† section 6quin does not allow the excess foreign taxes to be carried forward to the next tax year. .The excess will not qualify for a deduction under section 6quat(1C) as the resident has elected to use the section 6quin rebate method of relief as an alternative to the deduction method of relief under section 6quat(1C). In addition the excess is not deductible under section 11(a) read with section 23(g) or any other section of the Act.
7.3.1 Calculation of the section 6quin rebate – per service contract
Section 6quin(1) and (2) refer to amounts of income which have been received or accrued. Strictly speaking a separate section 6quin rebate calculation must therefore be performed for each amount of South African-source service income which is subject to foreign taxes as set out in 7.2. For example, if a contract provides that services will be rendered and invoiced on a monthly basis, then 12 separate calculations would be required in a single tax year.
However, subject to the exception discussed below, practically SARS accepts that the calculation may be performed per service contract per year of assessment. This is acceptable as the result obtained is not affected by adopting this approach and some of the inputs required can only be calculated on an annual basis (that is, normal tax, taxable income attributable to qualifying amounts of income received or accrued and total taxable income).
An exception arises when a single contract covers services rendered in different countries. In these circumstances a separate calculation will need to be performed per service contract per country within a year of assessment. This is required in order to prevent a low taxed country from effectively subsidising a high tax country and increasing the amount of the rebate available under section 6quin.
(a) The amount of foreign tax levied and withheld or imposed, as appropriate, by a foreign government under section 6quin(1)
As discussed in 7.3.1 the amount of foreign tax may be calculated per service contract per country within a year of assessment. In the case of foreign tax levied by a foreign government with which South Africa has a tax treaty, the amount of tax which will be taken into account is the amount of foreign tax which was withheld, even if incorrectly withheld under the tax treaty, from the payment made to the taxpayer.
The amount potentially qualifying for a rebate is the amount of tax levied by the foreign government. It follows that if the foreign government levies a withholding tax of, for example, 10% but the customer paying the resident withholds 30%, only 10% will potentially qualify for the rebate as the additional 20% is not a tax levied by a foreign government. Taxpayers may only claim a tax that is levied by a foreign government as a rebate under section 6quin.
Alternatively, in the case of foreign tax levied by a foreign government with which South Africa does not have a tax treaty, the amount of tax which will be taken into account is the amount of foreign tax which has been imposed under that country’s domestic law. ‘Imposed’ means that the amount must be payable under that country’s law but at the date of claiming the rebate it may not yet have been paid (unless it is only imposed on payment).‡
The fact that the relevant foreign taxes must be payable under law also means that the maximum amount which will be taken into account for purposes of section 6quin is the amount which the foreign government may impose under its law and if, for example, an error resulted in an amount greater than that permitted being imposed, the full amount will not qualify. This is different to the situation discussed in the preceding paragraph where South Africa has a tax treaty with the foreign country. In those circumstances the amount of foreign tax may not have been correctly imposed and withheld under the applicable tax treaty.
(b) The amount of normal tax attributable to the amount of South African- source service income
In determining the amount of normal tax which is attributable to the South African- source service income, SARS adopts a ‘pro rata’ method of calculation. Under a pro rata method the amount of attributable tax is determined by apportioning
the total normal tax payable in the ratio that the relevant amount of taxable service income bears to total taxable income.§
* Although the rebate is technically equal to the lesser of the applicable foreign tax and this amount, in general terms this is often referred to as the limitation in section 6quin.
† Paragraph (ii)(aa) of the proviso to section 6quat(1B)(a) (see 4.8).
‡ ‘Imposed’ is similar to the ‘proved payable’ wording used in section 6quat.
§ A pro rata method is also applied when determining foreign tax rebates calculated under section 6quat and most of
South Africa’s tax treaties.
308 saIT comPendIum oF Tax LegIsLaTIon VoLume 2