Page 319 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 51 – Determination of a section 6quin rebate per individual service
contract
Facts:
A resident company derives taxable income from professional services provided to a South African client (Client A) and a foreign client (Client B) during its 2015 year of assessment. All of the resident company’s business operations are conducted in South Africa, that is, the services are rendered in South Africa. Trading conditions in South Africa were particularly tough during the year resulting in unexpected operational losses. The resident company has no other operations. The foreign country where Client B is resident does not have a tax treaty with South Africa.
The information relevant for each contract is as follows:
Contract 1 with resident Client A
Gross income Deductible expenses
Contract 2 with non-resident Client B
Gross income
Deductible expenses
Foreign taxes imposed in relation to Contract 2
Result:
South African taxable income:
Gross income (R100 000 + R80 000)
Less: Deductible expenses (R150 000 + R50 000) Assessed loss
Normal tax payable
Less: Section 6quin rebate – Contract 2 (working 1) Final tax payable
Working 1 – section 6quin rebate for Contract 2 Lesser of:
• Foreign taxes of R5 000
• Taxable income per service contract
falling under s6quin per country _________________________________ × Normal tax payable
Taxable income derived from all sources
= (R80 000 - R50 000) / R20 000 (loss) × RNil = RNil
R
100 000 150 000
80 000 50 000 5 000
R 180 000
(200 000) (20 000) Nil (Nil) Nil
Therefore, the section 6quin rebate equals RNil. The foreign taxes of R5 000 may not be carried forward to the next year and are forfeited. As an alternative to a rebate under section 6quin the resident can consider a deduction under section 6quat(1C).
7.4 Timing of the section 6quin rebate
Assuming all the requirements of the section are met, the entitlement to a foreign tax rebate under section 6quin arises in the year of assessment in which the South African-source service income (in respect of which foreign taxes are withheld or payable, as appropriate) is included in the resident’s South African taxable income. This is apparent from the wording of section 6quin(1).
The foreign taxes may, however, be incurred in an earlier year of assessment, the same year of assessment or in a subsequent year of assessment to that in which the South African-source service income is included in the resident’s taxable income. For example, the foreign tax may only be withheld or payable when the South African- source service income is paid by the foreign payer, whereas the relevant income may have already been included in the resident’s taxable income in an earlier year of assessment when it accrued to the resident. The entitlement to the rebate in these circumstances does not arise in the year of assessment in which the foreign taxes are withheld or payable (depending on whether or not South Africa has a tax treaty with the foreign country) but arises, as noted above, when the South African- source service income is included in the resident’s taxable income.
Foreign taxes that are withheld or become payable (as appropriate) in an earlier or the same year of assessment must be taken into account in the calculation of the amount of the rebate under section 6quin in the year of assessment in which the related South African-source service income is received by or accrues to the resident. However, a question arises as to what happens when the foreign tax liability is only withheld or becomes payable (as appropriate), or is increased or reduced, in a later year of assessment.
The foreign taxes that are withheld or become payable in a later year of assessment but before the taxpayer has submitted the return and been assessed, must be taken into account in the year of assessment in which the relevant
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 311