Page 322 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Working 1: Section 6quat(1) rebate
Qualifying foreign taxes = R1 500 Limitation amount 1 120
Calculation of the limitation of the rebate:
Taxable income derived from all foreign sources _______________________________________ × Normal tax payable
Taxable income derived from all sources
= R4 000 / R40 000 × R11 200 = R1 120
Therefore, the section 6quat(1) rebate is limited to R1 120. The balance of the excess foreign taxes of R380 (R1 500 – R1 120) may be carried forward under paragraph (ii)(aa) of section 6quat(1B)(a) to the next year to potentially qualify for a rebate in that year.
Working 2: Section 6quin rebate
Rebate is equal to the lesser of:
• Qualifying foreign taxes = R13 500, and
Taxable income derived per service contract per country
• ______________________________________________ × Normal tax payable
Taxable income derived from all sources
= R36 000 / R40 000 × R11 200 = R10 080
The section 6quin rebate equals R10 080. The excess foreign tax of R3 420 (R13 500 – R10 080) is forfeited.
7.5.2 Interaction between sections 6quat(1C) and 6quin
An amount of foreign tax could potentially meet the requirements for a deduction from income under section 6quat(1C) and the requirements for a rebate under section 6quin(1). For example, foreign withholding tax paid on true South African- sourced service income which, in circumstances where an applicable tax treaty does not deem the income to be foreign-source, meets the detailed requirements* of section 6quat(1C) and section 6quin(1).
In these circumstances a resident may elect under section 6quat(1C) to claim a deduction from income when calculating South African taxable income. Assuming the election is validly made under section 6quat(1C), section 6quin(3)(ii) provides that no rebate under section 6quin is permitted.
The submission of the return discussed in 7.6 does not mean that the taxpayer has made a decision to apply section 6quin as opposed to section 6quat(1C). A taxpayer who has submitted a return as required in section 6quin(3A) is not restricted from electing that section 6quat(1C) as opposed to section 6quin applies.
A deduction under section 6quat(1C) may provide the best result for a resident in an overall assessed loss position. The reason being that the rebate under section 6quin would be equal to nil and section 6quin does not allow the carry forward of excess foreign taxes whereas a deduction under section 6quat(1C) could increase the taxpayer’s assessed loss carried forward.†
The choice of whether or not to apply section 6quat(1C) is exercised annually. A resident who has more than one service contract that is subject to foreign taxes and which quali es for a deduction under section 6quat(1C) and the rebate under section 6quin(1), may elect on a contract-by-contract basis to claim a deduction under section 6quat(1C) or a rebate under section 6quin.
7.6 Reporting requirements under section 6quin [section 6quin(3A)]
With effect from 1 July 2013‡ a resident who wishes to claim a foreign tax rebate under section 6quin on foreign taxes levied by a foreign government with which South Africa has a tax treaty and which have been withheld from payments made to the resident, must submit a return to SARS. The return must be submitted to SARS within 60 days from the date on which the foreign tax is withheld and it must be made on the ‘Declaration of foreign tax withheld – Section 6quin of the Income Tax Act (FTW 01)’ form§ which is available on www.sars.gov.za. Failure to submit the return within the 60-day period will result in the resident not being able to claim a section 6quin rebate as a deduction from normal tax.
SARS can use this information to reduce or eliminate the foreign tax if that tax has not been levied by the treaty partner in accordance with the provisions of the relevant tax treaty. SARS may also engage in a mutual agreement procedure, as provided for in the tax treaty, with the tax treaty partner in an attempt to resolve the issue. In order for SARS to commence the mutual agreement procedure, the resident must have approached the foreign tax authority regarding the tax not being levied in accordance with the provisions of the tax treaty. Accordingly, if the resident has not already done so, SARS will require the resident to approach the foreign tax authority to establish whether there is in fact a dispute which needs resolution or whether there is merely an error which the foreign tax authority acknowledges and is willing to correct. The potential mutual agreement procedure will not impact on the timing of the foreign rebate under section
* Consideration of the detailed requirements of each section is critical, for example, a foreign tax which is subject to a right of recovery (see 4.3.3 and 5) will not qualify for a deduction under section 6quat(1C) but could potentially qualify for a rebate under section 6quin(1).
† The limitation on the amount of the deduction under section 6quat(1D), which applies to the particular item of income, would need to be taken into account.
‡ Date determined by the Minister of Finance in Notice No. 463; Government Gazette No. 36627 (02 July 2013). § Section 25 of the TA Act.
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