Page 323 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
6quin as discussed in 7.4. That is, 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 (on which foreign taxes are withheld or payable, as appropriate) is included in the resident’s South African taxable income and will not be delayed, for example, until the resident approaches the foreign government regarding the foreign tax or until the mutual agreement procedure is commenced or completed.
Although not required to do so under section 6quin(3A), a person who wishes to claim a foreign tax rebate under section 6quin on foreign taxes imposed by a foreign government with which South Africa does not have a tax treaty must also submit the return referred to in the preceding paragraph.*
The return is for rebates claimed under section 6quin only. It does not apply for a rebate under section 6quat(1).
7.7 Translation of foreign taxes to rand [section 6quin(4)]
A resident’s liability for normal tax is determined in rand and any deduction from normal tax under section 6quin must also be determined in rand. Section 6quin(4) provides that any foreign tax which quali es for the section 6quin rebate must be translated to rand on the last day of the year of assessment in which the tax is levied and withheld or imposed at the average exchange rate for that year of assessment.
The average exchange rate in relation to a year of assessment is de ned in section 1(1) to be the average determined by using the closing spot rates at the end of daily or monthly intervals during that year of assessment. The chosen interval (daily or monthly) must be consistently applied per foreign currency within a year of assessment.
Average exchange rates for a range of foreign currencies are available on the SARS website www.sars.gov.za. These may be used to translate foreign taxes under section 6quin to rand. A resident may also use the rates available on www.oanda.com to calculate average exchange rates.
Example 56 – Translation of foreign taxes to rand
Facts:
During year 1 a resident derives income from services rendered within South Africa to a person resident in Country A. The service income, which is denominated in the of cial currency of Country A, is subject to a withholding tax in Country A as and when payment is made. Payment is made in year 2 and the payer withholds the required withholding tax in Country A’s currency.
South Africa does not have a tax treaty with Country A.
Result:
The foreign taxes expressed in Country A’s currency must be translated to rand by applying the average exchange rate for the year of assessment in which the tax was imposed. Under Country A’s tax law, the tax is only imposed when payment takes place and accordingly the average exchange rate for year 2 must be applied in translating the foreign taxes to rand for purposes of determining the section 6quin rebate in year 1.
Example 57 – Translation of foreign taxes to rand
Facts:
During year 1 a resident derives income from services rendered within South Africa to a person resident in Country B. The service income, which is denominated in Country B’s currency, is subject to tax at 40% of net pro t attributable to that service income which must be calculated at the end of the year of assessment. Payment is made partly in year 1 when a provisional withholding tax of 5% is withheld from payments made to the resident and partly in year 2 when the necessary returns are submitted and any top-up (or refund) is required.
South Africa does not have a tax treaty with Country B.
Result:
The foreign taxes expressed in Country B’s currency must be translated to rand by applying the average exchange rate for the year of assessment in which the tax was imposed. Under Country B’s law the tax is imposed on net pro t at the end of the year 1 and not when payment takes place. Accordingly, the average exchange rate for year 1 must be applied.
Example 58 – Translation of foreign taxes to rand at the average exchange rate
Facts:
A natural person resident in South Africa renders services from within South Africa to a person resident in Country C. The service contract lasts six months which period falls within year 1. Payment for the services rendered is made in year 2 and triggers a withholding tax in Country C in year 2.
The average exchange rate for year 1 amounted to R14 while the average exchange rate for year 2 amounted to R12. South Africa has a tax treaty with Country C. The requirements of section 6quin are met.
Result:
The foreign taxes are translated to rand for purposes of section 6quin by applying the average exchange rate of R12 (the year the foreign tax is levied and withheld), while the average exchange rate in year 1 (the year of accrual) of R14 is used to translate the service income to rand as the resident has elected under section 25D(3) to translate the service income to rand by applying the average method of translation rather than the spot method of translation.
* Section 46 of the TA Act.
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