Page 324 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
7.8 Foreign taxes refunded or foreign tax liabilities discharged deemed to be normal tax payable in year of refund or discharge [section 6quin(5)]
It may happen that –
• foreign taxes which were withheld by a foreign government, with which South Africa has a tax treaty, from payments
to a South African resident for South Africa-sourced services, are refunded (for example, after a mutual agreement
procedure); or
• foreign taxes which were payable by a South African resident on services rendered in South Africa under the laws of
a foreign government with which South Africa does not have a tax treaty, are discharged (reduced).
In these circumstances, section 6quin(5) deems so much of the refund or discharge that does not exceed the rebate claimed to be normal tax payable in the year of assessment in which the refund or discharge takes place.
The taxpayer’s tax position before considering the application of section 6quin(5), that is whether the taxpayer is in a tax paying or an assessed loss position, is not relevant. The amount deemed to be normal tax is payable even if the taxpayer is in an assessed loss position.
For example, if a resident company which has an assessed loss in year 2 receives a refund during that year for foreign taxes which were withheld and resulted in a section 6quin rebate in year 1; the receipt of the refund will result in a liability for normal tax in year 2 notwithstanding that the resident company has an assessed loss.
As the amount of the refund or the discharge will be denominated in a foreign currency, the amount must be translated to rand for South African tax purposes. Section 6quin(5) does not prescribe a translation rule in this regard.
As section 6quin(5) does not provide a translation rule, the general rule found in section 25D(1) for the translation of amounts denominated in a foreign currency to rand, namely, the spot rate will apply.* An individual or non-trading trust may elect under section 25D(3) to use the average exchange rate method of translation rather than the spot rate method of translation.
7.9 Calculation of provisional tax payments with reference to the section 6quin rebate
A provisional taxpayer may take a foreign tax that will qualify for a rebate under section 6quin at the end of the year of assessment into account when determining any provisional tax payable for South African income tax purposes.
8. Rebate in respect of foreign taxes on dividends [section 64N]
8.1 Rebate for foreign taxes on dividends paid by a foreign company [section 64N(1)]
A foreign dividend paid by a foreign company listed on the Johannesburg Stock Exchange to a resident† is subject to dividends tax to the extent the dividend does not consist of a distribution of an asset in specie and is not exempt from the tax under section 64F. This foreign dividend may also have been subject to tax in a foreign jurisdiction without any right of recovery by any person.
Section 64N(1) provides for a rebate which must be deducted from the dividends tax payable on the speci c dividends as set out in the preceding paragraph if the foreign dividend was subject to foreign tax. Section 64N is not applicable to a bene cial owner that is not liable for dividends tax as a result of the exemptions provided for under section 64F, because qualifying for an exemption means no dividends tax is payable and section 64N(3) provides that the amount of the rebate may not exceed the amount of dividends tax imposed on the relevant dividends. Thus, if foreign tax was payable in relation to foreign dividends paid by a foreign company listed on the Johannesburg Stock Exchange to a resident company, the amount of the rebate would be nil as the resident company is exempt from dividends tax under section 64F and as no dividends tax has been imposed the rebate is equal to nil (see 8.3).
An amount of foreign tax (for example, foreign dividend withholding tax) will not qualify for both a rebate from normal tax under section 6quat and a rebate against dividends tax under section 64N because amounts falling within the ambit of section 64N are exempt under section 10B(2)(d) and therefore the amount will not be included in the resident’s taxable income. The inclusion in the resident’s taxable income is a requirement in section 6quat.
* See section 25D(4) for the translation rule applicable to Head Quarter Companies
† Foreign dividends paid by a foreign company listed on the Johannesburg Stock Exchange to non- residents are exempt from dividends tax under section 64F(1)(j).
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Example 59 – Refund of foreign taxes incorrectly withheld, treated as normal tax payable in year of refund
Facts:
Country X with which South Africa has a tax treaty incorrectly withholds foreign tax at the domestic tax rate of Country X (15%) on services rendered by a resident to a person resident in Country X. The services are rendered in South Africa.
South Africa follows a mutual agreement procedure resulting in the refund of the 15% foreign withholding tax.
Result:
Under section 6quin(5) the foreign withholding tax of 15% refunded to the resident on successful completion of the mutual agreement procedure is regarded as normal tax payable by the resident.