Page 325 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3)
Example 60 – Rebate for foreign taxes on dividends
Facts:
Company Y, incorporated in Australia, declared a cash dividend of R1 million on shares listed on the Johannesburg Stock Exchange to its South African resident holders of shares. 50% of the holders are natural persons and 50% are companies, each person holding less than 10% of the shares in Company Y.
The holders, which are companies, complied with the necessary requirements and are exempt from dividends tax under section 64F(1)(a). Company Y pays the dividend of R1 million to Regulated Intermediary A resulting in a potential dividends tax liability of R75 000 (R1 million × 50% × 15%) for the holders who are natural persons without taking into account any rebates for foreign taxes.
Company Y withheld Australian tax of R150 000 (R1 million × 15%) from the dividend paid to Regulated Intermediary A in accordance with the tax treaty between Australia and South Africa.*
Result:
Under section 64N(1) a rebate for foreign taxes on dividends must be deducted by Regulated Intermediary A from dividends tax of R75 000 which would otherwise be withheld from the dividends paid to the individual holders of shares under section 64H(1). The amount of the rebate is R75 000 (see 8.2 and 8.3), therefore no dividends tax (R75 000 dividends tax – R75 000 rebate) is to be withheld by Regulated Intermediary A from the dividends paid to the individual holders of shares. In relation to the dividends paid to holders of shares who are companies, no rebate is available as there is no dividends tax against which the rebate could be deducted and the amount of the rebate is accordingly nil.†
Regulated Intermediary A pays R850 000 (R1 million – R150 000 Australian tax) to the South African holders of shares.
Note:
The foreign dividends received by the resident holders of shares are included in their gross income under paragraph (k) of ‘gross income’ in section 1(1), but are exempt from normal tax under section 10B(2)(d). The holders of shares will accordingly not qualify for a rebate under section 6quat(1).
8.2 Amount of rebate for foreign taxes on dividends [section 64N(2)]
The amount of the rebate is equal to the amount of any tax paid to any sphere of government of any country other than the Republic, without any right of recovery by any person, on a foreign dividend paid by a foreign company on a listed share. A rebate will only be allowed to the extent that the amount of the foreign tax is proved to be payable to a sphere of
government of a foreign country without a right of recovery.
To the extent that a bene cial owner receives a refund of foreign taxes or is the recipient of a bene t resulting in the
removal or reduction of double taxation, the double taxation will either diminish or be eliminated and there would be no reason to provide relief in these circumstances.
The bene cial owner or any other person must not be able to recover the foreign taxes proved to be payable. The existence of a right of recovery, held either by the bene cial owner or any other person, means that the amount of the foreign tax liability will not be allowed as a rebate. For example, exercising a right to contest a foreign tax liability gives rise to a contingent right to recover the overpaid tax if successful. A rebate will not be permitted while the tax is in dispute and not yet nally determined.
A further example includes a foreign jurisdiction imposing a higher domestic rate of tax on a foreign dividend than that permitted under the provisions of the relevant tax treaty. A rebate for foreign taxes actually paid will be allowed but only to the extent speci ed in the relevant tax treaty.
The words ‘right of recovery by any person’ are interpreted very broadly and include any form of relief against a foreign tax liability. See 4.3.3 for the interpretation of the term ‘right of recovery’ in the context of the section 6quat(1) rebate. For example, a refund, credit, rebate, remission or deduction, is considered to be a right of recovery. Any other form of economic bene t to which a person becomes entitled is also considered to be a ‘right of recovery by any person’.
* Article 10(2)(b) of the tax treaty between South Africa and Australia † Sections 64F and 64N(3).
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