Page 329 - SAIT Compendium 2016 Volume2

IN 18 (3) Income Tax acT: InTeRPReTaTIon noTes IN 18 (3) Annexure A – Comprehensive three-step limitation example including foreign branch operations, foreign dividend
income and income attributed to a CFC
Three-step limitation example including foreign branch operations, foreign dividend income and income attributed to a CFC
Facts:
A resident company derives the following income during year 1:
Income from –
South African operations (see note 1)
Foreign branch (see note 2) Foreign dividend (see note 3)
The resident company has shares in the following foreign companies: Company A (see note 4) Company B (see note 5) Company C (see note 6)
Note:
R 350 000
120 000 70 000
1) The resident company incurred expenses of R150 000 which qualify for a tax deduction against income derived from its South African operations.
2) The branch was entitled to deductions totalling R40 000 in both the foreign country and South Africa. The branch is obliged to pay foreign taxes of R20 000.
3) The dividend is declared by a foreign company which is not a CFC in relation to the resident. The resident’s participation stake in the foreign company is less than 10%.
Withholding tax of R3 500 is deducted from the dividend by the tax authorities in the country of residence of the foreign company.
4) The resident holds 60% of the participation and voting rights in Company A which means Company A is a CFC (CFC A). CFC A does not have a foreign business establishment. The net income of CFC A for year 1 consists of interest income of R100 000. In its country of residence the CFC’s equivalent taxable income amounted to R120 000 which resulted in a tax liability of R12 000 in that country.
5) The resident only holds 15% of the participation and voting rights in Company B, however other South Africans residents hold 60% of Company B which makes it a CFC (CFC B). CFC B has a foreign business establishment and derives interest income.
The net income of CFC B [which constitutes interest income in excess of the de minimus exclusion in section 9D(9A)(a)(iii)(cc)] for year 1 equals R100 000. In its country of residence the CFC’s taxable income amounted to R125 000 which resulted in a tax liability of R12 500 in that country.
6) The resident holds 75% of the participation and voting rights in CFC C which has a foreign business establishment. The net income of CFC C for year 1 is R100 000, made up as follows:
• R20 000 – interest income (not attributable to CFC C’s foreign business establishment)
• R80 000 – ‘diversionary’ service income as contemplated in section 9D(9A)(a)(ii) attributable to CFC C’s
foreign business establishment which are not excluded from imputation under section 9D(2) in terms of
either section 9D(9A)(a) or section 9D(9)(b).
• In its country of residence the CFC’s taxable income also amounts to R100 000 which resulted in a tax
liability of R8 000 in that country.
Result:
Taxable income:
South African sourced taxable income (R350 000 – R150 000) Pro ts of a foreign branch (R120 000 – R40 000)
Foreign dividend [see note a)]
CFC A – attributed to income [see note b)]
CFC B – attributed to income [see note c)] CFC C – attributed to income [see note d)] Taxable income
Normal tax (R467 500 × 28%)
Less: Section 6quat(1) rebate [see note e)] South African tax payable
R 200 000 80 000 37 500 60 000 15 000 75 000 467 500
130 900 (37 000) 93 900
saIT comPendIum oF Tax LegIsLaTIon VoLume 2
321