Page 551 - SAIT Compendium 2016 Volume2

IN 63 (2) Income Tax acT: InTeRPReTaTIon noTes IN 63 (2)
Example 7 – Election under section 25D(3)
Facts:
A resident who is a natural person earns the following amounts from abroad during the 2015 year of assessment:
Result:
For the 2015 year of assessment the resident may choose to apply either the spot rate method of translation or the average exchange rate method of translation in translating the income amounts to rand.
The resident must be consistent in applying the method of translation and may not, for example, elect to translate some amounts such as the interest income earned in USD to rand by using the spot rate while translating other amounts by using the average exchange rate.
The resident is not obliged to use the method chosen for the 2015 year of assessment in future years.
7. Foreign permanent establishments, controlled foreign companies, headquarter companies, domestic treasury management companies and international shipping companies
7.1 General introduction
Subject to certain exceptions and special rules, a foreign PE, CFC, HQC, DTMC or ISC must translate foreign currency amounts from its functional currency to rand using an average exchange rate. The exceptions and special rules, which differ for foreign PEs, CFCs, HQCs, DTMCs and ISCs, generally apply to amounts recognised in rand, CMA currencies or other foreign currencies.
7.2 Functional currency
The term ‘functional currency’ is de ned in section 1(1) as the currency of the primary economic environment in which the business operations of a person or a PE, as the case may be, are conducted. This de nition corresponds closely with the de nition of that term in IAS 21. As a result IAS 21 can provide useful guidance in interpreting and applying the de nition for income tax purposes. IAS 21 describes the primary economic environment in which an entity operates as normally being the one in which it primarily generates and expends cash. The functional currency will usually be the currency in which –
• sales prices of goods and services are denominated and settled; or • costs of providing goods or services are denominated or settled.*
Additional factors which may be considered include –
• the currency of nancing activities (debt and equity instruments); and • the currency in which receipts from operating activities are retained.†
As a practical matter, SARS will generally accept the functional currency used by a person for nancial accounting purposes provided the choice of that functional currency is consistently applied and made in accordance with IAS 21. SARS may reject the functional currency chosen by a person if that choice is inconsistent with the proper application of the factors mentioned above.
Presentation currency is the currency in which nancial statements are presented and may differ from the functional currency of the reporting unit.‡ The presentation currency of a person or PE is generally not relevant for purposes of the Act.
7.3 Foreign permanent establishments – general rule [section 25D(2)]
Under section 25D(2) any foreign currency amounts recognised which are attributable to a foreign PE must be –
• determined in the functional currency of that foreign PE (unless its functional currency is a CMA currency); and • translated to rand by applying an average exchange rate for the relevant year of assessment.
Amounts denominated in rand do not require translation and must not be determined in the foreign PE’s functional currency before being translated back to rand at an average exchange rate. In practical terms it is thus rst necessary to determine what may be described as the foreign PE’s taxable income in its functional currency,§ excluding rand amounts, before translating it to rand at the average exchange rate.
A PE is not a separate person for purposes of the Act and does not have its own year of assessment. Thus, the average exchange rate for a foreign PE must be determined by reference to the resident ‘owner’s’ year of assessment even if that foreign PE is in existence only for a portion of that year.
7.2.1 Multiple foreign permanent establishments
A resident with multiple foreign PEs must translate each foreign PE’s taxable income to rand by using the average exchange rate applicable to the particular foreign PE’s functional currency. The resultant rand amounts are then added together to obtain a single rand amount which constitutes taxable income derived from foreign trading operations. If
* IAS 21 in paragraph 9.
† IAS 21 in paragraph 10. See IAS 21 paragraph 11 for additional factors.
‡ IAS 21 in paragraph 8 under the heading: De nitions.
§ This rule does not apply if the functional currency is a currency of a countryin the CMA.
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