Page 553 - SAIT Compendium 2016 Volume2

IN 63 (2) Income Tax acT: InTeRPReTaTIon noTes IN 63 (2)
o the spot rate at the date of recognition if the foreign PE is owned by a company or trading trust, or by an individual or non-trading trust that does not elect to use an average exchange rate; or
o an average exchange rate if the foreign PE is owned by an individual or non-trading trust that elects to use the average exchange rate.
The CMA currencies currently trade at par with each other.
A foreign PE that uses a CMA currency as its functional currency must still determine its taxable income separately
from its resident ‘owner’, just as in the case of any other foreign PE. This determination is necessary in order to ring- fence any foreign trade losses and to facilitate the calculation of any foreign tax rebates. A resident having multiple foreign PEs must aggregate the rand taxable income gures for the foreign PEs, whatever their functional currency, in order to determine whether ring- fencing is applicable.
7.2.5 Foreign permanent establishment having a hyperin ationary currency
Under section 25D(2A) the general rule requiring foreign currency amounts to be translated to a foreign PE’s functional currency (see 7.3.2) before being translated to rand at the average exchange rate does not apply to the extent that –
• the functional currency of the foreign PE is a hyperin ationary currency; and
• the foreign PE recognises amounts in any other foreign currency.
A hyperin ationary currency is one with an of cial rate of in ation of 100% or more. At the time of issuing this Note no hyperin ationary currencies exist. The Zimbabwe dollar is a historical example of a hyperin ationary currency. The use of the Zimbabwe dollar as an of cial currency was effectively abandoned on 12 April 2009 as a result of the Reserve Bank of Zimbabwe legalising the use of the rand and the US dollar as standard currencies for exchange.
The purpose of section 25D(2A) is to ensure that amounts expressed in a currency other than the functional currency of the foreign PE, which is a hyperin ationary currency, are not translated to the functional currency of the foreign PE. These amounts are translated directly to rand at the applicable spot rates under section 25D(1). Amounts originally expressed in rand retain their original rand values for purposes of section 25D(2). Amounts in functional currency are still translated to rand at the average exchange rate for the relevant year of assessment.
7.2.6 Final taxable income of a foreign permanent establishment – translated elements of taxable income
Once the relevant amounts have been translated to rand the taxable income of the resident’s foreign PE can be determined. It may consist of three separate elements, namely –
• the taxable income of the foreign PE translated to rand from its functional currency [section 25D(2)];
• the taxable income of the foreign PE comprising amounts initially denominated in rand; and
• if the functional currency is a hyperin ationary currency, the taxable income of the foreign PE comprising amounts
expressed in foreign currencies other than the functional currency which have been translated to rand.
Example 10 – Translation of the portion of the taxable income of a foreign PE with a hyperin ationary functional currency
Facts:
A resident company has a branch in Country Z through which it operates a number of hotels in Country Z. For purposes of section 25D(2) the branch’s functional currency is the Country Z dollar. Country Z has an of cial rate of in ation of 300%.
A large portion of the receipts and accruals attributable to the branch are denominated in USD. The branch also earns interest income in rand.
All amounts are taxable or deductible.
Result:
The Country Z dollar is a hyperin ationary currency for the purposes of section 25D(2A) because Country Z’s of cial rate of in ation is 100% ormore.
The branch’s taxable income, which will be included in the resident’s taxable income calculation assuming the branch does not make a current year assessed loss, has 3 elements, namely:
• A taxable income calculation in Country Z dollar for amounts expressed in that currency. The end result of the
calculation must be translated to rand at the applicable average exchange rate.
• The interest income denominated in rand.
• Under sections 25D(2A) and 25D(1) the USD amounts translated directly to rand at the applicable spot rates.
7.2.7 Applicable year of assessment
A foreign PE is not a separate entity and does not have its own independent year of assessment. The average exchange rate for purposes of translating the taxable income of the foreign PE to rand must therefore be determined by reference to the resident’s year of assessment even if the foreign PE commenced or terminated operations within that year (see 4.2.4).
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