Page 554 - SAIT Compendium 2016 Volume2

IN 63 (2) Income Tax acT: InTeRPReTaTIon noTes IN 63 (2)
Example 11 – Translation of the net pro ts of a foreign PE trading for part of a year
Facts:
A resident company has been in existence for several years and has a year of assessment that ends on the last day of December. On 1 November 2014 the company opened a PE in Country A and commenced trading activities on the same day. The of cial currency of Country A is the schilling.
Result:
The resident company must calculate the taxable income of the foreign PE for the two-month period ending 31 December 2014 in schilling and translate that amount to rand by applying the average exchange rate for the 12-month period ending 31 December 2014.
7.4 Controlled foreign companies – general rule [section 9D(6)]
Section 9D(2) generally requires that a portion of a CFC’s net income* must be included in the income of any resident, other than an HQC, that directly or indirectly holds any participation rights in the CFC. This deemed income inclusion is commonly referred to as ‘attribution’. The amount which must be attributed to a particular resident is that resident’s proportional amount as determined under section9D(2). Section 9D(6) provides that a CFC’s net income for its foreign tax year must be determined in its functional currency and translated to rand at the average exchange rate for that foreign tax year.
7.4.1 Foreign tax year vs year of assessment
A CFC’s foreign tax year may be different to the years of assessment of the residents holding participation rights in that CFC that are required to include a portion of the CFC’s net income in their taxable income. The average exchange rate that is used to translate a CFC’s net income from its functional currency to rand must be based upon the foreign tax year of the CFC and not the years of assessment of the residents holding participation rights init.
7.4.2 Other currency amounts recognised by a controlled foreign company
A CFC may recognise amounts in currencies other than its functional currency. These other currencies may be the rand, a CMA currency or the currency of any other country. Such amounts, including any amounts denominated in rand or CMA currencies, must be translated to the CFC’s functional currency in accordance with section 9D(6), which requires the net income of a CFC to be determined in its functional currency before being translated to rand at the relevant average exchange rate (see 7.4.1).
The amounts may relate to transactions undertaken directly by the CFC or by the CFC’s PE that has the same or a different functional currency to the CFC. Neither section 9D nor section 25D prescribe speci c rules for translating such other currencies to the functional currency of the CFC. As a practical matter, it will be acceptable to SARS if –
• the spot rate is used to translate other currencies to the CFC’s functional currency and, if applicable, to the CFC’s PE’s
functional currency; and
• if the CFC’s PE has a different functional currency to the CFC, the average exchange rate is used to translate the net
income of a CFC’s PE to the CFC’s functional currency.
Example 12 – The translation of the net income of a CFC whose year-end occurs before the year-end of a resident holding participation rights
Facts:
A resident company with a 31 December year-end holds 60% of the participation rights in a CFC which has a foreign tax year ending on 30 June.
Result:
For the year of assessment ended 31 December 2014 the resident company must attribute 60% of the CFC’s net income, as determined for the CFC’s year of assessment ended 30 June 2014, by using the average exchange rate for the CFC’s foreign tax year ended on 30 June 2014.
* As determined under section 9D(2A) and calculated for its foreign tax year.
546 saIT comPendIum oF Tax LegIsLaTIon VoLume 2