Page 555 - SAIT Compendium 2016 Volume2

IN 63 (2) Income Tax acT: InTeRPReTaTIon noTes IN 63 (2)
Example 13 – CFC having a foreign PE
Facts:
A resident company holds all the shares of a CFC based in the United States. The CFC’s functional currency is the USD. The CFC undertakes transactions directly in various other foreign currencies. It also has a branch in the United Kingdom which uses GBP as its functional currency.
Result:
All transactions undertaken by the UK branch in currencies other than GBP, including the rand, must rst be translated to GBP at the spot rate. Next, the taxable income of the foreign PE in GBP must be translated to USD at the average exchange rate applicable for the CFC’s foreign tax year.
Transactions undertaken directly by the CFC in currencies other than USD (including rand) must be translated to USD at the spot rate.
Finally, the CFC’s total taxable income in USD must be translated to rand at the average exchange rate for the CFC’s foreign tax year.
7.4.3 Controlled foreign company having a hyperin ationary currency
Any exchange item denominated in a currency other than the functional currency of a CFC is deemed not to be attributable to any PE of that CFC if the functional currency represents a currency of a country which has an of cial rate of in ation of 100% or more for that foreign tax year. The effect is that the amounts expressed in non- hyperin ationary currencies must be translated directly to rand at the spotrate.
7.5 Headquarter companies [section 25D(4)], domestic treasury management companies [section 25D(5)] and international shipping companies [section(25D(6)]
Sections 25D(4), 25D(5) and 25D(6) apply to HQCs, DTMCs and ISCs, respectively, which have a functional currency other than the rand. These companies must determine taxable income in its functional currency and translate that gure to rand using an average exchange rate for the year of assessment. In circumstances in which the functional currency is rand, the other provisions of section 25D must be considered.
Amounts that are denominated in any other currency, including amounts in rand or CMA currencies, must be translated to the company’s functional currency. Sections 25D(4), 25D(5) and 25D(6) do not specify how such other currencies must be translated to the functional currency. As a practical matter, it will be acceptable to SARS if –
• the spot rate is used to translate other currencies (including rand) to the relevant functional currency and, if applicable,
to the company’s PE’s functional currency; and
• the average exchange rate is used to translate taxable income of the PE to the company’s functional currency when PE
has a different functional currency to that of the company.
Example 14 – Application of the functional currency rule to an HQC
Facts:
Company A is a HQC. Its holding company is resident in the United States. The holding company requires Company A to prepare all its accounts and nancial statements in its functional currency which is USD.
For its rst year of assessment Company A’s taxable income for its South African operations was USD100 000 and the applicable average exchange rate was USD1 = R12,1024.
Result:
Under section 25D(4) Company A must determine its taxable income in its functional currency, which is USD. It must then translate the resulting gure to rand using the average exchange rate for its year of assessment. For its rst year of assessment Company A’s taxable income was R1 210 240 (USD100 000 × R12,1024).
8. Translation of foreign taxes to rand for purposes of foreign tax rebates and the section 6quat(1C) deduction
8.1 Rebate and deduction for foreign taxes on foreign-source amounts [sections 6quat(4) and (4A)] Any foreign taxes proved to be payable for purposes of the section 6quat(1) rebate or the section 6quat(1C) deduction
must be claimed as a rebate or a deduction, as the case may be, in the year of assessment in which the foreign amount to which those taxes relate is included in taxable income and not in the year of assessment in which the foreign taxes are proved to be payable.
The foreign taxes must be translated to rand on the last day of the year of assessment during which the amount is included in the taxable income of the resident by applying the average exchange rate for the year of assessment in which the foreign-source amount is included in the taxpayer’s taxable income.
An amount translated to rand that includes a number of cents less than one hundred cents must be rounded off to the nearest rand. By convention, amounts of less than 50 cents are rounded down, while amounts of 50 cents or more are rounded up. Thus R100,50 would be rounded up to R101 and R100,49 would be rounded down to R100.
See Interpretation Note No. 18 (Issue 3) dated 26 June 2015 ‘Rebate and Deduction for Foreign Taxes on Income’ for more detail on the rebate and deduction.
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