[FAQ] The tax implication of a foreign branch

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[FAQ] The tax implication of a foreign branch

• 14 May 2021
• International Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Background

A taxpayer (SA retail company) opened a branch in the United States of America (USA). The branch will source stock directly in USA, sell there and will also buy stock from a South African (SA) company to sell in USA. The USA branch will have its own set of books and the accountant in SA will do the processing, however, the staff at the USA branch will do invoicing and the sales from there. The USA branch has an EIN number.

Please advise on the following questions:

1. Will this branch be a permanent establishment in USA and as such will have to file tax returns in USA?
2. The SA company has to file tax on worldwide income, thus include the branch, but taxes paid in USA will be a foreign tax credit on SA tax return? 3. Is any South African VAT applicable to USA branch sales?

Answer

We accept that the EIN is an Employer Identification Number. It is also known as a Federal Tax Identification Number and is used to identify a business entity. Generally, businesses need an EIN.

It is outside the scope of the service provided by The Tax Faculty to its members to provide guidance on the interpretation and application of foreign tax legislation. We believe it would be advisable to “appoint a tax consultant in USA” to assist with the requirements relevant to the filing of tax returns and the interpretation and application of USA tax laws. The taxation of the taxable income of the branch will be in terms of Article 7 (business profits) of the RSA / USA treaty.

In terms of paragraph 2(b) of Article 5 of this treaty, the “term "permanent establishment" includes especially … a branch …” In terms of paragraph 1, of Article 7, the “profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.” The rest of Article 7 deals with the determination of profits to be attributed to the branch.

The taxing right, in terms of Article 7 is a dual right and you are correct, a section 6quat rebate will be available to the RSA taxpayer to relief the double tax that arises.

The VAT Act

Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor. VAT is imposed at the standard rate of (currently 15%), unless the supply qualifies to be supplied at the zero-rate in terms of section 11 of the VAT Act or are exempt from VAT in terms of section 12 of the VAT Act.

Proviso (ii) to the definition of “enterprise” in section 1(1) of the VAT Act determines that:

“Any branch or main business of an enterprise permanently situated at premises outside the Republic shall be deemed to be carried on by a person separate from the vendor, if

(aa) the branch or main business can be separately identified; and

(bb) an independent system of accounting is maintained by the concern in respect of the branch or main business.”

Application of the principles

Based on the information supplied, supplies made by the independent branch in the USA will fall into proviso (ii) to the definition of “enterprise” in section 1(1) of the VAT Act and will accordingly not be subject to the South African VAT regime. No VAT must accordingly be declared (be it at the standard or zero-rate of VAT) in respect of supplies made by the USA branch, neither should any supplies made by the USA branch be declared in the South African company’s VAT return. Proviso (ii) to the definition of “enterprise” in section 1(1) of the VAT Act deems the South African company and the independent foreign branch to be two separate persons.

Webinar Commentary

Refer to webinar commentary Essentials of International Tax (Webinar Series) here.

 

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