Interpretation Note 18 (Issue 4) - Rebate and deduction for foreign taxes on income

Interpretation Note 18 (Issue 4) - Rebate and deduction for foreign taxes on income

• 26 June 2020
• SARS

1. Purpose

This Note explains the scope, interpretation and application of section 6quat which provides for a rebate or deduction for foreign taxes on income.

Section 6quin previously provided for a rebate for foreign taxes paid on South African-source service inc me included in South African taxable income. Section 6quin(1) to (4) were deleted with effect from years of assessment commencing on or after 1 January 2016. Section 6quin is not discussed in this Note, but a detailed discussion of the section is contained in Issue 3 of this Note which is available on the website under “Legal Counsel / Legal Advisory / Interpretation Notes”.

Section 64N, which provides for a rebate for foreign taxes on dividends against dividends tax payable, is not discussed in this Note. The Comprehensive Guide to Dividends Tax contains a detailed discussion in this regard.

This Note reflects the income tax and tax administration legislation (as amended) at the time of publication and includes the following:
• The Taxation Laws Amendment Act 34 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42951).
• The Tax Administration Laws Amendment Act 33 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42952).
• The Rates and Monetary Amounts and Amendment of Revenue Laws Act 32 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42950).

2. Background

Residents are subject to income tax on their worldwide taxable income regardless of the source of the income. Foreign-source amounts derived by a resident may under specific circumstances be taxed by the country of source and by South Africa, resulting in international juridical double taxation. International juridical double taxation refers to the imposition of similar taxes by two or more sovereign countries on the same item of income (including capital gains) of the same person.

Relief from double taxation resulting from the imposition of tax by a residence country and a source country on the same amount is normally granted by the residence country. Thus, the source country’s right to tax generally has priority over the residence country’s right to tax. In many instances, countries provide for relief from international juridical double taxation under a tax treaty, although many countries (including South Africa) also provide unilateral tax relief in their domestic law.

South Africa provides relief from double taxation to its residents in its domestic law mainly by rebate methods4 or by a deduction5 for foreign taxes payable on income that is subject to South African normal tax. The rebate and deduction methods are supplemented by certain exemptions for foreign-source amounts received by or accrued to residents.

3. The law

The relevant sections of the Act are quoted in Annexure C.

4. Introduction to section 6quat(1) and (1C)

The rebate methods of relief for foreign taxes

The following rebate methods are currently employed in South Africa:

• Section 6quat(1) which is the principal method used to provide relief for foreign taxes proved to be payable on income derived from a foreign source which is included in a resident’s taxable income. Foreign taxes on income derived from a foreign source do not qualify for a deduction under section 6quat(1C)(a). Section 6quat(1) provides for the deduction of foreign taxes against normal tax payable.
• Section 64N which provides for relief for foreign taxes paid on foreign dividends paid by a foreign company on listed shares.6 Section 64N provides for a deduction of foreign taxes against dividends tax levied under section 64E(1).

The deduction method of relief for foreign taxes

Under section 6quat(1C)(a) a resident may claim certain foreign taxes that are not contemplated in section 6quat(1) as a deduction in determining taxable income derived from carrying on any trade, that is, essentially, foreign taxes paid or proved to be payable on South African-source amounts.

Depending on the nature and detail of the amounts, one or more of the methods of relief provided for in section 6quat(1), section 6quat(1C)(a) and section 64N may apply to a person in respect of different amounts received by or accrued to or paid to that person during a particular year of assessment.

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This article first appeared on sars.gov.za.

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