In certain circumstances, the provisions of an agreement for the avoidance of double taxation may be applicable. Most countries impose income tax both on the worldwide income derived by the residents of the country and on income derived by non-residents in that country. The effect of such a system is that income derived by a resident of one country from a source in another country is subject to tax in both countries. As this position discourages foreign investment, countries that have trade relationships entered into agreements for the avoidance of double taxation. Such agreements provide that income of a particular nature will be taxed only in one of the two countries or may be taxed in both countries with the country of residence allowing a credit for the tax imposed by the other country. Certain agreements may provide that the residence country may exempt the income. South Africa uses the credit method.
Rebate for foreign taxes paid A resident who is taxable in South Africa on income received from a foreign country and who is liable to tax in the foreign country on that income will be allowed a credit for the foreign tax paid against his or her normal tax liability in South Africa. To qualify for this credit, the taxes must have been paid or payable to the government of any country other than South Africa, without any right of recovery of the tax paid or payable. This rebate may be granted in substitution for the relief to which a resident would be entitled under a double taxation agreement and is not granted in addition to such relief.
It will be necessary for a resident to submit proof of foreign taxes paid or payable. An assessment or the equivalent thereof, tax receipts or an official document will generally be accepted as proof of foreign tax paid or payable.
In the case of persons married in community of property, certain income is deemed to have accrued in equal shares to both spouses. In such cases, foreign tax credits relating to that income must be divided equally between the two spouses. It must be noted that foreign tax credits can never exceed the South African normal tax payable on the total amount of foreign taxable income in the hands of a resident during a tax year. An excess amount may, however, be carried forward for possible setting off in succeeding years but may not be carried forward for more than seven years calculated from the tax year when it was for the first time carried forward.
Foreign taxes paid on income that is not subject to tax in South Africa are, however, forfeited and cannot be carried forward.
A further understanding of double taxation concepts have been explained in two part form below: