Author: Manri Oosthuizen (Moore Stephens)
An explanation of rebates on foreign withholding taxes paid in accordance with 6quin of the Income Tax Act 58.
It is a common occurrence in many South African businesses to transact with customers outside our borders, especially with customers in the rest of Africa. In most of these transactions, in particular services such as IT-related and management, tax is withheld by the customer in the African country. Tax withheld is based on the invoice amount of the transaction with rates as high as 25 percent.
South African companies are liable for tax at 28 percent on taxable income from all sources. This may cause an instance where the company is double taxed on income from foreign sources. Section 6quat and 6quin of the Income Tax Act 58 of 1962 (Act) makes provision for relief on tax withheld.
Income from a source outside South Africa (physical service was rendered outside of South African borders) is dealt with in terms of the section 6quat rebate and income from a South African source (physical service is rendered inside of South Africa for the benefit of a foreign company) is dealt with in terms of the section 6quat (1C) deduction or section 6quin rebate. SARS have issued a Draft Interpretation Note 18 Issue 3, which provides a view of SARS’s interpretation of sections 6quat and 6quin.
Income from a foreign source
Section 6quat of the Act contains the implementation of a rebate mechanism for foreign taxes paid or payable on income sourced outside of South Africa. This rebate will be applied against tax, not against income. The South African resident will get a credit against his tax liability where tax was withheld on qualifying income.
The amount of foreign taxes which qualify for the section 6quat rebate is limited to the South African tax which would be payable in respect of the relevant income in a particular year of assessment. Where foreign taxes withheld exceed the South African tax payable in a particular year of assessment, the excess may be carried forward for seven years.
Income from a South African source
Section 6quin came into effect on 1 January 2012, allowing a rebate for foreign taxes imposed or withheld by a foreign country on income from a source within South Africa in respect of services rendered. This rebate will be limited to the lesser of;
- the amount of normal tax attributable to the amount received or accrued; or
- the amount of tax levied and withheld; or
- the amount of tax imposed.
The calculation of the section 6quin rebate is difficult to calculate as it should be calculated on a project-by-project basis and is based on taxable income. The apportionment of expenses to the relevant projects is thus very important.
Subsection (3A) was promulgated by the Finance Minister on 2 July 2013. In terms of this subsection, the taxpayer must submit a return (form FTW01 and supporting documentation for the foreign tax withheld) to SARS within 60 days from the date on which the foreign tax was levied and withheld. Separate forms must be submitted for each project. The submission of the FTW01-form provides SARS with an opportunity to attempt to recover the tax from the foreign government.
Where foreign tax paid exceeds the amount deductible, the excess is forfeited and may not be carried forward to a subsequent year of assessment.
In instances where the taxpayer cannot claim any other relief from double taxation, such as the sections 6quat or 6quin rebates, section 6quat (1C) deduction can be claimed.
This deduction allows foreign taxes paid to be claimed as deductible expenses incurred in the production of income. Although the deduction provides some relief, the company still effectively loses 72% of foreign tax paid by applying this method.
The deduction is limited to the amount of the underlying income giving rise to the foreign tax. Where foreign tax paid exceeds the amount deductible, the excess is forfeited and may not be carried forward to a subsequent year of assessment.
The inclusion of section 6quin was a welcome change to the Act. South African taxpayers transacting with customers in foreign jurisdictions, should however be aware of the possible tax effects in respect of withholding taxes on services rendered.