Navigating the risks of double taxation

South African residents pay tax on their worldwide income and it is not uncommon for the same income to be double-taxed, either erroneously or in terms of South African legislation and the foreign legislation.

South Africa does provides relief from double taxation by way of a rebate or by a deduction for foreign taxes payable on income that is subject to South African normal tax.

In December last year the South African Revenue Service (Sars) published its updated Interpretation Note (IN18) on section 6quat, which deals with rebates and deductions for foreign taxes on income. There are instances where taxpayers will not be able to claim a rebate, but there is an option whereby they may claim a deduction in some circumstances.

In terms of the updated note, Sars is now taking an expanded view on the taxes that may qualify for a deduction, which was not the case under the previous note.

Relief 

Jackie Arendse, professor of taxation at Academy One and presenter of The Tax Faculty’s monthly tax update, says section 6quat of the Income Tax Act provides relief for a South African tax resident who has paid foreign taxes on income that is also subject to tax in SA (see example below).

The main type of relief is in the form of a rebate, which applies where a resident has paid foreign taxes on foreign-source income – provided that the foreign taxes are “proved to be payable” without any right of recovery.

A resident who is taxed in SA on income that has been subjected to foreign taxes, but where the taxes do not qualify for the rebate, may then be eligible to deduct the foreign taxes from their income under s 6quat(1C).

The deduction applies to two types of foreign taxes:

• Foreign taxes paid or proved to be payable on South African-source amounts; and
• Foreign taxes paid, but not proved to be payable, on income derived from a foreign source.

‘Complicated’

The note, covering more than 130 pages, sets out the scope, interpretation, and application of the section.

It is extremely complicated, as is evident from the length of the interpretation note, says Arendse.

An example from the note: “ … a foreign tax incorrectly levied and paid to Country A’s revenue authority in terms of Country A’s local tax law and the relevant tax treaty on services rendered in Country A is not contemplated in section 6quat(1A) and therefore potentially qualifies for a deduction under section 6quat(1C)(a) if no person has a right of recovery”.

Expanded view

Although the legislation has not changed, in the latest version of IN 18 Sars gives an expanded view of the foreign taxes that qualify for the s 6quat(1C) deduction, says Arendse.

In the previous version of IN 18 the deduction was limited to “foreign taxes levied on South African-source” income. Sars did not consider that “foreign taxes on foreign-source” income paid “but not proved to be payable” could qualify for a deduction. These taxes are now included as being eligible for the deduction.

If taxes have been levied by the foreign government but possibly not in terms of the “strict interpretation of the law” the taxpayer will now be able to deduct the incorrect levied taxes thereby reducing their tax liability on their worldwide income.

Arendse says a deduction on foreign taxes is not as beneficial as a rebate, since a rebate is a straight credit against the SA tax, whereas the deduction will only reduce the taxable income of the individual.

“We see increasingly that residents are earning worldwide income. This section in the act is an important mechanism to reduce the very negative impact of double taxation.”

Rebate versus deduction

Source: Sars Interpretation Note 18 Issue 5