TO provide relief from double taxation, the Income Tax Act provides that a South African tax resident can claim foreign tax credits in respect of income derived from a source outside South Africa. The rebate is provided for in terms of section 6quat of the Income Tax Act.
When the income is from a South African source, however, the taxpayer may only claim a deduction of the foreign tax paid.
The source of income in relation to services rendered would be where the services are physically rendered. Thus where the services are rendered outside South Africa such income would be non-South African, foreign sourced income.
However, where the services are physically rendered in South Africa for the benefit of a non-resident, the income will still be considered to be South African, locally sourced.
A problem is when the income is foreign sourced: the recipient would be entitled to claim tax credit (against normal tax payable) for foreign taxes paid on such income. However, when the income is from a South African source the recipient would only be entitled to a deduction (in the determination of taxable income) of the foreign tax paid. This tax treatment means that the taxpayer earning South African sourced income from non-residents is worse off from a tax point of view.
In order to improve the disparity, section 6quin has been brought into the Income Tax Act. The section came into effect on January 1, 2012, and applies in respect of amounts of tax withheld during years of assessment commencing on or after that date.
The section provides for a limited foreign tax credit for South African tax residents in respect of foreign withholding taxes paid on income arising from services rendered in South Africa.
The rebate works similarly to the section 6quat rebate with the exception that unused credits cannot be carried forward to succeeding years. Thus regardless of whether services are rendered in South Africa or outside, the tax treatment of foreign taxes would now be similar.
The Income Tax Act does not define the services that would qualify for the rebate, so it would appear that services that would qualify would be management, legal, accounting and information technology services, for instance.
The introduction of section 6quin comes as a welcome change, particularly for multinationals based in South Africa that render certain administrative and management services to non-resident sister companies from South Africa.