Withdrawal of rebate in respect of foreign taxes on income

By way of background, section 6quin of the Income Tax Act, which was introduced by Government in 2011, provides for a rebate in respect of foreign taxes withheld by a foreign government on income from a source within South Africa (SA). The rebate is 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.

However, taxes imposed on South African residents by some foreign countries for services rendered in SA for clients who were residents in those countries are not in accordance with the provisions of the Double Taxation Agreements (DTA’s) between South Africa and these countries, and international tax principles. Accordingly, the Budget has proposed that the s 6quin rebate be withdrawn.

The Minister provides that such withdrawal aims to alleviate the compliance burden on South African taxpayers to apply for a refund of the tax that was incorrectly imposed (by the foreign government). Although the introduction of this relief was well intended, it has been noted that it has resulted in significant compliance burdens for both taxpayers and the South African Revenue Service.

This withdrawal is interesting in light of the Davis Tax Committee’s (DTC) Interim Report on Preventing Base Erosion and Profit Shifting in South Africa in which a recommendation was made for the reconsideration of s6quin of the Act. The DTC provided that certain foreign jurisdictions, especially in Africa, were incorrectly claiming source jurisdiction on services (especially management services) rendered abroad and yet those services should have been considered to be from sources within SA. Further, the DTC provided that although s 6quin was intended to be a temporary measure aimed at addressing interpretation issues arising out of certain DTAs (where the foreign government did not apply the provisions of the DTAs in respect of services rendered by SA residents in those countries), SA has departed from the tax treaty principles in the OECD Model Tax Convention in its treaties with African countries, in that it has given them taxing rights over income not sourced in those countries. In essence, the DTC called into question the s 6quin rebate by stating that the rebate effectively relinquishes taxing authority to its fellow African neighbours even though this relinquishment is unwarranted under international tax principles.

As an aside, it is also important to note that the Minister has proposed that “interest for withholding tax” be defined as this will ensure that there is no confusion with other references related to interest in the Act. Reference has to be made to the report of the Standing Committee on Finance dated 11 September 2013, where it was indicated that the interest withholding tax provisions would apply to common law interest and that “as a general rule of interpretation, in the absence of a specific definition or cross reference to section 24J, the common law definition will apply”. This is a welcomed proposal as the scope of the “interest” definition contained in section 24J of the Income Tax Act extends beyond common law interest and therefore, could widen the scope of interest withholding tax which the legislator did not anticipate.