South African people and corporations wishing to assert foreign tax credits should guarantee they tick all of the bins to achieve success.
If the South African Revenue Service (Sars) audits the submission and requests supporting documentation, it’s completely entitled to disallow the total credit score if any bins have been left unticked. This is in response to Carmen Westermeyer, talking throughout a tax dialogue hosted by The Tax Faculty.
The most necessary standards, which is usually “conveniently” ignored, is that the taxpayer should show that the foreign tax was appropriately paid, that it was not refundable, and that the opposite income authority really had the authority to levy the tax.
Correcting the error
“It is not enough to show that you paid the tax,” says Westermeyer.
She quotes an instance the place dividend tax was withheld by the foreign subsidiary of a South African firm.
In this occasion the corporate had an funding portfolio within the UK. When the UK subsidiary paid the dividend, it withheld tax at 30%. The South African firm wished to assert credit score for the tax, however encountered an issue.
Although appropriate beneath UK legislation, by way of the Double Tax Agreement (DTA) between the 2 international locations, the withholding tax price is capped at 15% or 5% relying on the standards. When the corporate then submits a foreign tax credit score to Sars it can not declare the total quantity paid as a result of the foreign tax is wrong. The South African firm should first get better the tax incorrectly withheld from both Her Majesty’s Revenue and Customs (HMRC) or the withholding firm.
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“People seldom consider whether the tax has been correctly raised in the first instance and then they simply want a credit from Sars because it is too much of an effort to argue with the other revenue authority,” says Westermeyer.
The taxpayer may have obtained a refund however selected to not go that route. “You must show that it was a final tax and that it was appropriately raised.”
Violation of tax treaties
There are additionally cases the place foreign jurisdictions violate the DTA with SA and lift taxes towards South African taxpayers when they haven’t any proper to. Since the taxes have been levied in violation of the treaty the taxpayer has no option to ‘prove’ that the tax was certainly payable.
This may lead to double taxation with no reduction.
Another key precept is to reveal foreign revenue on a gross foundation. Westermeyer says a South African taxpayer who earns foreign rental revenue should disclose the gross rental and bills and never solely the revenue.
The quantity of the credit score should be equal to the quantity of tax paid on any foreign revenue that’s included within the taxable revenue. If the taxpayer has an exempt quantity, such because the R1.25 million exemption on foreign employment revenue, or claimed any deductions towards the foreign revenue, the credit score that may be claimed will likely be much less.
Correct apportionment
Westermeyer notes that the apportionment of the credit score is finished by the tax authority. However, the onus is on the taxpayer to examine whether or not it was finished appropriately.
The rebate can also be restricted to the quantity of tax payable in SA. If the taxpayer paid 30% tax within the foreign jurisdiction, they are going to solely have the ability to declare 28% (the present company revenue tax price).
Westermeyer says that, as with most deductions and rebates, will probably be essential to have the required supporting paperwork readily available ought to Sars question the declare.
This features a assertion of the tax paid, the identify of the tax, the jurisdiction through which it was paid, the legislation beneath which the tax was imposed, and whether or not it was levied by a nationwide, state or native tax authority.
Many individuals shouldn’t have this info, she remarks.
Listen to Boitumelo Ntsoko’s interview with Craig Torr of Crue Invest about how your investments will likely be taxed on this Money Savvy podcast (or learn the transcript right here):