The sun sets on the section 6quin tax rebate
26 February 2015
Posted by: Author: Erich Bell
Author: Erich Bell (SAIT)
In 2011, government introduced a
special incentive in the form of a tax credit for withholding taxes incorrectly
imposed on South African tax residents by foreign countries. This incentive
applies in respect of services rendered in South Africa to clients who are
residents in foreign countries. This incentive is currently embedded in section
6quin of the Income Tax Act (No. 58 of 1962). Something that may come as a big
shock to the tax community is the proposal in the Budget Speech 2015 to
withdraw the so-called section 6quin incentive.
South African tax residents are,
subject to the provisions of a double-tax agreement, liable for Income Tax on
their world-wide income. With increased sophistication available in technologies,
it became an everyday occurrence for South African residents to render
management and technical services virtually around the globe without having to
leave their South African offices. Because a double-tax agreement would usually
assign taxing rights to the country where the services were physically rendered
(in other words, in the South African office), the resident will usually be
subject to tax on the resulting income in South Africa.
The above is, however not always
the case as various African countries are incorrectly imposing withholding taxes
on the income generated from the above South African services if it was paid
for by their country. This was usually done in a manner which was not in
accordance with the relevant double tax agreement. This placed an additional
burden on the South African resident who was then required to pay income tax on
the same receipt in both countries and who then afterwards had to apply to the
foreign country for a refund of the tax incorrectly imposed. The resident was
therefore subject to double taxation with little relief.
This incentive was therefore introduced
to compensate taxpayers for the compliance burden associated with these taxes
incorrectly imposed by other countries. The rebate is broadly speaking equal to
the lesser of the amount of foreign tax imposed or the amount of South African
attributable to that amount.
The mischief resulting in the
withdrawal of the incentive was contained in section 6qiun(3A) that required the
resident to submit to SARS proof of the foreign taxes withheld together with a
FTW01 – Return of Foreign Tax Withheld within 60 days after the taxes have been
withheld by the foreign country. It is, however, a seldom occurrence for
foreign revenue authorities to provide proof of the withholding taxes to the
residents within the 60 days which resulted in the residents accordingly
forfeiting the section 6quin relief. National Treasury was therefore faced with
two choices – it could either have increased the 60 days requirement to provide
residents with more time to obtain the tax certificates from the foreign
revenue authorities or it could have withdrawn the incentive.
It is, however, a pity that the
decision was taken to withdraw the incentive given the fact that a simple
amendment to section 6quin(3A) could have enhanced its effectiveness. Even
though the Budget Review 2015 stated that the incentive was exploited by
certain taxpayers, one cannot help but to speculate that the increased pressure
on Government to generate more revenue could have resulted in the withdrawal.
The only relief left for
taxpayers after the withdrawal of section 6quin is to revert to the deduction
provided by section 6quat(1C) and (1D). It should, however, be noted that the
section 6quat(1C) deduction is not nearly as beneficial as the section 6quin
rebate. This is because the deduction reduces your income, whilst the rebate
reduces your tax payable.
For an analysis of the impact that the withdrawal of section 6quin would have on your tax affairs, especially if your business provides services to African countries, please contact your SAIT tax professional.