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The sun sets on the section 6quin tax rebate

26 February 2015   (0 Comments)
Posted by: Author: Erich Bell
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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.

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