Globalisation and foreign trade has been a most relevant and complex issue within the finance world since the dawn of technology.

A great deal of services are being provided by South African companies to foreign companies which inherently has brought with it a risk of exposure to double taxation.

Tax authorities have responded to this with various legislation and Double Taxation Agreements (DTA's), including, but certainly not exclusive to, Section 6quat(1) and Section 6quat(1C) of the South African Income Tax Act.

It is important for management to understand these sections as incorrect application may have a significant effect on income tax payable resulting in unnecessary penalties and interest charged on their income tax account in addition to the burden of possible double taxation.

The crucial difference between Section 6quat(1) and Section 6quat(1C) is the source of the income. This article will not discuss source rules in detail but the simplified crux of the matter is, when considering services, that the source of the income derived from the service is generally regarded as being where the service was provided.

If the service was provided within South Africa to a foreign entity, Section 6quat(1C) will apply and foreign tax charged and/or withheld on the services invoiced may be deducted from income as an expense when calculating taxable income.

When services are provided outside of South Africa to a foreign entity, for example consulting services provided overseas, Section 6quat(1) will apply and a rebate may be claimed for the foreign tax charged and/or withheld directly from Income Tax payable, thereby creating a more substantial tax benefit than Section 6quat(1C).

The above principles must be further considered where DTA's are in place with countries to which services are provided as they may override any domestic tax laws.

Taxpayers must consider and apply the above sections of the Income Tax Act as well as any DTA's carefully and be sure to consult with their Tax Practitioner if unsure as foreign income is being increasingly regulated by the South African Revenue Service, especially if services are being provided to connected foreign entities.

Liezl Laughton

Tax Trainee, Johannesburg

Also read: Withholdings tax on interest