Confirmed, your foreign tax on employment income is tax deductible!
Confirmed, your foreign tax on employment income is tax deductible!
From a theoretical point of view, a taxpayer should be able to claim taxes charged legally in a foreign jurisdiction, when calculating their tax liability in their country of residence. One would expect the relief to take the form of a tax credit.
According to the Explanatory Memorandum supporting the legislation that amended section 6quat, tax credits are only available to the extent foreign taxes arise on foreign source income, not against domestic source income. Countries are only prepared to surrender primary jurisdiction if the underlying activity (i.e. source) arises outside its border.
When section 6quat was amended in 2007, the reason for the amendment was that it has come to Government’s attention that a number of countries were incorrectly claiming source jurisdiction in respect of services occurring within South Africa and accordingly claiming that withholding tax is required.
South Africa was not prepared to give section 6quat rebates for South African source activities. However, South Africa was prepared to treat these foreign taxes as a deductible expense incurred in the production of income. Hence, section 6quat was amended to allow these deductions.
It was announced in the Budget Speech that taxpayers should be allowed to claim their foreign tax on employment income as a deductible expense. This appeared to have been the original intention of the legislature, and the proposed amendment per the Budget Speech, though unfortunately applicable in limited circumstances, seems intended to clarify the legislation on that point.
For example, if you have income which is not from a foreign source, and such income is correctly taxed by a foreign government, you can claim such foreign tax as a tax deduction (there are a few additional requirements).
In essence and for the purposes of this article, if you are working in South Africa, but your employment income is correctly taxed by a foreign government you could claim the foreign tax paid as a tax deduction.
Technically at issue was if you read the various legislative provisions together (section 6quat(1C), section 11 and section 23(m)), you arguably could not claim such foreign tax as a deductible expense.
The negative result was not the intention of the legislature.
While certain requirements would need to be met in order to qualify for such a deduction, this is a welcome proposal in the Budget!
According to the Explanatory Memorandum supporting the legislation that amended section 6quat, tax credits are only available to the extent foreign taxes arise on foreign source income, not against domestic source income. Countries are only prepared to surrender primary jurisdiction if the underlying activity (i.e. source) arises outside its border.
When section 6quat was amended in 2007, the reason for the amendment was that it has come to Government’s attention that a number of countries were incorrectly claiming source jurisdiction in respect of services occurring within South Africa and accordingly claiming that withholding tax is required.
South Africa was not prepared to give section 6quat rebates for South African source activities. However, South Africa was prepared to treat these foreign taxes as a deductible expense incurred in the production of income. Hence, section 6quat was amended to allow these deductions.
It was announced in the Budget Speech that taxpayers should be allowed to claim their foreign tax on employment income as a deductible expense. This appeared to have been the original intention of the legislature, and the proposed amendment per the Budget Speech, though unfortunately applicable in limited circumstances, seems intended to clarify the legislation on that point.
For example, if you have income which is not from a foreign source, and such income is correctly taxed by a foreign government, you can claim such foreign tax as a tax deduction (there are a few additional requirements).
In essence and for the purposes of this article, if you are working in South Africa, but your employment income is correctly taxed by a foreign government you could claim the foreign tax paid as a tax deduction.
Technically at issue was if you read the various legislative provisions together (section 6quat(1C), section 11 and section 23(m)), you arguably could not claim such foreign tax as a deductible expense.
The negative result was not the intention of the legislature.
While certain requirements would need to be met in order to qualify for such a deduction, this is a welcome proposal in the Budget!