FAQ on foreign tax rebates implication

Background information:

The following information is given:

  • the South African company has a foreign branch in another country.
  • The accountant has included the profits from the foreign branch in the financial statement of the South African company.
  • The foreign branch has also paid the foreign tax in the host (foreign) country.
  • The foreign branch is not a foreign operation but a subsidiary of the South African company.

Question:

  • What is the foreign tax rebate implication?
  • How does the taxpayer claim the foreign tax rebate (if any) via efiling in the ITR14?
  • What documents are required in order to claim the foreign tax rebate?
  • What exchange rate must be used in order to claim the foreign tax rebate?

Response:

If is given that the South African company has a branch in a foreign country. Therefore, each line item of the branch activity (such sales, & expenses) is included in the books of the SA Company.

Under these circumstances, the following will apply:

  • the taxable income of the branch will be included in the books of the SA company,
  • The profit of the branch will be included in the books of the H/O.
  • The after-tax (net) profit would be reflected in the books of the SA company
  • Consideration must be given to the DTA between SA & the host country (if there is one). The SA Company would be able to claim the foreign tax rebate because the branch would have already paid the tax in the branch host’s country.

With reference to the tax implication for the South African company, the following will apply:

  • Since the foreign tax is paid and the income to which it relates is included in the taxable income of the SA company, then it will be able to claim the foreign tax rebate,
  • When the South African company creates a tax return, the taxpayer say `yes’ to foreign tax rebate (since the foreign income is included in the total taxable income of the SA company),
  • Documents required: the SA taxpayer must provide proof to SARS that the tax was actually paid in a foreign jurisdiction and the tax is not refundable,
  • the foreign tax must be converted to SA rands using the average exchange rate for the year of assessment.