The normal rule is that SA residents are taxed on their world-wide income. They are then entitled to a tax credit against normal SA tax payable in respect of foreign taxes paid. Thus no foreign tax credits are available in respect of foreign sourced income.

A number of African countries impose withholding taxes in respect of services (including management services) rendered abroad if funded by payments from their home jurisdictions. These withholding taxes are imposed despite the applicable treaties suggesting differently. They are likewise imposed on SA sourced services, i.e. including on management services.

The net effect is that the African withholding taxes result in double taxation with little relief - the reason being that the SA tax system does not provide tax credits in respect of these withholding taxes since they lack a proper foreign source nexus.

Only partial relief is given by allowing a deduction. Bottom-line: this reality impacts negatively on SA's objective to become a regional financial centre. The TLAB proposes the introduction of a limited foreign tax credit.

It will only apply in respect of foreign withholding taxes imposed in relation to services rendered in SA. These credits will be limited solely to SA taxes otherwise imposed on the same service income after account has been taken of applicable deductions. Foreign withholding taxes in excess of the SA tax cannot be carried over and will be forfeited.
The limited foreign tax credit will apply with regard to foreign withholding taxes paid in respect of years of assessment commencing on or after 1 January 2012.

By Johan van der Walt, Director, Tax, Cliffe Dekker Hofmeyr