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How to know if you must pay tax on your company's foreign income

by , 21 February 2013
Online retail group, Amazon.com is in big trouble with the taxman because of the tax it's paying on foreign income it's earning in the UK and other markets. According to reports, 'Amazon earned more than £7 billion in the UK but paid just £2.3 million in corporation tax'. The group's in similar trouble with the tax authorities in France and America. What about your company? Is it paying the right amount of tax to SARS on income earned outside of South Africa. Here's how to find out...

Like many multinationals, 'Amazon and Apple [have been] legally funnel revenues out of countries through payments to subsidiaries, typically in the form of loans or royalties for intangibles such as use of the brand or technology developed in-house,' reports the Mail & Guardian.
According to the article, Apple has managed to put $1 billion a week beyond the reach of the UK and US tax authorities. And now, tax authorities are turning up the heat on this 'tax-avoidance' scheme.
But what about your company? Are you complying with your foreign income tax liabilities correctly?
Does your company need to pay tax on foreign income?
If SARS considers your company a 'resident' for tax purposes, your foreign income will be liable for tax.
'Unlike individuals, corporate taxpayers such as companies, close corporations (CC) and trusts must meet one of three criteria to be considered a resident by SARS for tax purposes,' explains professional accountant Steven Jones in The Practical Tax Loose Leaf Service.
  1. Your company or CC was incorporated or established in South Africa,
  2. Your trust was formed in South Africa,
  3. Or it has its effective place of management in South Africa (note this isn't the same as control of the company).
If your company fulfils any of these criteria, it must pay tax on all its foreign income – no matter where in the world it's earned.
This list will help you know where you'll be taxed on your foreign income
There are specific rules for the different types of foreign income that apply, says The Practical Tax Loose Leaf Service.
Controlled foreign companies: If you have a participation interest in a controlled foreign company, any income earned therein may be taxed by SARS.
Dividends: If you earn dividends from ordinary share investments in foreign companies, you'll be taxed by SARS.
Foreign branches: A foreign branch of a South African resident company isn't a separate legal entity – as such, any trading income is subject to South Africa's tax laws.
Interest: Interest earned on any foreign deposits – such as a foreign savings account – fall into the gross income definition and are taxed by SARS.
Pensions: Any foreign income you earn from a non-South African pension is subject to tax, unless the pension relates to a past employment outside of South Africa or if it's paid under the social security system (i.e. state pension) of another country.
Remuneration: In most cases, income you earn from foreign employment is subject to tax in South Africa.
Now that you know what types of foreign income activities are subject to tax in South Africa, ensure your accountant reflects them correctly on your company's tax return to avoid getting into trouble with SARS for tax-avoidance. 

If you need more information on the correct tax treatments on your foreign income get your hands on the Practical Tax Loose Leaf. In the Practical Tax Loose Leaf we've got a dedicated chapter on International tax for South African residents. In it you'll discover:

  • Pros and cons of the old source basis
  • If you're a resident you're liable for South African tax
  • When you cease to be ordinarily resident in South Africa...
  • Convert foreign income into rands
  • Apply the default position where no treaty exists I
  • Are employees' tax, SDL and UIF contributions payable on remuneration exempt under the foreign employment exemption?
  • Benefit from double taxation relief
Get your Practical Tax Loose Leaf here...

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