Here's why you're at risk of double taxation on your company's international income
South Africa has double tax agreements with several countries including Mauritius, the US and UK. Essentially this means, the two countries have an agreement that states both countries can tax the same income.
This means that it can be very hard to avoid double taxation because of these agreements.
But bowman.co.za says there are situations when these agreements allow you to take advantage of certain loopholes.
The site states you can successfully use double dip planning in cases of international sale and leaseback transactions. Double dip planning is a strategy for limiting the chance of two entities taxing the same amount of money or double dipping into it.
This applies where a South African company sells to and leases a movable asset, located in South Africa, from a US company. In this case, the rental income you receive from the US company isn't taxed in South Africa, but you can still claim the appropriate deductions here.
The good news is, there are more of these tax reducing loopholes.
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Here's how to avoid double international taxation
If you have to pay tax on the same profits twice, during the same period, in two or more countries, determine which country has the taxing rights.
The countries in the Double Tax Agreement (DTA) will determine who holds the tax rights. For example, you do can the residence test. The country with the first taxing rights will be the one you're a resident in.
If residency isn't a factor, for example if you don't hold permanent residency in either country, you'll use the source rules. If the source of income is from Country A then Country A will have the first taxing rights. Check out the Practical Tax Loose Leaf Service
to find out how to do the residency test and to find out more about the source rule.
If both countries have taxing rights, claim the foreign tax you paid as a credit against your tax liability in South Africa.
Here's an example to explain how these tax rights work
Lisa considers South Africa to be her principal place of residences. she earned passive income from a source in the Mauritius during the 2013 year of assessment in the form of rental income of Rs5 500 from a flat.
Lisa will pay tax on the profits from a South African tax law perspective. She's ordinarily a resident in South Africa and therefore considered a resident for tax purposes.
From an international double taxation perspective, rental income's included in Lisa's gross income in South Africa. In terms of the definition of gross income 'in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident shall be included in his/her gross income' (Section 1 of the Income Tax Act).
The rental income's taxed in the Mauritius on the source basis as Lisa isn't a Mauritius resident.
This makes Lisa's passive income taxable in the Mauritius and in South Africa. Clearly a problem of international double taxation exists.
Lisa must consult the double tax treaty between South Africa and the Mauritius. Article 6 of this treaty provides that income derived by Lisa, a South African resident, from immovable property situated in the Mauritius might pay tax in Mauritius.
To avoid paying tax twice Lisa must complete a return in the Mauritius and pay tax on the rental income there because she earned this income from a Mauritius source. She must also complete and submit a return in South Africa where she's liable to normal tax on the Rs5 500 (converted to rands at the appropriate rate).
But, she can claim a rebate against her South African tax liability equal to the amount of tax paid in the Mauritius (per Section 6 in the Income Tax Act).
Or, she can claim a credit of the foreign tax paid in South Africa under Article 21 of the double tax treaty between South Africa and the Mauritius. She can't claim both the rebate and the credit (Section 6(2) of the Income Tax Act).
There you have it. Don't just accept double taxation. Determine the country with the tax rights and never pay more than you should.