As per Amendment 7 of the Taxation Laws Amendment Act, 2015, Sections 1 to 4 of Section 6quin of the Income Tax Act 58 of 1962 have been deleted.
This section provided that foreign tax credits would be allowed against tax payable in respect of withholding taxes imposed on service fees from a South African source (ie. services rendered in South Africa by a South African resident to a foreign resident).
The result of the amendment means that taxpayers will no longer be entitled to claim the foreign tax credits effective from 1 January 2016 and applies to years commencing on or after that date.
The reasons for the deletion are that revenue authorities in treaty partner countries that have withholding tax on service fees in their tax law ignored the provisions of the double tax agreements with South Africa and withheld tax on services rendered by a South African resident to their residents. It has become a compliance burden for SARS with taxpayers exploiting the situation by claiming tax credits for other income such as royalties and interest.
As a means to avoid double taxation faced by taxpayers, amendments will be made to Section 6quat (1C) and (1D) to allow foreign taxes paid or proved to be payable as a deduction against income.
Also read: Individual tax deduction for amounts previously included in gross income