Theme 3 – jurisdiction to tax

INTRODUCTION
• Basic framework for calculating a person’s taxable income -
o Gross income MINUS exempt income MINUS deductions and allowances
• Starting point - determining gross income
o S1 of ITC ‘gross income’ in relation to any year/period of assessment means –
▪ (i) in the case of any resident, the total amount, in cash/otherwise,
received by/accrued to/in favour of such resident OR
▪ (ii) in the case of any person other than a resident, the total amount, in
cash/otherwise received by/accrued to/in favour of such person from a
source within the Republic,
▪ during such year/period of assessment, excluding receipts/accruals of a
capital nature
o Requirements of definition of gross income must be complied with -
▪ In the case of a resident -
• There must be an amount in cash or otherwise
• That is received by or accrued to or in favour of such resident
• During a year of assessment
• Excluding receipts or accruals of a capital nature
▪ In the case of a non-resident
• There must be an amount in cash or otherwise
• This is received by or accrued to or in favour of such non-resident
• During a year of assessment
• From a source within SA
• Excluding receipts or accruals of a capital nature
o Although receipts/accruals of a capital nature are excluded from gross income
- specific inclusions will be included even if they are of a capital nature
▪ Para (a) - (n) of s1(1) definition of gross income
• Tax residency has nothing to do with citizenship – can be considered

THE CONCEPT OF ‘RESIDENT’

• Resident
o Taxed on worldwide income
▪ Natural person
▪ Person other than natural person
• Non-resident
o Taxed only on income from SA source
o Definition of resident (s1)- Not resident if deemed to be to be exclusively a
resident of another country in terms of a double tax agreement (DTA)

RESIDENCE OF NATURAL PERSONS

• Para (a) of the definition of resident in s1
 o Resident if -
▪ Ordinarily resident in the Republic OR
▪ Meets requirements of the physical presence test
• Test – only for natural persons NOT company
o Ordinarily resident
o Physical presence test
• (1) Ordinarily resident
o Term not defined in Act + interpretation of courts followed
o Cohen v CIR (page 27)
▪ Taxpayer who was a South African resident at the time was requested by
his employer to work in the USA
▪ Taxpayer + his family lived in NY for period of 20 months without
returning to SA during the period
▪ Court had to consider if taxpayer was ordinarily resident in SA during that
time
▪ Court held – person’s ordinarily residence would be the country to which
he would naturally + as a matter of course return from his wanderings
▪ Should not only consider actions during year of assessment
▪ Physical absence during full year of assessment is not decisive
▪ Court established three important principles -
• Person’s ordinarily residence would be the country to which he
would naturally + as a matter of course return from his
wanderings. The person’s usual/principal residence or a person’s
real home
• Not only consider persons actions during year of assessment to
determine whether he is ordinarily resident in a particular
country. Also consider person’s mode of life outside year of
assessment.
• Physical absence during full year of assessment NOT decisive.
Person could be absent from country for the entire year + still
qualify as ordinary resident in that country
o CIR v Kuttel –
▪ Page 27 textbook
▪ Person is ordinarily resident where he has his usual/principle residence
(real home)
▪ Followed principles in Cohen
o SARS Interpretation Note 3 – whether person is ordinarily resident in SA is a
question of fact + each case must be considered on its own merits
▪ An intention to be ordinarily resident in SA
▪ A fixed + settled place of residence
▪ Habitual mode - place where the person stays most often + his present
habits + mode of life
▪ Place of business + personal interests of the person + his family
▪ Employment + economic factors
 ▪ Status of individual in the Republic + in other countries - whether he is an
immigrant, work permit periods + conditions etc
▪ Location of personal belongings
▪ Nationality
▪ Family + social relations (schools, place of worship, social clubs)
▪ Political, cultural/other activities
▪ Application for permanent residence/citizenship
▪ Periods abroad, purpose + nature of visits
▪ Frequency of + reasons for visits
o NB INTERPRETATION NOTES ARE NOT LAW + NOT BINDING ON SARS/COURTS
• Beginning and end of being ‘ordinarily resident’
o Taxpayer immigrating to Republic will be treated as being ordinarily resident in
the Republic from the day on which he becomes ordinarily resident in the
Republic
▪ Not for full year of assessment in which he becomes ordinarily resident
o IN 3 - natural persons who emigrate from Republic to another country will
cease to be a resident from the date that he emigrates
▪ Day he flies to another country = considered non-resident for tax
purposes
o Proviso to def of ‘resident’
▪ Where any person that is a resident ceases to be a resident during a year
of assessment, that person must be regarded as not being a resident
from the day on which that person ceases to be a resident
o S9H(2)(b) of the ITA
▪ The year of assessment of a resident who ceases to be a resident is
deemed to have ended on the date immediately before the day on which
he ceases to be a resident
o S9H(2)(c) of the ITA
▪ The next succeeding year of assessment is deemed to have started on the
day on which the resident ceases to be resident
o Example -
▪ If a natural person emigrates on 1 October 2022 his 2023 year of
assessment as resident will be from 1 March 2022 to 30 September 2022
and his 2023 year of assessment as non-resident will be from 1 October
2022 to 28 February 2023

PHYSICAL PRESENECE TEST

• APPLY OF NOT APPLY ORDINARILY RESIDENT
• Test applies to person who is not ordinarily resident in the Republic at any time during
the year of assessment but is physically present in the Republic for a period/periods -
o > 91 days in aggregate during the current year of assessment AND
o > 91 days in aggregate during each of the 5 years preceding the current year of
assessment AND
 o > 915 days in aggregate during the 5 years of assessment preceding the current
year of assessment (para (a)(ii) of definition of resident in s1)
• Rules –
o Part of a day is included as a day
o A day spent in transit is not a day if no formal entry through a port of entry
▪ If SA is your connecting flight and you don’t leave the airport
o >91 days + >915 days periods need NOT be continuous
▪ If a person is present for several periods which in aggregate exceed
91/915 days the requirement will be met
• Beginning and end of resident ito physical presence test
o Person will cease to be resident from day that he ceases to be physically
present in SA if that person remains physically outside SA for a continuous
period of 330 full days immediately after this date
▪ 330 days must be continuous + therefore meeting this proviso will stretch
over 2 years of assessment
▪ Must have been physically present in Republic for more than 91 days in
the year that he ceases to be physically present
▪ 330 continuous full days of absence only commence on day after the
period of more than 91 days has been met + then ceases to be physically
present
o IN 4 para 4.4 -
▪ Natural person who is a resident by virtue of the physical presence test,
ceases to be a resident from the day when the person leaves the Republic
▪ 330 continuous full days of absence therefore start on the day after the
person leaves the republic

• ANSWER –
o Physical presence test is used as it states Phuleng is not an ordinarily resident.
Phuleng has more than 91 days (185 days) in South Africa during the current year
of assessment (2023). Phuleng has not been in aggregate during each of the 5
years preceding the current year of assessment as he only spent 91 days in SA in
2019. Therefore, he is not a resident of South Africa for income tax purposes.

RESIDENCE OF PERSONS OTHER THAN NATURAL PERSONS

 • Para (b) of the definition of “residence” in s1
o A person other than a natural person Eg. company, close corporation + trust is
resident if it –
▪ Is incorporated, established/formed in the Republic OR
▪ Has its place of effective management in the Republic
o Both incorporated + POEM is not defined in the Act
• Where a company is incorporated, established or formed
o S13 of Companies Act
▪ Company that is formed or incorporated in SA is a resident because of its
formation + incorporation in the Republic
▪ Irrespective of where it is managed/where it carries out business
o Company liable for tax in SA on worldwide receipts
• Where a company is effectively managed
o IN 6 -
▪ Place of effective management = place where key management +
commercial decisions that are necessary for the conduct of its business a
s a whole are in substance made
▪ Consistent with the OECD’s commentary on Article 4 of the Model Tax
Convention
o All relevant facts must be determined to determine place of effective
management (POEM)
o If decisions are made at more than one location -
▪ POEM will be location where those decisions are primarily made
• REMEMBER –
o Not resident if deemed to be resident exclusively of another country ito tax
treaty (Section 1 provisio)
• Oceanic trust case
• Tax treaty – contracts between states FIX
o SA has no tax treaty with another country – taxpayer pay both taxes (no relief)

CHANGE OF RESIDENCE – NATURAL PERSONS

• How?
o Resident ito physical presence test – person remains outside the country for 330
continuous days
o Ordinarily resident – current position uncertain. Formally apply to SARS together
with financial exit (Reserve Bank application).
• Section 9H – natural persons
o Triggers exit charge through capital gain/income gain when a person is no longer
a resident during any year of assessment
o Deemed disposal of ALL assets at market value the day before day ceases to be
resident
 ▪ Market value - price which could be obtained upon a sale of that asset
between a willing buyer + willing seller dealing a arms length in an open
market (s9H(1))

CHANGE OF RESIDENCE – PERSONS OTHER THAN NATURAL PERSONS

• How?
o Change in place of effective management
• Section 9H persons other than natural persons
o Company ceases to be resident/becomes a headquarter company
o Triggers exit charge through capital gain/income gain
o Deemed disposal of ALL assets + shares at market value day before ceases to be
resident/becomes headquarter company
o Dividend in specie deemed to be declared which triggers dividends tax (s64
EA(b))

ASSETS EXCLUDED FROM s9 CHARGE

• S9H(4) - certain assets excluded from the deeming provision of s9H
o Immoveable assets situated in RSA
o Assets that will, after ceasing to be a resident, be attributable to a permanent
establishment of that person situated in RSA
o Qualifying equity shares that were granted to that person less than 5 years
before ceasing to be resident
o Equity instruments which have not yet vested at the time the person ceases to
be a resident
o Qualifying employee broad based shares granted less than 5 years before person
ceases to be resident
o Any right (ito s8A) to acquire a marketable security

PERMANENT ESTABLISHMENT (PE)

• Section 1 – defined from time to time in Article 5 of the OECD MTC: provided …
o Article 5 of OECD MTC –
▪ Permanent establishment is fixed place of business through which the
business of an enterprise is wholly/partly carried on
▪ Includes place of management, an office/factory BUT EXCLUDES use of
facilities for activities of a preparatory nature such as storage,
display/delivery
▪ A PE will also exist if there is a person in another country which acts on
behalf of the company + habitually concludes/plays the principal role
leading to the conclusion of contracts in the name of the foreign
company

CONTROLLED FOREIGN COMPANY (CFC)

• NOTE - deals with situations concerning shareholders
 • A CFC is a foreign company where –
o More than 50% of the total participation rights/voting rights are
directly/indirectly held by residents OR
o The financial results of that foreign company are reflected in the consolidated
financial statements of a resident company ito IFR10
• The rule –
o Resident shareholder must include a portion (in respect of voting
rights/participation rights) of the CFC’s net income in that person’s taxable
income

NON-RESIDENT: SOURCE RULES

• Taxed on income from a South African source
• Source not defined in the ITA
• Can be determined ito statutory source rules, tax treaty provisions/common law
principles established by court cases
• Whether income sourced in SA -
o Legislation – starting point
o Common law – if not dealt with in legislation
o Treaty

STATUTORY SOURCE RULES

• Source of dividend income s9(2)(a) –
o Depends on residence status of company that pays the dividend
o Paid by SA resident company = source of dividend in SA
o Paid by foreign company = source of dividend outside SA
• Source of interest income s9(2)(b) –
o Interest can be from a SA source on either of the following bases -
▪ The residence of the person paying the interest
▪ The place where the funds/credit obtained is being used/applied
o Interest incurred by a person resident in RSA is from a South African source
(s9(2)(b)(i))
▪ Unless the interest is attributable to a permanent establishment outside
RSA - residence of taxpayer NOT cause the source of the interest to be
South African
o Interest received by/accrued to a person is from a SA source if the funds/credit
are used/applied in SA (s9(2)(b)(ii))
▪ If the funds/credit is used in SA the payer’s residence status is not
relevant
o Any interest that does NOT meet one of the criteria to be from a SA source is
derived from a source outside SA (s9(4)(b))
• Royalties s9(2)(c), (d), (e), (d) –
o Royalties incurred by a RSA resident is from a RSA source unless if the royalty is
attributable to that a permanent establishment outside RSA
 o Royalty received by/accrued to a person in respect of the use/right to use
intellectual property in RSA is from a source in RSA
▪ S9(2)(c) – if Beyonce would have to come and perform where, what
would she be taxed on?

COMMON LAW SOURCE RULES

• If not specified in legislation/tax treaty look at common law principles
o CIR v Lever Brothers & Unilever Ltd
• If the source of income must be determined with reference to case law - inquiry
involves two questions -
o What is the originating cause of income?
o Where is the originating cause situated?
• If an amount has more than one originating cause –
o Source of income is based on the dominant cause
▪ CIR v Black
• More than one dominant cause –
o Appropriate to apportion its cause
▪ CIR v Nell
• Example: Rental income
o Originating cause is generally the asset used to earn rental income
o If the asset is located in SA then sourced in SA
o However, COT v British United Shoe Machinery
▪ Focus must not always be location of asset but regard of lessor business +
location of business is important

TAX TREATIES
• Purpose –
o Avoid juridical double taxation (when impose tax on same taxpayer in respect of
same amount)
o Allocate taxing rights + elimination of double taxation
o Render reciprocal assistance in tax administration issues + exchange of
information
• Contracting parties (SARS website)
• S108(1) -
o Makes provision for the National Executive to enter into an agreement when
the government of another country
▪ With the view to prevent the levying of tax under the laws of the
countries on the same income/profits/gains
o Allows SA to render reciprocal assistance in the adminitrsation + collection of
taxes under the laws of SA + the other country
• Application of tax treaties
o Cannot impose a tax liability that taxpayer would not otherwise be liable for
under domestic laws
 o Once published in GG following its approval by parliament it has the effect of
being enacted in the ITA
o Treaty provisions must be considered as if they form part of the Act
o Tax treaty provisions enjoy preference over domestic law
▪ s108 of the ITA
• MLI
• Business profits of non-resident company: PE (article 5)

PRACTICE QUESTIONS
1. Apple Inc, an American tax resident company advances a loan of R50 million to i-store
(Pty) Ltd, a South African tax resident company to use to build its new store at Loftus
mall. The loan bears interest at a fixed rate of 11.55 per annum. Is the interest paid to
Apple Inc sourced in South Africa? (6 marks)
• Will apply have to pay tax on interest it receives from i-store? (legal question)
• According to section 9(2) of the ITA, ….
• Apply the law to the facts
• Conclude
2. Jay-Z, an American rapper, receives rental income in terms of a lease agreement
entered into with a student renting his flat in Hatfield.

3. Dr Xelo is a medical doctor who specialises in aesthetics. He operates from a practice in

Sandton. He has lived in South Africa since childhood. During 2019, he attended an
aesthetics course in Austria. During the course, Beautify® (a company incorporated in
Austria) introduced a new dermal filler that requires that the filler must be mixed by the
medical professional in accordance with a specific formula that is calculated based on a
computerised skin and age analysis of the patient. Specialised software is required to
calculate the formula.
4. Dr Xelo enters into an agreement with Beautify® in terms of which Dr Xelo will be
provided with the licence to use the online software to administer the product to his
patients. Dr Xelo pays a licence fee of 50 Euros per patient.
a. Is the licence fee sourced in South Africa?

WITHOLDING TAXES
• SA tax can be in the form of normal tax/withholding tax
• If subject to WHT normally exempted from normal tax
• WHT is used to ensure tax collection in circulation where it may be difficult to collect
taxes
• Usually applies to people without sufficient presence in the source country
• Generally imposed on passive income eg. Interest/royalities
• SA WHT examples –
o Proceeds paid to non-residnet sellers in respect of immoveable property
▪ S35A
o Fees earned as entertainers + sportspersons
 ▪ S46A-49K
o Royalties
▪ S49A-49H
o Interest
▪ S50A - 50H
o Dividends
▪ Dividends tax s64E + 64N
• Subject to applicable DTA/MLI
o Dividends – 20%
o Interest – 15%
o Royalties – 15%
• DTA may reduce WHT rate