ch21.1-21.3 source & non-residency
Thursday, 07 March 2024 20:34
outcomes of this chapter
- identify the factors to consider to determine the tax implications of a cross-border transaction
- determine whether or not income is received or accrues from a south african source
- calculate the normal tax consequences of cross-border transactions for south africa for tax residents
21.1. overview [SILKE p.863]
global trade increased exponentially as technology & access to global markets improved which results in economic activities where
parties who are situated in different jurisdictions transact & interact with each other (e.g., foreign persons setting up business
operations in south africa or rendering services to south africans)
countries generally encourage cross-border trade given its positive impact on their economies. these transactions pose a challenge,
or threat, from an income tax pov as they may attract tax in more than one jurisdiction. respective tax authorities must acknowledge
the tax effects of transactions in the other jurisdiction to prevent multiple layers of tax, which is an obstacle to cross-border trade.
remember: cross-border transactions are also subject to the exchange control requirements in south africa
21.2. principles of south african taxation of cross-border transactions [SILKE p.864]
• countries generally have either a residence based tax or source based tax system
i. residence: taxes residents on their worldwide income (wwi) without having regard to the source of the income
ii. source: taxes income which has its source in the particular country & residential status of taxpayer is irrelevant
• south africa introduced a residence-based system of tax. this means that persons who are residents of south africa for tax
purposes are subject to income tax in south africa on their worldwide income (wwi)
• persons who are not residents of south africa for tax purposes are only subject to income tax in south africa on amounts
derived from a source in south africa. the tax i.r.o. amounts paid to non-residents is often levied in the form of a withholding
tax for ease of collection.
• starting point to determine south african tax implications of a cross-border transaction is to establish whether or not the
person who derives income is a resident of south africa for tax purposes
• a cross-border transaction may be subject to tax in:
○ jurisdiction where the income arises from the source country this tax is imposed on the basis that the income was
derived in this country, using its resources, irrespective of the residence of the recipient
○ jurisdiction where the recipient of the income is a resident this tax arises if the jurisdiction where the recipient is a
tax resident follows a residence based tax-system
• if the same amount is taxed in the hands of the same person by more than one country, the transaction may no longer be
economically feasible. various measures exist to prevent double tax from obstructing cross-border trade :. they incl.
○ countries that follow a residence-based tax system generally provide relief to their residents for certain foreign taxes
incurred i.r.o. cross-border transactions
○ certain cross-border transactions are exempt from tax this may be an exemption afforded by the source country or
the country of residence
○ governments enter into agreements to avoid double tax imposed on the residents of a country when they transact with
or in the other country
• the approach may be a useful guideline to determine the south african tax implications of a cross-border transaction
see the mind map at end of summary!
21.3. source (s9) [SILKE p.866] [see SAICA p.56]
note: section 9 has mostly to do with passive income
before 2001, south africa had a source-based tax system. at the time, the concept of source played an important role to determine
the income tax liability of both residents & non-residents
a. statutory source rules:
▪ act defines the source of some income streams. these statutory source rules mirror the source principles applied
in tax treaties to a large extent, although some exceptions exist
b. common law source principles:
▪ if the source of a specific type of income is not specified in the legislation or tax treaty, it must be determined with
reference with case law.
▪ if the source income must be determined with reference to case law, the inquiry generally involves 2 questions:
▫ what is the originating cause of the income?
▫ where is the originating cause located?
21.3.1. source of dividend income (s9(2)(a)) [SILKE p.867]
the source of dividend income depends on the residence status of the company that pays the dividend. if the dividend is paid by a
south african resident company, the source of the dividend is in south africa. if the dividend is paid by a company that is a non-
resident, the source of the dividend is outside south africa.
→ if a non-resident receives a dividend, ask yourself - was the company that declared the dividend a resident company or not?
refer back to 3.22. - a person is a resident if… [1] company incorporated or established in south africa or [2] the place
ch21.1-21.3 Page 1
Thursday, 07 March 2024 20:34
outcomes of this chapter
- identify the factors to consider to determine the tax implications of a cross-border transaction
- determine whether or not income is received or accrues from a south african source
- calculate the normal tax consequences of cross-border transactions for south africa for tax residents
21.1. overview [SILKE p.863]
global trade increased exponentially as technology & access to global markets improved which results in economic activities where
parties who are situated in different jurisdictions transact & interact with each other (e.g., foreign persons setting up business
operations in south africa or rendering services to south africans)
countries generally encourage cross-border trade given its positive impact on their economies. these transactions pose a challenge,
or threat, from an income tax pov as they may attract tax in more than one jurisdiction. respective tax authorities must acknowledge
the tax effects of transactions in the other jurisdiction to prevent multiple layers of tax, which is an obstacle to cross-border trade.
remember: cross-border transactions are also subject to the exchange control requirements in south africa
21.2. principles of south african taxation of cross-border transactions [SILKE p.864]
• countries generally have either a residence based tax or source based tax system
i. residence: taxes residents on their worldwide income (wwi) without having regard to the source of the income
ii. source: taxes income which has its source in the particular country & residential status of taxpayer is irrelevant
• south africa introduced a residence-based system of tax. this means that persons who are residents of south africa for tax
purposes are subject to income tax in south africa on their worldwide income (wwi)
• persons who are not residents of south africa for tax purposes are only subject to income tax in south africa on amounts
derived from a source in south africa. the tax i.r.o. amounts paid to non-residents is often levied in the form of a withholding
tax for ease of collection.
• starting point to determine south african tax implications of a cross-border transaction is to establish whether or not the
person who derives income is a resident of south africa for tax purposes
• a cross-border transaction may be subject to tax in:
○ jurisdiction where the income arises from the source country this tax is imposed on the basis that the income was
derived in this country, using its resources, irrespective of the residence of the recipient
○ jurisdiction where the recipient of the income is a resident this tax arises if the jurisdiction where the recipient is a
tax resident follows a residence based tax-system
• if the same amount is taxed in the hands of the same person by more than one country, the transaction may no longer be
economically feasible. various measures exist to prevent double tax from obstructing cross-border trade :. they incl.
○ countries that follow a residence-based tax system generally provide relief to their residents for certain foreign taxes
incurred i.r.o. cross-border transactions
○ certain cross-border transactions are exempt from tax this may be an exemption afforded by the source country or
the country of residence
○ governments enter into agreements to avoid double tax imposed on the residents of a country when they transact with
or in the other country
• the approach may be a useful guideline to determine the south african tax implications of a cross-border transaction
see the mind map at end of summary!
21.3. source (s9) [SILKE p.866] [see SAICA p.56]
note: section 9 has mostly to do with passive income
before 2001, south africa had a source-based tax system. at the time, the concept of source played an important role to determine
the income tax liability of both residents & non-residents
a. statutory source rules:
▪ act defines the source of some income streams. these statutory source rules mirror the source principles applied
in tax treaties to a large extent, although some exceptions exist
b. common law source principles:
▪ if the source of a specific type of income is not specified in the legislation or tax treaty, it must be determined with
reference with case law.
▪ if the source income must be determined with reference to case law, the inquiry generally involves 2 questions:
▫ what is the originating cause of the income?
▫ where is the originating cause located?
21.3.1. source of dividend income (s9(2)(a)) [SILKE p.867]
the source of dividend income depends on the residence status of the company that pays the dividend. if the dividend is paid by a
south african resident company, the source of the dividend is in south africa. if the dividend is paid by a company that is a non-
resident, the source of the dividend is outside south africa.
→ if a non-resident receives a dividend, ask yourself - was the company that declared the dividend a resident company or not?
refer back to 3.22. - a person is a resident if… [1] company incorporated or established in south africa or [2] the place
ch21.1-21.3 Page 1
