Trading stock : a critical analysis of the application of Section 1 of the Income Tax Act no 58 of 1962

• Main Author: Nkerebuka, Eliya John
• Other Authors: Davis, Dennis
• Format: Dissertation
• Language: English
• Published: University of Cape Town 2016
• Subjects: Tax Law
• Online Access: http://hdl.handle.net/11427/19790

The right to tax is traditionally based on connection to jurisdiction. Taxation is divided into international and domestic systems. An international tax system subjects its residents to tax on their income from all around the world while a domestic tax system subjects its residents to tax only on income arising out of a source within the borders of such a State. Under the international tax system, a State's right to tax firstly depends on whether the taxpayer deriving the said taxable income is a resident of that country or not. With respect to an entity or enterprise, its place of effective management or its headquarters within a State is used to establish residence of such an entity in the State hence making the entity taxable. Where the enterprise does not have a place of effective management or headquarters in a State, hence rendering such enterprise a non-resident, treaty rules have established that the permanent establishment concept be used to tax business profits. The permanent establishment becomes the minimum criteria for establishing that such an enterprise has an economic presence within the borders of the source State. In the presence of an enterprise having cross-border transactions, it is possible for the enterprise to be subject to taxable under both the domestic tax system of the State within which it is a resident as well as under the international tax system of the source State within which it has a permanent establishment, thus arising the question of double taxation. To help solve such a situation, legal instruments, arising in the form of tax treaties were created to combat double taxation of income arising out of cross-border transactions. Integral in solving this situation is the concept of permanent establishment. The permanent establishment is a source rule; thus a basic requirement to be met before business profits of a non-resident that are attributable to its permanent establishment in the source State are taxed in that State. However, technology developments and the rise of electronic commerce are rising problems on the application of the permanent establishment concept in relation to taxing income from international sources of such businesses.3 The broad meaning of the permanent establishment concept, particularly its requirements, make it difficult and ambiguous during its application to enterprises that conduct their businesses electronically or via the internet.