Abstract

Keywords

Estate duty; wealth transfer tax; double taxation relief; deceased estate.

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1 Introduction

Adam Smith, a Scottish economist, in his 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, defined four criteria of a good tax system that are commonly referred to as the "canons of taxation". 1

* Maretha Retief. BCom Law (UP), LLB (UNISA), LLM in Estate Law (NWU). Faculty of Law, North-West University, South Africa. Email: maretharetief@gmail.com. ORCiD: https://orcid.org/0000-0003-0209-5296. This contribution is an edited version of chapter 4 of the author's thesis, submitted in partial fulfilment of the LLD degree in Mercantile Law at the Faculty of Law, NWU.

1 Butler Condensed Wealth of Nations 70.

One such consideration for reform under the Estate Duty Act relates to handling double taxation in respect of cross-border estates. 5

5 A cross-border estate exists when a person owns property in more than one country.

The reality of double taxation arises in a cross-border estate, for example, where the deceased owns property in one country and is a tax resident in another country, and both countries may exercise the right to tax such property. South Africans are not excluded from double taxation where a deceased is "ordinarily resident" in South Africa and owns property outside South Africa which may be subject to estate duty in South Africa as well as

to an estate 6

6 An estate tax is a transferor-based wealth transfer tax levied on the deceased estate based on the dutiable value of assets in an estate and payable by the executor. This type of taxation is often referred to as an "estate tax" or in the context of South Africa, an "estate duty". The United Kingdom also has a transferor-based wealth transfer tax but is called an "inheritance tax". See Rudnick and Gordon "Taxation of Wealth" 292; Jestle 2018 https://wiiw.ac.at/inheritance-tax-regimes-a-comparison-dlp-4690.pdf 2; Weber-Frisch and Duquennois-Djoua 2014 ERA Forum 410; OECD Inheritance Taxation 62-64.

The impact of double taxation is minimised through unilateral relief embodied in a country's domestic legislation or through the bilateral provisions of a double taxation agreement (hereafter referred to as an estate tax treaty). 10

10 The OECD encourages unilateral relief to alleviate double taxation due to the limited network of estate tax treaties (see OECD Inheritance Taxation 128). Also see Beckmann Estate Duty on Deceased Estates 22.

Section 16(c) of the Estate Duty Act 11

11 Section 16(c) of the Estate Duty Act 45 of 1955 (the Estate Duty Act) states that a deduction against estate duty is allowed "without in any way modifying or adding to the rights of any person under an agreement entered into by the Government of the Republic with the Government of any other country or territory relating to the prevention of or relief from double taxation in respect of estate duty, any amount of any death duties proved to the satisfaction of the Commissioner to have been paid to any other State in respect of any property situate outside the Republic and included in the estate of any person who at the date of his death was ordinarily resident in the Republic: Provided that the deduction under this paragraph shall not exceed the duty imposed on such property by this Act."

If an estate tax treaty exists, the relief under the estate tax treaty applies and section 16(c) is not available. 13

13 Section 16(c) read with s 26 of the Estate Duty Act; Meyerowitz Administration of Estates 30.8, 31.1; Davis, Jooste and Beneke Estate Planning 2.8H; Stiglingh et al Silke: South African Income Tax 1017-1018; Beckmann Estate Duty on Deceased Estates 112. This conclusion is based on the wording of s 16(c) of the Estate Duty Act, that grants a credit without any modification or addition to the rights of any person under an estate tax treaty. This implies that where an estate tax treaty exists, the relief in respect of the foreign death duty is limited to the application of the estate tax treaty and the unilateral relief under s 16(c) of the Estate Duty Act is unavailable.

For example, person A (who is ordinarily resident in South Africa and owns UK-sourced immovable property) dies. The dutiable amount of person A's estate is less than R30 million and the estate duty rate applicable in South Africa (as the country of residence) is 20%. The UK (as the country of source) imposes an inheritance tax of 40%. According to the estate tax treaty between the UK and South Africa, relief from double taxation should be granted by South Africa as the country of residence. The relief will be limited to the estate duty liability in South Africa, which is 20%. The remaining 20% inheritance tax liability will remain payable in the UK.

South Africa has entered into an estate tax treaty with the UK, the USA and Zimbabwe, as well as a combined treaty with Botswana, Lesotho and eSwatini. 15

15 Swaziland's name changed to eSwatini with effect from 19 April 2018. This change resulted from the official declaration by King Mswati III that the Kingdom of Swaziland was now to be known as the Kingdom of eSwatini in honour of the country's independence (see Legal Notice 80 of 2018 (The Declaration of Change of Swaziland Name Notice, 2018) published in the Gazette of 11 May 2018 but deemed to have come into effect on 19 April 2018). Also see Adams & Adams 2018 https://www.lexology.com/library/detail.aspx?g=278eafa1-d6c5-4be5-9524-10f1900fbe0c. The estate tax treaties with Botswana, Lesotho and eSwatini (previously referred to as the BLS countries), Zimbabwe and the USA were concluded under the provisions of the Death Duties Act 29 of 1922 but are still in force as the treaties continue to apply in respect of any similar taxes subsequently enacted by the contracting states. The treaty with the UK was entered into under s 26 of the Estate Duty Act and is also the only estate tax treaty that South Africa entered into that can be compared with the Estate Tax Model (see Beckmann Estate Duty on Deceased Estates 23 and SARS date unknown https://www.sars.gov.za/legal-counsel/international-treaties-agreements/estate-duty-agreements/).

From an international perspective the Organisation for Economic Co-operation and Development (OECD), which designs tax policies to align the tax treatment across countries in various fields, supports the enhancement of unilateral provisions due to the limited estate tax treaty network. 17

17 OECD Inheritance Taxation 74; Rudnick and Gordon "Taxation of Wealth" 325.

The following section will attempt to establish clarity in regard to these various issues in respect of unilateral relief under section 16(c) of the Estate Duty Act.

2 Unilateral relief under section 16(c) of the Estate Duty Act

2.1 Qualifying foreign taxes

Section 16(c) does not define what would constitute qualifying foreign death duties. Whitfield 20

20 Whitfield Taxation Implications 161, 182.

As mentioned above, double international juridical taxation arises where the same or a similar tax is imposed by different countries on the same taxpayer on the same property at the same time. In the case of inheritance tax payable by the beneficiary, the requirement of a tax imposed on the same

taxpayer is not met. However, it is accepted that it is still a similar tax imposed on the same asset by different countries at the same time (death). Roeleveld 23

23 Roeleveld 2015 SAJAR 159.

Beckmann 25

25 Beckmann Estate Duty on Deceased Estates 200, 225.

Since the inclusion of section 16(c) in 1960 the wording has remained the same. 26

26 Section 16(c) of the Estate Duty Act was added by s 5(c) of the Estate Duty Amendment Act 65 of 1960.

taxes. The OECD 31

31 OECD date unknown https://www.oecd.org/ctp/glossaryoftaxterms.htm.

Based on the above, it is clear that the term "death duties" is interchangeably used with "estate tax" and "inheritance tax" and means a tax levied upon death in respect of a deceased person's estate and specifically the property of an estate and not the income of the estate. In the context of estate duty, a transferor-based estate tax payable by the foreign estate clearly fits within the words "estate duty". According to the OECD, 32

32 OECD Model Double Taxation Convention on Estates and Inheritances and on Gifts (OECD Estate Tax Model) 102; OECD Inheritance Taxation 63-64.

It is therefore concluded that to eliminate the double taxation in respect of the same property upon death, a qualifying foreign tax for the purposes of section 16(c) could include an inheritance tax, a gift tax or an estate tax levied upon death but could exclude any foreign income taxes (including CGT). 40

40 Most foreign countries do not levy CGT upon death and, therefore, the incidence of having to pay CGT in a foreign country and estate duty in South Africa at the same

The following section will consider the scope of foreign property that may qualify for unilateral relief under section 16(c) of the Estate Duty Act.

2.2 Qualifying property

Section 16(c) does not provide for a detailed list of qualifying foreign property and would therefore include the meaning of "property" under sections 3(1) 41

41 Section 3(1) of the Estate Duty Act states "For the purposes of this Act the estate of any person shall consist of all property of that person as at the date of his death and of all property which in accordance with this Act is deemed to be property of that person at that date."

The Estate Duty Act does not provide a detailed definition of what would constitute "foreign property" in the estate of a person who is ordinarily resident in South Africa. Also, no such list is found in any leading work in relation to estate duty and international deceased estates. However, even though the Estate Duty Act does not specifically state what would constitute "foreign property", it is generally understood and explained that the worldwide property of an ordinary resident is included in the estate for estate duty purposes. 46

46 Haupt Notes on South African Income Tax 863; Stiglingh et al Silke: South African Income Tax 1000; Meyerowitz Administration of Estates 27.2; Davis, Jooste and Beneke Estate Planning 2.2.

interpreted to include the foreign counterpart of any property listed in sections 3(1), (2)(a) and (b) of the Estate Duty Act.

Beckmann 47

47 Beckmann Estate Duty on Deceased Estates 73.

It is submitted that it may not be feasible to provide a detailed list of foreign property in the Estate Duty Act as each foreign country involved may have its own rules regarding the different types of property. However, the generally accepted approach of including worldwide assets seems to be aligned internationally and, to the extent that a conflict in rules occurs, the approach discussed by Beckmann is supported where it will be included only if it aligns with South African rules. A possible clarification that could be considered for the purposes of section 16(c) would be to refer to foreign property that is defined or treated in a manner similar to that in which it is defined or treated in South Africa.

The next section discusses the guidance that is required regarding the exchange rate that should be applied in converting (to South African Rands), a foreign death duty paid in a foreign currency, to calculate the available relief.

2.3 Conversion of a foreign death duty liability

For the purposes of calculating the unilateral relief under the Estate Duty Act, it is important that the value of the foreign death duty paid be converted to South African currency to determine the allowable credit. The Estate Duty Act makes no provision for the exchange rate that must be used for the

purposes of section 16(c). 51

51 Michaelides International Tax Consequences 67; Meyerowitz 1987 The Taxpayer 117.

The provision equivalent for income tax purposes to section 16(c) of the Estate Duty Act is section 6quat of the Income Tax Act 58 of 1962 (the Income Tax Act), which similarly allows for a credit against the South African income tax liability for any foreign income tax payable in respect of foreign income that is also included in the South African taxable income. 54

54 Section 6quat(1) of the Income Tax Act. Also see SARS 2022 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/Legal-IN-18-Rebate-and-deduction-for-foreign-taxes-on-income.pdf (SARS Interpretation Note No 18) 85.

If the provision of section 6quat(1) is compared to that of section 16(c), it is noted that for the credit to apply, the foreign death duty must be paid, whereas for section 6quat purposes the foreign taxes must be proved to be payable and not necessarily actually paid. Estate duty is a once-off tax in comparison to income tax, which is levied on an annual basis.

In the context of section 16(c), an average rate over a period may minimise the effect of exchange rate differences over the different liability dates and payment dates as those differences are evened out. However, a more accurate amount is obtained by applying the spot rate, based on the actual payment made on a specific date. That will further provide certainty as to the amount that can be claimed as a credit. Goodwin 58

58 Goodwin 2019 https://www.lawskills.co.uk/articles/2019/10/the-impact-of-exchange-rates-when-administering-estates/.

although a fixed exchange rate will most likely remove the risk involved, the difficulty lies in what the right time is to set the rate. He further states that the volatility of the currency markets is a challenge as it may result in short-term spikes in rates or sudden drops. 59

59 Goodwin 2019 https://www.lawskills.co.uk/articles/2019/10/the-impact-of-exchange-rates-when-administering-estates/.

Michaelides 60

60 Michaelides International Tax Consequences 67.

The Income Tax Act also contains other exchange rate provisions applicable in different contexts, 63

63 Section 24I(1)(b) of the Income Tax Act; SARS 2023 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/Legal-IntR-IN-101-Gains-or-losses-on-foreign-exchange-transactions.pdf 6-7. Also see Haupt Notes on South African Income Tax 571; Stiglingh et al Silke: South African Income Tax 516; SARS Interpretation Note No 18 86.

outcome can be chosen when claiming the section 16(c) credit and the impact of the volatility of the markets can be minimised.

When considering an average exchange rate, the period over which the average should be applied becomes relevant. Estate duty is not determined in respect of a year of assessment but as a once-off tax on the value of the deceased estate as at the date of death. In the context of an inheritance tax, the liability is calculated in respect of the value of the inheritance due to the beneficiary.

A possible period over which the rate could be determined is the period from the date of death to the date of payment. As stated above, the average rate approach may provide greater flexibility in determining the converted value and may mitigate the impact of the volatility of the markets. An alternative could even include an election between a spot rate and an average rate over a qualified period, as under section 25D of the Income Tax Act. However, as death duty-related taxes are not intended to be a continuous liability, it is submitted that the spot rate on the date of payment of the foreign death duties should be considered. 65

65 Seade "Tax Revenue Implications of Exchange Rate Adjustment" 54. Seade comments that the impact of exchange rates and their relevance and application in tax legislation have hardly ever been addressed.

The next section discusses various elements regarding a limitation rule for the purpose of the application of section 16(c) of the Estate Duty Act.

2.4 Limitation rule

2.4.1 General

The deduction in respect of foreign death duties is limited to the amount of estate duty payable in respect of the property in South Africa. This implies that the allowable deduction is the lesser of the estate duty payable and the foreign death duty paid on the property. 66

66 Meyerowitz Administration of Estates 30.8; Meyerowitz 1987 The Taxpayer 117.

2.4.2 Method to calculate the attribution of the foreign death duty liability

The Estate Duty Act does not provide for a method on how the foreign death duty or the estate duty attributable to the foreign property should be calculated. However, the following method is used in practice: 67

67 Meyerowitz Administration of Estates 30.8; Meyerowitz 1987 The Taxpayer 117. Also see OECD Estate Tax Model 180, where the same method is recommended in determining the foreign duties attributable for the purpose of calculating a credit.

Meyerowitz 70

70 Meyerowitz Administration of Estates 30.8. Also see Beckmann Estate Duty on Deceased Estates 111; De Ferm v Von Lieres und Wilkau (WCHC) (unreported) case number 10805 / 2023 of 11 October 2023 para 30, where it is stated that a foreign inheritance tax is often calculated on the receipt by the legatee in comparison to the value of the property stipulated in a will.

2.4.3 Time rule

The Estate Duty Act does not under section 16(c) provide any limitation in respect of the period during which the credit may be claimed. This effectively means that the period is open-ended, which is contradictory to administering an estate in an efficient and speedy manner. Similarly, rules of prescription apply to ensure that tax is administered in an effective manner to prevent claims from being submitted years after the deceased's tax affairs have been concluded. In the context of an estate, a time rule would also minimise unnecessary delays and encourage effective administration. The European Commission 71

71 European Commission 2011 OJ 84.

should address their unilateral provisions regarding relief of double inheritance taxation that the tax relief should be allowed only for a reasonable period, for example, for a period of ten years from the date of liability. The European Commission Expert Group 72

72 European Commission Expert Group 2015 https://www.kessler.co.uk/wp-content/uploads/2016/05/Ways-to-tackle-inheritance-cross-border-tax-obstacles.pdf 22.

Estate duty is a SARS-assessed tax, 74

74 See the definition of assessment in s 1 of the Tax Administration Act 28 of 2011 (the Tax Administration Act), which means "the determination of the amount of a tax liability or refund, by way of self-assessment by the taxpayer or assessment by SARS."

3 International comparison

3.1 United Kingdom

The United Kingdom (the UK) levies a transferor-based inheritance tax that operates like estate duty where the liability is calculated on the value of the estate at death and payable by the executor.

The UK inheritance tax legislation makes provision for double taxation relief in one of two ways, namely through estate tax treaties 80

80 The UK has an existing estate tax treaty with South Africa to cover lifetime transfers as well as transfers on death. See Muller Wealth Transfer Taxation 276.

In the case where the property is neither situated in the foreign jurisdiction nor the UK, or if it is situated in both the foreign jurisdiction and the UK, the relief is calculated according to a specific formula. 83

83 Section 159(3) of the Inheritance Tax Act. The formula is A/(A + B) = C, where A is the amount of inheritance tax payable, B is the amount of tax payable in the foreign jurisdiction and C is the smaller of A and B.

If an estate tax treaty exists, the relief under the treaty will be applied, 84

84 Section 158 of the Inheritance Tax Act.

3.2 United States

The United States (the US) levies a transferor-based estate tax on the value of the estate at death, which is payable by the executor. Double estate taxation arises when a US citizen or resident owns property situated in a foreign country. The US, as the country of residence, taxes the worldwide property of the deceased, and the foreign country where the property is situated may tax the property as the country of source. 86

86 IRS 2020 https://www.irs.gov/irm/part4/irm_04-025-004.

Relief for double estate taxation is provided unilaterally under section 2014 of the Internal Revenue Code, 1986 (the Internal Revenue Code) or bilaterally through the application of a tax treaty in the form of a tax credit for any death taxes paid to a foreign country by a US citizen or US resident. 88

88 Rudnick and Gordon "Taxation of Wealth" 324.

Taxes that are considered similar to death taxes include estate tax, inheritance tax, legacy tax, succession tax or a similar transfer tax. 90

90 Sections 2014 and 2053 of the Internal Revenue Code. Foreign death taxes paid to a foreign jurisdiction on property not situated in that country or on property not included in the gross estate do not qualify for a credit. The foreign taxes paid are converted to US dollars on the day they are paid by using the rate of exchange on that day. Such clarity, pertaining to issues such as the type of foreign tax to be paid and the date on which the conversion to South African Rand should take place, is lacking under the Estate Duty Act.

The available credit is not unlimited and is subject to the following requirements:

(a) The qualifying tax credit in respect of foreign death taxes paid is limited to the total federal estate tax attributable to the property. 92

92 Section 2014(b) of the Internal Revenue Code.

(b) The period allowed to submit a claim for a tax credit is four years from the date the estate tax return is filed provided the foreign taxes were paid. 93

93 Section 2014(e) read with s 6018 of the Internal Revenue Code. Also see IRS 2020 https://www.irs.gov/irm/part4/irm_04-025-004. Proof of the payment of the foreign death taxes must be provided to the IRS before the credit will be allowed (see s 2014(e)(2) of the Internal Revenue Code).

(c) If a petition for the redetermination of a deficiency was filed with the Tax Court within the required periods, the claim must be submitted within the four years or before the expiration of 60 days after the decision of the Tax Court becomes final. 95

95 Section 2014(e)(1) of the Internal Revenue Code.

If the relief available under a tax treaty is more favourable than the unilateral relief under the Internal Revenue Code, the executor can elect for the treaty relief to apply. 96

96 IRS 2020 https://www.irs.gov/irm/part4/irm_04-025-004. To claim the relevant relief, Form 706 should be submitted, and it must indicate the treaty provision being invoked.

4 Conclusion

The OECD Estate Tax Model has not been updated since 1982 and the European Commission has provided useful recommendations for the purposes of updating unilateral relief provisions in respect of double estate taxation. The OECD in its latest report, Inheritance Taxation in OECD Countries (2021), aligns its recommendations with those made by the European Commission as a sound basis on which unilateral relief provisions can be reviewed.

The lack of clear statutory guidance to claiming unilateral relief in South Africa in respect of double estate taxation was discussed, and various recommendations are proposed to enhance certainty under section 16(c) of the Estate Duty Act.

To address the uncertainty regarding the type of foreign death duty and qualifying foreign assets that may fall within section 16(c), a definition for "death duties" under section 1 of the Estate Duty Act, 98

98 See para 2.1 above.

It is further recommended that the existing limitation rule where the relief is limited to the value of the estate duty payable in South Africa in respect of the foreign asset be expanded to provide guidance on the method where an appropriation of foreign duties to an asset is required. 101

101 See para 2.4.2 above.

applied for. It is further suggested that a standard rule of, for example, five years from the date the liability arises should apply, and the Commissioner should be provided with the discretion to extend the period up to a maximum of ten years, provided sufficient proof of why the extension is needed can be provided. 102

102 See para 2.4.3 above.

In addition to the above, clear conditions on when the relief can apply should be considered. For example, the relief should not be allowed automatically, but only if applied for on death duties paid in respect of the same asset that is also subject to estate duty in South Africa, and if a tax treaty exists the unilateral relief is not available.

It is argued that implementing the above suggestions would promote the canon of certainty by providing clear guidance on how and when relief from double estate taxation can be claimed.

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Merriam-Webster Dictionary 2023 Death Duty https://www.merriam-webster.com/dictionary/death%20duty accessed 25 March 2023

Nevil 2023 https://www.investopedia.com/terms/d/death-taxes.asp

Nevil S 2023 What are Death Taxes? How to Reduce or Avoid Them? https://www.investopedia.com/terms/d/death-taxes.asp accessed 25 March 2023

OECD date unknown https://www.oecd.org/ctp/glossaryoftaxterms.htm

Organisation for Economic Co-operation and Development date unknown Glossary of Tax Terms https://www.oecd.org/ctp/glossaryoftaxterms.htm accessed 28 March 2023

Oxford Reference 2023 https://www.oxfordreference.com/view/10.1093/ oi/authority.20110803095704769

Oxford Reference 2023 Death Duties https://www.oxfordreference.com/ view/10.1093/oi/authority.20110803095704769 accessed 25 March 2023

SARS date unknown https://www.sars.gov.za/legal-counsel/international-treaties-agreements/estate-duty-agreements/

South African Revenue Service date unknown Estate Duty Agreements https://www.sars.gov.za/legal-counsel/international-treaties-agreements/estate-duty-agreements/ accessed 5 August 2023

SARS 2015 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/ LAPD-IntR-IN-2012-63-Rules-Translation-Amounts-Foreign-Currencies.pdf

South African Revenue Service 2015 Interpretation Note No 63 (Issue 2): Rules for the Translation of Amounts Measured in Foreign Currencies Other than Exchange Differences Governed by Section 24I and the Eighth Schedule https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-2012-63-Rules-Translation-Amounts-Foreign-Currencies.pdf accessed 26 September 2023

SARS 2022 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/ Legal-IN-18-Rebate-and-deduction-for-foreign-taxes-on-income.pdf

South African Revenue Service 2022 Interpretation Note No 18 (Issue 5): Rebate and Deduction for Foreign Taxes on Income https://www.sars.gov.za/wp-content/uploads/Legal/Notes/Legal-IN-18-

Rebate-and-deduction-for-foreign-taxes-on-income.pdf accessed 26 September 2023

SARS 2023 https://www.sars.gov.za/wp-content/uploads/Legal/Notes/ Legal-IntR-IN-101-Gains-or-losses-on-foreign-exchange-transactions.pdf

South African Revenue Service 2023 Interpretation Note No 101 (Issue 2): Gains or Losses on Foreign Exchange Transactions https://www.sars.gov.za/wp-content/uploads/Legal/Notes/Legal-IntR-IN-101-Gains-or-losses-on-foreign-exchange-transactions.pdf accessed 26 September 2023

List of Abbreviations