1) For the purposes of this section--
"acquisition rate" means the exchange rate in respect of an exchange item obtained by dividing the amount of the expenditure incurred for the acquisition of such exchange item by the foreign currency amount in respect of such exchange item;
"affected contract" means any foreign currency option contract ot forward exchange contract, as the case may be, which has been entered into by any person during any year of assessment, to serve as a hedge in respect of a loan, advance or debt, where--
a) such loan or advance has not yet been obtained or granted, as the case may be, by such person or such debt has not yet been incurred by or the amount payable in respect of such debt has not yet accrued to such person, as the case may be during such year of assessment; and
b) such loan, advance or debt--
i) is to be utilized by such person to acquire any asset or to finance any expense; or
ii) will arise from the sale of any asset or the supply of any services,
in the ordinary course of his trade in terms of an agreement entered into by such person prior to the end of such year of assessment; and
"disposal rate" means the exchange rate in respect of an exchange item obtained by dividing the amount received or accrued in respect of the disposal of such exchange item by the foreign currency amount in respect of such exchange item;
"exchange difference" means the foreign exchange gain or foreign exchange loss in respect of an exchange item during any year of assessment determined by multiplying such exchange item by the difference between
a) the ruling exchange rate on transaction date in respect of such exchange item during that year of assessment, and--
i) the ruling exchange rate at which such exchange item is realised during that year of assessment; or
ii) the ruling exchange rate at which such exchange item is translated at the end of that year of assessment; or
b) the ruling exchange rate at which such exchange item was translated at the end of the immediately preceding year of assessment or at which it would have been translated had this section been applicable at the end of that immediately preceding year of assessment, and--
i) the ruling exchange rate at which such exchange item is realised during that year of assessment; or
ii) the ruling exchange rate at which such exchange item is translated at the end of that year of assessment;
"exchange item" of or in relation to a person means an amount in a foreign currency-
a) which constitutes any unit of currency acquired and not disposed of by that person;
b) owing by or to that person in respect of a loan or advance or a debt incurred by or payable to such person;
c) owed by or to that person in respect of a forward exchange contract; or
d) where that person has the right or contingent obligation to buy or sell that amount in terms of a foreign currency option contract;
"foreign currency" in relation to any exchange item of a person, means any currency which is not local currency
"foreign currency option contract" means any agreement in terms of which any person acquires or grants the right to buy from or to sell to any other person a certain amount of a nominated foreign currency on or before a future expiry date at a specified exchange rate;
"forward exchange contract" means any agreement in terms of which any person agrees with another person to exchange an amount of currency for another currency at some future date at a specified exchange rate;
"forward rate" means tile specified exchange rate as referred to in the definition of "forward exchange contract";
"intrinsic value", in relation to a foreign currency option contract, means the value for the holder or writer thereof, as the case may be, determined by applying the difference between--
a) the spot rate on translation date or the date on which the foreign currency option contract is realised, as the case may be; and
b) the option strike rate, to the amount of foreign currency as specified in such foreign currency option contract: Provided that such foreign currency option contract shall have a nil value for the holder or writer thereof if such holder thereof would have sustained a loss had he exercised his right in terms of such foreign currency option contract on such translation date or date realised due to the unfavourable difference between the option strike rate and the spot rate on such translation date or date realised;
"local currency" means in relation to -
a) any person in respect of an exchange item which is attributable to any permanent establishment outside the Republic, the functional currency of that permanent establishment: Provided that for purposes of this paragraph any exchange item shall be deemed not to be attributable to any such permanent establishment if the functional currency that permanent establishment is the currency of a country which has an official rate of inflation of 100 per cent or more throughout the relevant year of assessment.
b) any resident other than a headquarter company in respect of an exchange item which is not attributable to a permanent establishment outside the Republic, the currency of the Republic;
c) any person that is not a resident in respect of any exchange item which is attributable to a permanent establishment in the Republic, the currency of the Republic; or
d) any headquarter company in respect of an exchange item which is not attributable to a permanent establishment outside the Republic, the functional currency of that headquarter company;
"market value", in relation to a foreign currency option contract, means--
a) in the case of a person who for accounting purposes uses a market-related valuation method in terms of a practice consistently applied by him to determine the value of all his foreign currency option contracts, the market-related value so determined; or
b) in the case of any other person, the intrinsic value of such foreign currency option contract;
"option strike rate" means the specified exchange rate as referred to in the definition of "foreign currency option contract";
"premium or discount on a forward exchange contract" means the amount obtained by applying the difference between the forward rate in respect of a forward exchange contract and the spot rate on the date on which such forward exchange contract was entered into, to the foreign currency amount specified in such forward exchange contract;
"realised" means, in relation to an exchange item, where such exchange item is--
a) a loan or advance or debt in any foreign currency, when and to the extent to which payment is received or made in respect of such loan, advance or debt, or when and to the extent to which such loan, advance or debt is settled or disposed of in any other manner;
b) a forward exchange contract, when payment is received or made in respect of such forward exchange contract;
c) a foreign currency option contract, when payment is received or made in respect of the right in terms of such foreign currency option contract having been exercised, or when such foreign currency option contract expires without such right having been exercised, or when such foreign currency option contract is disposed of; or
d) an amount which constitutes a unit of currency, when that amount is disposed of;
"ruling exchange rate" means, in relation to an exchange item, where such exchange item is-
a) a loan or advance or debt in a foreign currency on--
i) transaction date, the spot rate on such date,
ii) the date it is translated, the spot rate on such date, or
iii) the date it is realised, the spot rate on such date:
Provided that where the rate prescribed in respect of a loan or advance or debt in terms of this definition is the spot rate on transaction date or the spot rate on the date on which such loan or advance or debt is realised, and any consideration paid or payable or received or receivable in respect of the acquisition or disposal of such loan or advance or debt was determined by applying a rate other than such spot rate on transaction date or date realised, such spot rate shall be deemed to be the acquisition rate or disposal rate, as the case may be;
b) a forward exchange contract on--
i) transaction date, the forward rate in terms of such forward exchange contract;
ii) the date it is translated, the market-related forward rate available for the remaining period of such forward exchange contract, or in respect of a forward exchange contract which is an affected contract, the forward rate in terms of such forward exchange contract;
iii) the date it is realised, the spot rate on such date; or
c) a foreign currency option contract on--
i) transaction date, a nil rate;
ii) the date it is translated--
aa) in relation to a foreign currency option contract which is not an affected contract, the rate obtained by dividing the market value of such foreign currency option contract on that date by the foreign currency amounted as specified in such foreign currency option contract; or
bb) in relation to a foreign currency option contract which is an affected contract, the rate obtained by dividing any amount included or deducted, as the case may be, in terms of subsection (3)(b) by the foreign currency amount, as specified in such affected contract;
iii) the date it is realised, the rate obtained by dividing the market value of such foreign currency option contract on that date by the foreign currency amount as specified in such foreign currency option contract: Provided that where such foreign currency option contract is realised by the disposal thereof, the rate shall be obtained by dividing the amount received or accrued as a result of the disposal of such foreign currency option contract, by the foreign currency amount as specified in such foreign currency option contract:
iv) [Sub-para. (iv) deleted by s. 11(1)(c) of Act No. 140 of 1993];
d) an amount which constitutes a unit of currency, on –
i) transaction date, the spot rate on that date;
ii) the date it is translated, the spot rate on that date; or
iii) the date it is realised, the spot rate on that date:
Provided that the Commissioner may, having regard to the particular circumstances of the case, prescribe an alternative rate to any of the aforementioned prescribed rates to be applied by a person in such particular circumstances, if such alternative rate is used for accounting purposes in terms of generally accepted accounting practice;
"transaction date" means, in relation to--
a) a loan or advance owing by a person, the date on which the amount payable in respect of such loan or advance was received by such person;
b) a debt owing by a person, the date on which such debt was actually incurred;
c) a loan or advance owing to a person, the date on which the amount payable in respect of such loan or advance was paid to another person or the date on which such loan or advance was acquired by such person in any other manner;
d) a debt owing to a person, the date on which the amount payable in respect of such debt accrued to such person or the date on which such debt was acquired by such person in any other manner;
e) a forward exchange contract, the date on which such contract was entered into;
f) a foreign currency option contract, the date on which such contract was entered into or acquired; and
g) an amount which constitutes a unit of currency, the date on which that amount was acquired;
"translate" means the restatement of an exchange item in the local currency at the end of any year of assessment by applying the ruling exchange rate to such exchange item.
2) The provisions of this section shall apply in respect of any-
a) company;
b) trust carrying on any trade;
c) natural person who holds any amount contemplated in paragraph (a) or (b) of the definition of ‘exchange item’ as trading stock; and
d) natural person or trust in respect of any amount contemplated in paragraph (c) or (d) of the definition of ‘‘exchange item;
Provided that this section does not apply in respect of any exchange item of a person who is not a resident (other than a controlled foreign company), unless that exchange item is attributable to a permanent establishment of that person in the Republic.
3) In determining the taxable income of any person contemplated in subsection (2), there shall be included in or deducted from the income, as the case may be, of that person-
a) any exchange differences in respect of an exchange item of or in relation to that person, subject to subsection (10); and
b)
i) any premium or like consideration received by, or paid by, such person in terms of a foreign currency option contract entered into by such person; or
ii) any consideration paid by such person in respect of a foreign currency option contract acquired by such person;
c) [deleted by section 38 of Taxation Laws Amendment Act No. 17 of 2009] :
Provided that such discount or premium shall be deemed to have accrued or been incurred, as the case may be, on a day to day basis during the period of such forward exchange contract for the purposes of this paragraph.
4) Deleted by the Revenue Laws Amendment Act, 74 of 2002
5) [deleted by the Taxation Laws Amendment Act, 2008 (Act No. 3 of 2008)] .
6) Any inclusion in or deduction from income in terms of this section shall be in lieu of any deduction or inclusion which may otherwise be allowed or included under any other provision of this Act.
7) Notwithstanding the provisions of subsection (3), but subject to the provisions of sections 36 and 37E--
a) any exchange difference arising from a loan, advance or debt having been utilized by a person in respect of--
i) the acquisition, installation, erection or construction of any machinery, plant, implement, utensil, building or improvements to any building, as the case may be; or
ii) the devising, developing, creation, production, acquisition or restoration of any invention, patent, design, trade mark, copyright or other similar property or knowledge contemplated in section 11(gA), or (gC) as the case may be;
b) any exchange difference arising from a forward exchange contract or a foreign currency option contract which has been entered into by a person contemplated in paragraph (a), to the extent to which such forward exchange contract or foreign currency option contract is entered into to serve as a hedge in respect of a loan or advance obtained or to be obtained or a debt incurred or to be incurred for the utilization thereof as contemplated in paragraph (a); and
c) any premium or other consideration paid or payable in respect of or in terms of a foreign currency option contract entered into or acquired by a person contemplated in paragraph (a), to the extent to which such foreign currency option contract is entered into or obtained in order to serve as a hedge in respect of a loan or advance obtained or to be obtained or a debt incurred or to be incurred for the utilization thereof as contemplated in paragraph (a),
shall, where such exchange difference arose or such premium or other consideration was paid or became payable in a year of assessment prior to the year of assessment during which such machinery, plant, implement, utensil, building, improvements to any building, invention, patent, design, trade mark, copyright or other similar property or knowledge was or is brought into use for the purposes of such person's trade, be carried forward and be taken into account in the determination of the taxable income of such person in the year of assessment during which such machinery, plant, implement, utensil, building, improvements to any building, invention, patent, design, trade mark, copyright or other similar property or knowledge was or is so brought into use for the purposes of such person's trade.
Provided that where the commissioner is satisfied that during any year of assessment subsequent to the year of assessment during which such exchange difference arose or such premium or other consideration was paid or became payable--
a) the loan, advance or debt to be obtained or incurred, as the case may be, as contemplated in paragraph (b) or (c)of this subsection will no longer be so obtained or incurred;
b) such loan, advance or debt has not been utilized as contemplated in paragraph (a); or
c) any such asset, property or knowledge will no longer be bought into use for the purpose of such person's trade, such exchange difference or premium or other consideration shall no longer be carried forward, but shall be taken into account in the determination of such persons taxable income in such subsequent year of assessment.
7A)
a) Where any exchange difference is to be included in or deducted from the income of any company in terms of subsection (3), there shall, in lieu of such deduction or inclusion, be included in or deducted, as the case may be, from the income of such company during any year of assessment an amount equal to 10 per cent of the deferred amount of such exchange difference arising from a loan or advance obtained or granted during any year of assessment ending before 8 November 2005 owing by such company to any other company or owing by any other company to such company (such a loan or advance referred to as a qualifying exchange item for the purposes of this subsection), if--
i) such company is a connected person in relation to such other company; and
ii) the qualifying exchange item is of a capital nature.
b) The deferred amount of any exchange difference shall, subject to the provisions of paragraphs (c), (d) and (e), be the sum of--
i) the foreign exchange gain or foreign exchange loss as determined in terms of this section during any year of assessment in respect of any qualifying exchange item if such foreign exchange gain or foreign exchange loss arose as a result of the translation of such qualifying exchange item at the end of such year of assessment; and
ii) the balance of any foreign exchange gain or foreign exchange loss, in respect of any qualifying exchange item which had arisen as a result of the translation of such qualifying exchange item during any preceding year of assessment, not included in or deducted from the income of such company in terms of paragraph (a) during such preceding year of assessment.
c) The foreign exchange gain and foreign exchange loss referred to in paragraph (b) (i) shall exclude--
i) in respect of all years of assessment ending on or before 31 December 1995, any foreign exchange loss in respect of any loan or advance made by such company to any other company or by any other company to such company on or before 31 December 1994; and
ii) any foreign exchange gain or foreign exchange loss arising in respect of any qualifying exchange item at the end of any year of assessment to the extent to which such qualifying exchange item is hedged by a related or matching forward exchange contract.
d) The balance of any foreign exchange gain or foreign exchange loss in respect of any qualifying exchange item referred to in paragraph (b) (ii) shall--
i) where the foreign currency amount of a qualifying exchange item, to the extent to which it is not hedged by a related or matching forward exchange contract, at the end of any year of assessment is less than the foreign currency amount of such qualifying exchange item, to the extent to which it was not hedged by a matching or related forward exchange contract, as at the end of the immediately preceding year of assessment, be reduced by an amount which bears to such balance the same ratio as the reduction in the foreign currency amount of such qualifying exchange item which is not so hedged at the end of such year of assessment bears to the foreign currency amount of such qualifying exchange item which was not so hedged at the end of such immediately preceding year of assessment; or
ii) be reduced by 100 per cent of such balance in the first year of assessment during which the provisions of paragraph (a) have not been complied with.
e) Where any qualifying exchange item (hereinafter referred to as the old qualifying exchange item) is realized during the year of assessment by conversion thereof into a qualifying exchange item denominated in any other foreign currency (hereinafter referred to as the new qualifying exchange item)--
i) any exchange difference arising as a result of such conversion shall, for the purposes of paragraph (b) (i), be deemed to be a deferred amount of any exchange difference in respect of such old qualifying exchange item;
ii) the foreign currency amount of such old qualifying exchange item shall, for the purposes of paragraph (d), be deemed not to have been reduced on realization to the extent that it was converted into a new qualifying exchange item and, thereafter, the old qualifying exchange item and the new qualifying exchange item shall be deemed to be one and the same qualifying exchange item and a reduction of the foreign currency amount of the new qualifying exchange item shall be deemed to be a reduction of the old qualifying exchange item; and
iii) the foreign currency amount of the old qualifying exchange item at the end of such immediately preceding year of assessment shall for the purposes of paragraph (d) be restated in the foreign currency in which the new qualifying exchange item is denominated by applying the appropriate exchange rate used to convert the old qualifying exchange item to the new qualifying exchange item.
f) Any reduction in terms of paragraph (d) of the balance of any foreign exchange gain or foreign exchange loss in respect of a qualifying exchange item shall be included in or deducted from, as the case may be, the income of such company in the year of assessment of such reduction.
8) Any foreign exchange loss sustained in respect of a transaction entered into by a person, or any premium or other consideration paid in respect of or in terms of a foreign currency option contract entered into or acquired by a person, shall not be allowed as a deduction from such person's income under subsection (3), if such transaction was entered into or such foreign currency option contract was entered into or acquired solely or mainly to enjoy a reduction in tax by way of a deduction from income.
9) [deleted by Revenue Laws Amendment Act No. 31 of 2005]
10) Subject to the provisions of subsection (7A), no amount shall in terms of this section be included in or deducted from the income of –
a) any resident in respect of any exchange difference determined on the translation of an exchange item to which that resident and any company are parties, where that company is-
i) a connected person in relation to that resident; or
ii) a controlled foreign company in relation either to that resident or to any other company, which is a resident, and which other company forms part of the same group of companies as that resident; or
b) any controlled foreign company in relation to any exchange item contemplated in paragraph (a); or
c) any controlled foreign company in relation to a resident in respect of any exchange difference determined on the translation of an exchange item to which that controlled foreign company and any other controlled foreign company in relation either to that resident or to any other resident company and which forms part of the same group of companies as that resident are party:
Provided that where that exchange item is realised during any year of assessment, the exchange difference in respect of that exchange item shall be determined by multiplying that exchange item by the difference between the ruling exchange rate on the date on which that exchange item is realised and the ruling exchange rate on transaction date, after taking into account any exchange difference included in or deducted from the income of that person in terms of this section in respect of that exchange item.
Provided that where that exchange item is realised during any year of assessment, the exchange difference in respect of that exchange item shall be determined by multiplying that exchange item by the difference between the ruling exchange rate on the date on which that exchange item is realised and the ruling exchange rate on transaction date, after taking into account any exchange difference included in or deducted from the income of that person in terms of this section in respect of that exchange item.
11) No amount shall be included in or deducted from the income of a person in terms of this section in respect of any exchange difference arising from –
a) any amount owing by a person in respect of a loan, advance or debt incurred by that person in foreign currency to acquire any asset, other than an asset –
i) which constitutes an exchange item;
ii) the currency of expenditure of which is denominated in the local currency of that person; or
iii) in respect of which the provisions of section 9G or paragraph 43(4) of the Eighth Schedule would apply had that asset been disposed of, regardless of whether or not that asset constitutes trading stock; and
b) any forward exchange contract or foreign currency option contract entered into to hedge such loan, advance or debt.
11A) An amount shall not be included in or deducted from the income of a resident in terms of this section in respect of any exchange difference arising from any forward exchange contract or foreign currency option contract or premium in respect of any foreign currency option contract entered into by that resident to hedge the acquisition of the equity shares of a company by that resident, or by any other resident forming part of the same group of companies as that resident, to the extent—
a) that resident, or that other resident, as the case may be, acquires or is entitled to acquire, no less than 20 per cent of the equity shares of that company;
b) that company will, after that acquisition, be a controlled foreign company (as defined in section 9D(1)) in relation to that resident or that other resident, as the case may be; and
c)
i) in the case of an acquisition by that resident, that amount is not included in the income statement of that resident utilised for financial reporting purposes pursuant to International Financial Reporting Standards, or
ii) in the case of an acquisition by another resident forming part of the same group of companies as that resident, that amount is not included in the consolidated income statement forming part of the annual financial statements of a group for purposes of financial reporting pursuant to International Financial Reporting Standards or South African Statements of Generally Accepted Accounting Practice in terms of which the aforementioned residents are viewed as part of that group for purposes of those Standards or Statements.
12) Where a person holds any exchange item and the provisions of this section at any time during a year of assessment –
a) become applicable to that person, that exchange item shall be deemed to have been acquired at that time for the purposes of this section; or
b) cease to apply to that person, that exchange item shall be deemed to have been realised at that time for the purposes of this section.