Could South Africans earning foreign income face double taxation?

The 2017 Draft Taxation Laws Amendment Bill (TLAB) and the 2017 Draft Tax Administration Laws Amendment Bill have proposed the removal of the foreign remuneration exemption. Current legislation allows employees to prevent the occurrence of double taxation “based on their residence in South Africa and the source of their remuneration in a foreign country if certain criteria were met,” explained Tarryn Atkinson, chairperson of the South African Institute of Chartered Accountants (SAICA) Employees Tax and Expatriate Sub-Committees.

Niel Pretorius, wealth adviser at Sable International, highlighted that tax is an area of major concern for South Africans who are either currently working abroad or looking to leave to work abroad. The proposed removal of the foreign employment income exemption, “will have the effect that many South Africans may be exposed to further tax in South Africa on their foreign employment income where the tax they pay on such income is less than what they would have paid on an equivalent amount in South Africa,” explained Pretorius.

The current requirements for exemption of paying tax in South Africa, require that the employee spends at least 183 days outside of South Africa rendering services in any 12 month period, of which at least 60 days must be continuous. “The premise of the exemption was that South Africa, as relief, would voluntarily give up its taxing rights as the international standard practice was for foreign countries to tax taxpayers rendering services in those countries for more than 183 days,” clarified Atkinson.

If the exemption is removed could you be taxed twice?

There is a concern that if the current exemption is removed, South Africans working and earning abroad could be taxed twice.

Atkinson noted that South African tax is residence based. This means that all tax residents are subject to tax on their worldwide income, whether they are a citizen of South Africa or not. If you are working in a foreign jurisdiction, yet you are a tax resident in South Africa, all of your earnings would be taxable in South Africa if it weren’t for the current exemption.

Atkinson elaborates: “Most other jurisdictions will tax non-residents on a source basis, as is the case in South Africa. In the case of remuneration, the source would be where the services are rendered. This creates a double taxation situation where one jurisdiction taxes income on a residence basis and the other on a source basis. The only remedy is then to rely on a Double Taxation Agreement (DTA) if one existed or claim relief such as a foreign tax credit to prevent double taxation. The exemption operated to prevent this.”

The removal of the exemption could result in employees being double taxed, where no relief can be claimed. “Consideration will, however, have to be had to foreign tax rebates and any DTAs in place between South Africa and the relevant foreign jurisdiction, which substantially adds to the tax complexity and administrative burden of these taxpayers,” added Atkinson.

What could the removal of the foreign remuneration exemption mean for you?

As a South African tax resident, you should have, up to now, been declaring your foreign remuneration anyway, in order to claim the current exemption in your annual tax return. But what happens if the exemption is removed?

Atkinson stated: “If South Africa retains taxing rights, the taxpayer will have to pay tax in South Africa on that remuneration, and then claim any foreign taxes paid as a credit.”

To better illustrate this, Atkinson provided the following example: A taxpayer working in Nigeria on an expatriate assignment paying tax at 25% will have to make good on the difference between this rate and the South African tax rate of 45%. They will therefore need to pay 20% tax on remuneration that has already been subject to taxation. There will be a larger impact for those taxpayers working in lower tax jurisdictions or no tax jurisdictions such as Dubai.

However, this situation becomes more complex when you have no rights in terms of a DTA. If you seek to apply the above principle of only paying tax on the difference between the tax rate in the foreign country and that in South Africa, you will have to prove your reliance on this DTA exclusion. This includes providing a tax residency certificate from the foreign jurisdiction in certain circumstances, as well as various other steps.

“Where a person works in multiple countries in that year, this enquiry and process would have to be applied separately to each country,” added Atkinson.

The effect of emigration and immigration

Pretorius noted of South Africa’s tax system: “One has to bear in mind that South Africa employs a residence-based taxation system. You are only liable for tax in South Africa on foreign earnings if you are either ‘ordinarily resident’ in South Africa or meet the requirements of the physical presence test. That said, even though you may still be deemed to be resident in South Africa in terms of the Income Tax Act, by virtue of your foreign presence and employment you may escape tax in SA on your foreign income if you are deemed to be a resident of another country by virtue of the provisions of a DTA between South Africa and such country. This is known as treaty relief.

“If South Africans are living and working outside of South Africa with the intention of, and having taken steps to evidence that intention, becoming ordinarily resident in another country, the proposed repeal of the exemption would not affect them. Similarly, if they meet the criteria of a relevant DTA the repeal would also not affect them. The onus remains on the taxpayer to prove this which can be difficult from a practical point,” said Pretorius.

He added: “Emigration from SA does not affect your citizenship in any way. It does, however, have various tax consequences, such as a deemed disposal of your worldwide assets for CGT purposes. This needs to be considered carefully when deciding to emigrate formally.”

Furthermore, dual citizenship will not impact whether or not you are liable to pay tax in South Africa, as Pretorius pointed out that citizenship does not determine tax residency. “As much as a South African can be a tax resident of another country, a foreigner may be a tax resident of South Africa.”

Responses to the proposal

Many people grudgingly pay tax, however, it is important to do so, as failing to pay tax where it is required could see you facing hefty fines or other legal challenges.

Pretorius stated: “The blanket taxation of SA expats, only allowing foreign tax credits, seems unfair in the extreme. Government has not taken into account that the vast majority of expat rich countries have a very high cost of living, and if they were to be taxed on their total foreign income most expats would be forced to either return home (and probably become unemployed) or to formally emigrate.”

However, in contrast, SAICA noted that it agrees with “a fiscal proposal that seeks prevent double non taxation and seeks to create uniformity in policy (i.e. single residence basis of taxation) but seeks to do this in a pragmatic and cost effective manner.”

It added: “The main Treasury concern is double non-taxation and though a mere repeal of the current law will solve this problem, it is not a pragmatic or cost effective approach in the many instances where double non-taxation is not applicable. SAICA’s view remains that the current law is a pragmatic approach that seeks to balance protecting the tax base with the administrative cost in doing so.”

Pretorius added: “Even if a SA expat escapes the proposed amendment by virtue of being non-habitually resident or in terms of a DTA, they should take care to structure their affairs in such a manner that, should they return to South Africa in future, their affairs are optimised for future taxation of those assets. This can be a very complex area as one is dealing with multiple jurisdictions and you should seek advice from professionals who have the requisite experience in cross-border planning and understand the issues South Africans abroad face whilst outside of SA as well as on their return.”

For more information on the proposed amendments in the tax legislation, click here

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