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Impending changes to the taxation of foreign employment of SA residents  

The change only impacts individuals who are South African tax residents.

The general rule is that SA tax residents are taxable on their worldwide income. However, section 10(1)(o)(ii) provides a specific exemption for remuneration earned for services rendered outside SA if an employee spends more than 183 full days (including a continuous period of more than 60 full days) outside SA in any 12-month period during which those services are rendered outside SA.

Most foreign countries will tax the employment income of individuals who are earning income from employment in their country on a PAYE-type system. The purpose of this exemption was to provide relief to SA tax residents from paying tax, both in the country where the services were performed as well as in SA. The 183 day and the 60 continuous days’ test, exempted SA residents from being liable for tax on the same income in SA, their country of residence. 

However, many individuals are employed in countries where the employment income of foreign nationals is not subject to tax. These individuals would therefore pay no tax on that employment income, either in SA or in the foreign country where the services are rendered. This is obviously unfair and results in a situation of double non taxation. This goes against the intention of the exemption which was to provide relief against double taxation of the same income and not to provide double non-taxation of the remuneration from foreign services.

In order to end the situation of double non-taxation of foreign employment income, the section was amended in the Taxation Laws Amendment Act of 2017 with effect from March 1, 2020.

Initially it was intended to repeal the section in totality. However, after impassioned representations by affected individuals to National Treasury, the proposal was revised and the section continues to allow the first R1 million of foreign remuneration to remain exempt from tax in SA if the individual meets the requirements of section 10(1)(o)(ii) in relation to that remuneration.

The effect is that if an individual earns remuneration exceeding R1 million from foreign services, the portion exceeding R1 million will be included in the person’s SA taxable income and taxed at the person’s applicable personal income tax rate.

It is important to note that this exemption is applicable to persons who are still considered tax residents of SA although they are performing services outside SA.

The practical implication of this for SA-resident individuals is as follows:

1.    If the individual in foreign employment earns more than R1 million, in a country where they have not been paying tax on remuneration from those foreign services, it is likely that they will be taxable on this income in SA.

2.    If an individual in foreign employment earns more than R1 million, in a country where they have been paying a lower amount of tax on that remuneration than they would have in SA, it is likely that they will be taxable on the difference in tax in SA.

3.    If that person was already paying the same or more employees’ tax in the country where the services are rendered, and now becomes liable for tax in SA, this might result in double taxation.

4.     In situations where double taxation is possible because the individual is already paying tax in the country where the services are being performed, relief in terms of the foreign tax credit sections of the Income Tax Act or the application of a DTA are likely to be available.

5.    If an individual is eligible for foreign tax credit or relief under a DTA, a directive would need to be obtained from the South African Revenue Service (Sars) to request relief from SA tax to the extent that a rebate in respect of the foreign taxes paid on that remuneration is available. In such cases, it is important that the individuals take advice on how to apply for these directives and to understand whether these must be applied for annually.

The change only impacts individuals who are South African tax residents. Many South African nationals working abroad are already non-resident from a tax perspective and will not be affected. In such cases the individual might have to provide evidence to Sars that he or she is not ordinary resident in SA. This is far easier to evidence when a person financially emigrates but it can apply with a change of intention to become an ordinary resident of the foreign country.

South African nationals working abroad are encouraged to obtain professional advice to enable appropriate planning and the assessment of any impact that the new rules may have on their future tax liability. It is not a one-size-fits-all situation and specific advice on an individual’s personal situation should be taken. Many South Africans might have already broken their SA tax residence and be in a better situation than they believe they are.

There is still time before March 2020 to put practical steps in place to ensure that relief from any potential double taxation has been arranged with Sars.

Jenny Gordon, is the head of Retail Legal at Alexander Forbes.

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Excellent article, and none of the greedy fear-mongering that has accompanied previous articles on this topic.

Points 4 & 5 will cause a great deal of problems. The implication is that we’ll tax you here, double tax you in some cases and not credit you for paying too much tax, e.g. what if I pay 60% income overseas and only 45% say in South Africa. Who will give me the tax credits or will SARS pretend it didn’t happen? If we double tax you, it’s up to you to apply for restitution by applying as an individual.

I’ve worked overseas for almost 15 years in total. I’ve always paid tax where I worked, always between 45% and 60% depending on the country. When you convert my income to rands it’s way over the R1m mark, purely because of the Rand’s weak exchange rate. When I started working overseas the exchange rate was US$1 to 2.95 ZARs. It has lost value continuously to where it is today at about R13,80 for a dollar.

In one country I get taxed with a 18% “foreigner” tax, then a 60% income tax. Countries like this one have high cost of living and indirect taxes too, e.g. GST, Medical taxes etc. My income is pretty average compared to the rest of workforce. The irony is that there’s a tax agreement between this country and SA. The purpose of agreement is to avoid double taxation, double shot of irony. It’s not active by default. You can’t look up a value in a table and pay accordingly. You have to apply successfully as an individual. When I visited SARS and DIRCO wrt this, no one knew about it and could not refer me to anyone. The entire application process for one tax year takes about 9 months, partly because you must navigate two sovereign tax jurisdictions successfully.

The current approach seems to be simplistic and to cater for only one use case. The details seem to be completely missing and there’s no operational procedure in place – there’s your problem. The implication is that it’s plan on paper, developed by looking at stats in a spreadsheet with no thought given to implementation.

The number of people who will be liable for this kind of tax is a minority. There will be many many cases of double taxation and “over tax”. Since the details are lacking, the resolution process will stretch into years. It’s unlikely that the tax raised in this way will cover the administration and legal costs of the tax.
This will create an incentive to legitimately avoid this tax. There are several options.

Secondly, the tax is unlikely to raise R100,000,000 per individual ever. But you can easily raise 5 times that amount per year from *one* company dodging taxes…..just one….

My wife and I are not sure from where we will get the money to pay for this new tax. Both of us have been living and working in the Middle East for a number of years. As for the many South Africans in the ME, our incomes are based on the fact we don’t pay “taxes” – typically most South Africans will be reasonably to highly qualified but still would be seen as low-income earners as for example measured against the Brits, Aussies and News Zealanders. But also, please note we do however “pay” significantly for living here including high costs for rent, air fares, school fees and food. Vegetables and fruits are extremely expensive. Consider this: we have fixed incomes, but its blown out of proportion by an ever-weakening Rand. For example, take the Rand at below 10 to the US Dollar (when we first arrived early 2000’s up to about 2013, it was for most times well below it), very little taxes will be due. At the current USD / ZAR exchange rates levels, we will be liable for a significant tax burden albeit our incomes did not increase – the money for such taxes, therefore simply not there. To explain take an average salary (engineer, quantity surveyor, etc): UAE 40,000 less costs for accommodation 18000, vehicles 5000, foods 6000, school fees 2000, general expenses 3000 & savings and retirement 5000 leaving a small balance of 1000. The tax liability in SA: 40k x 3.8 x 12 = ZAR 1824000 – 1000000 = taxable amount of R824000, @ 41% = R337840 – per month will = UAE Dirham of 7408. When we came in 2002 the exchange rate was 1.6. The resultant tax then would have been UAE Dirham 978 per month. Thus, the application of this regulation clearly unfair; and I believe the Constitution categorically denies the application of such unfair regulations / laws – hopefully there are persons that can take this matter up with Treasury / Constitutional Court, and get it put on hold until such stage as a fair means can be established for levying taxes on foreign employment incomes. The regulations as it is now; not fair.

Good comments.

Lets hear from a true tax expert on what “Income” for individuals in this new tax grab situation actually means. Is it going to be as bad as frikkieo indicates.

Back in the day one could not deduct travelling expenses to and from work. Will SA expats here be able to deduct their travelling costs from SA>offshore and back? What about the horrendous accommodation costs? If I live in SA and travel on business to say Durban I can claim my hotel, daily living expenses and car hire/taxi.

How about a couple of real=life examples of what will occur.

What happens I this new tax grab situation?

Hi, as I understand it, accommodation costs etc are not tax deductible when you are “permanently” living far from your “home”.

You need to take advice on where the UAE/SA treaty would place you as exclusively resident. If UAE you’d have nothing to fear.

There is so much BS on the web on this topic when it is actually not that complicated. Mostly from those selling financial emigration as the ultimate solution.

The Great South African response: the purpose of the SA constitution, as we all know, it to protect us from anything we dislike.

Tax is tax. Barring a revolution we all bear it. But if you do not pay your bit then I must pay it for you, and it strikes me that if you cannot afford to live where you live and do what you do, then maybe you must change where you live or change what you do, just like anyone else might need to in the same situation should things get tough, regardless of who or where they are.

As you indicate, it is only arithmetic: if you can’t afford your lifestyle, increase your income or change your lifestyle. We are not guaranteed an endless trajectory upwards merely by virtue of wanting it to be that way. After all, no one forces you to be where you are, doing what you do: you elected to do it and you must be able to support that election, if you can’t, then perhaps it is time to move on. Things change, for all of us.

It is tight for most people right now and we could all appeal to the impact of the exchange rate, for example. But I suspect that I will spend as much of my day thinking about alleviating your problems as you will spend thinking about resolving mine.
As a professional you have many options that others do not. That is what you worked for. Meet the challenge.

I wish you well.

No sir, your point of view will not stand further scrutiny. The point you are missing is this; due to a weaking rand foreign incomes are increased, but its not! At the worst about R30 to a dollar I will need to remit my whole foreign salary to SARS.

At 10 to dollar, r1000 tax pm, at 13:1 r8000 pm, 15:1 about r18000 pm.

This remember my foreign income not increasing. That is my point.

How on earth do you arrive at R337840 in tax? Using the 41% *marginal* tax rate. Plug your numbers into any of the many tax calculators on the web and you will see the tax comes to less than half of that. That’s assuming your retirement contributions are not deductible, which they may be, depending on what they are.

Hello sir. Well its the marginal rate…I am already on paying in 41% bracket as we have rent and invest income in SA. The point that is not understood is regarding the poor rand exchange rate.

I hope this will bring a better understanding.

Notwithstanding high living expenses you refer to in the ME, it’s fair that everyone pays tax. In SA we also have high living expenses.

Taxation is never fair. It should be called extortion, which is what it really is. Look at the theft and wastage that happens to the money you pay to SARS. I hope you are having with that.

Typo. Happy with that.

Agree with you, tax goes mostly to politicians’ lifestyles unfortunately. But I’ve not heard of high living costs being a reason not to pay tax at all in fairness to those who live and work in SA.

You should only pay taxes to SA if you use the country’s services hence the residency test. It just shows how people do not understand that if you are not t you are not liable for taxes.

I will pay taxes to the country whose services I use and that provides me with services for my taxes… (that is fundamentally broken in SA and another case all together).

In any case; relevant Double Taxation Treaties include the residency portion as in the UK and SA one; this means that I live and work in the UK and I am employed by a UK employer… so according to that treaty I am UK resident for tax purposes.

In any case; first principle is you are taxed to pay for the services a country provides you… if you do not use their services… you should not be taxed.

Yes, but remember irrespective of the exchange rate, your tax essentially stays the same; ours will not. As the rand exchange rate is weakening the more tax we will remit; my point is this: from where must I get it? My UAE salary did not increase!

PS just for the record: we did not come to Middle East because of issues in SA; we are sad when leaving but more than happy when returning for holidays.

What’s wrong with double non taxation, I welcome it. Most have left this country because of reverse apartheid. Given the opportunity I would rather pay my taxes to the country I work in rather than to SA to feed greedy ANC cadres.

So if you get into an altercation with a native of the country you work in, and the secret police lock you up,I presume you will decline South African consular assistance?

The government is only going to get more desperate in the coming years.

I will die one day owing SARS a massive amount of money. That much is certain.

Storm in a teacup – most people will have a different tax residence. Furthermore to those that don’t it is near impossible to detect.

To those that say the current system of tax in South Africa is fair – back it up with some facts. My effective federal tax rate was in the teens last year in the USA. No state tax and 7% sales tax, free schooling, zero crime, cheap utilities and petrol. When we were in SA I could hardly make ends meet – effective tax in the late 30’s, 14% VAT, utilities 3x the cost in dollar terms, petrol 40% higher, private schooling, sky high insurance and of course being subject to violent crime which if it had a dollar value would dwarf all the rest. I’d say its extremely unfair based on these facts.

To those who were forced to leave through any of racist policies, rampant crime, a disastrous government etc. don’t pay this criminal state a single cent and make plans to leave permanently. You are refugees or people in exile to get away from vicious racism and do not owe this government a cent. If you like call it your ‘illegal disconnection’ from the tax system.

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