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Concern about wider ramifications of proposed expat tax change

Stakeholders collecting data to substantiate claims.
Further discussions are currently being held at an industry forum level to collect data on the increased cost to employers as well as the effectiveness of the existing tax credit system. Picture: Shutterstock

Stakeholders are currently collecting data on the wider ramifications of National Treasury’s proposed amendment to expat tax exemption. This is following concerns that it could come at a significant cost to certain employers, individual tax residents and the attractiveness of South Africa as a gateway to Africa.

The proposal, which is expected to take effect on March 1 2020, would mean that South African tax residents working abroad for more than 183 days a year (of which 60 days are continuous) will be taxed in South Africa. Only the first R1 million of foreign remuneration will be exempt and tax residents would only be eligible for a tax credit to the extent that tax was paid offshore. Currently, the employment income earned on foreign services that meet these requirements is exempt from tax in South Africa, subject to certain conditions.

Beatrie Gouws, associate director for global mobility services at KPMG, says while the exemption threshold should limit the impact of the amendment for lower- to middle-class self-sponsored South African tax residents who are working abroad in high-income tax jurisdictions, it seems that the R1 million exemption will provide little relief for employer-sponsored workers on assignment and some employers could be worse off.

Employer-sponsored workers normally receive various types of fringe benefits like relocation support, home leave and assistance with schooling in order to provide them with the same type of living conditions that they were used to in South Africa, but these benefits are taxable.

If the employer also “tax equalises” the remuneration package – thereby effectively placing the employee in the same tax position he or she would have been in if they stayed in South Africa – it can become complex and costly.

There is also concern about the potentially onerous process of claiming tax credits.

While the South African Revenue Service (Sars) previously advised Parliament’s Standing Committee on Finance that the tax credit system was working well, this has not been their experience, Gouws says. Moreover, provisional tax liabilities will be difficult to estimate as most foreign countries’ tax years aren’t aligned with South Africa’s and it is unclear what Sars would accept as sufficient proof of foreign taxes paid upon assessment.

If the proposal is implemented in its current form, there is a risk that companies would enter foreign countries directly, and not necessarily through a headquarter company in South Africa or by using South African talent, she adds.

It could also be less beneficial for individuals to remain South African tax residents and for local companies to tender for projects in Africa.

While National Treasury argues the current exemption appears excessively generous and creates opportunities for South African tax residents to benefit from double non-taxation, Gouws says closing the loophole could be shortsighted. Some businesses will be less competitive and South African tax residents may choose to exit the country, particularly where they don’t have a lot of assets.

This could put strain on an already small income tax base.

Gouws says although Treasury has softened its original stance by allowing for a R1 million exemption threshold, questions have been raised as to whether the updated proposal will ultimately benefit the fiscus.

“Submissions to that effect have been made to the National Treasury, arguing that the proposed amendment would result in a significant impact on the bottom line of companies engaged in current or future foreign inward investment into South Africa, and South African companies alike.

“However, very few companies have provided any detailed analysis to substantiate these assertions, either as an expected increase in their administration, employment and/or tax cost.”

Against this background, further discussions are currently being held at an industry forum level to collate data on the increased cost to employers and the expected result of the amendment as well as the effectiveness of the existing tax credit system, she says.

Read more on the proposed expat tax:

Relief, concern about revised expat tax proposal

Expat tax could be ‘final straw’

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There treasury goes kicking up a big fuss concerning state organs they are not even in charge of or even understand. All this will do is make overseas workers under-declare their income and stash it abroad. That effectively equals capital flight and a direct drain on the foreign currency deficit.

No country is obliged or has any interest in sharing tax information of skilled labour within their borders. Tax swap agreements exist but are negotiated as part of trade deals, and not plucked from the air at your fancy. The cost of investigating individual cases of such small evasion is astronomical. The treasury should hire someone with an economics degree, or even just Economics 101.

With CRS it is becoming more and more difficult to “stash” income abroad and participating countries are obliged to share information with the home countries of residents. I live in Abu Dhabi and had to sign a CRS approval form and declare my tax residency in SA a few months ago.

Treasury needs to stop milking the middle and upper income classes since their actions will result in that group simply leaving. They are too afraid to touch any of the income streams that will affect their voter base (ie. low LSM)…

I wouldn’t worry about CRS. They won’t stand for draconian US FACTA-style reboot of migrant tax collection. You can’t tax twice. It’s ludicrous. Especially on real estate or company equity and dividends.

The point of CRS is to eliminate tax evasion. By stashing your money offshore to avoid double taxation you are avoiding tax in SARS’s eyes. Regardless of how you feel about the fairness of tax. (I agree with you about the double taxation on investments with regards to CGT and DWT, but what we feel has no effect on SARS).

I say it won’t come to pass since FATCA is primarily an asset reporting instrument, instead of income reporting or tax related. Any income taxed on Americans living abroad is by bilateral agreement (as with any such arrangement). CRS isn’t a global tax regime for any country to just sign up to: that’s non-existent.

SARS can do what they want but once they see the exodus of high-value inhabitants they’ll realise they’re putting the carriage ahead of the horse. 80% of the total Personal Income Tax, which comprises 34% of SARS’s total tax revenue, is derived from only 1,9 million individuals. A fat portion of those I’d think have received the message loud and clear that they are not on Santa’s present list. If you are living abroad already, it’s a small leap to emigrate permanently for a healthy tax break. I really don’t grasp what Malooter thinks they’re doing for worldwise globetrotters to make them slap on the ball and chain.

FACTA = Foreign Account Tax Compliance Act. So it is very much tax related. Will it be simple to implement? Of course not. But the framework is being put in place that will give SARS information about foreign accounts. Whether we like it or not.

Which is a good thing theoretically. What’s not being discussed is that foreign workers bring capital into the country. Discouraging that contributes to a trade deficit. Foreign workers are really like exporting goods and services in return for foreign capital.

But I think the number of part-timers is insignificant compared to fully fledged emigrants. There is a global sentiment towards limiting dual citizenship to simplify tax and administration. It feels more like a cost-cutting measure to me than an economic one.

If you are a naturalised South African citizen it should be simple to regain citizenship later if you renounce it to live elsewhere. But gaining citizenship elsewhere isn’t exactly a cake walk. There are likewise very generous visa considerations in SA. In some ways it’s better to be a expat here. Unless you’re American, probably, thanks to FATCA.

This reminds me of when Malusi Gigaba, in his previous role for which he was not suited (excuse the pun), almost destroyed SA tourism by requiring unabridged birth certificates to be presented for all visiting minors.
That time, only the hospitality and travel industries suffered.
This time, it is going to hit the state coffers directly. Brilliant own goal guys, keep up the outstanding work.

Can we please have some discussion of the international best practice? Since this is a cross-border issue to begin with, I’d like to know what the UK / Australia / Canada / Brazil / India tax authorities have in place for offshore workers.

What we are seeing from the expat community working abroad is a scramble to file retrospective emigrations applications … which will not only serve to cut their Tax Residency here – but also to further the flight of whatever capital they may have left here or inherit in the future.

Many South Africans have left the country [hundreds of thousands] over the past few decades by merely relocating without formally emigrating [mostly because of a misguided belief that by emigrating they would lose their RSA Citizenship]. Some may have chosen not to emigrate because of the deemed disposal of their RSA assets and consequent exposure to CGT … but given the ever increasing inclusion rate and escalating tax rates – that may have been an expensive mistake.
Those who formally emigrate are unlikely to return their wealth to South Africa.

So … this shift in taxation policy may well prove to be a DELUXE “own goal” … not only because it is often all too easy to exit the Tax Residency but also because it will lead to a greater exit of much needed capital from the country. Another typical example of the “Namhlanje” mindset that pervades Government in this country! Cash in TODAY … who cares about tomorrow!

The President does not pay his tax!

If I have to go through all the effort to work abroad I would:

No. 1 Emigrate or relocate and tell SARS where to go …
No. 2 Or keep my cash overseas.

Let the President and his friends go work like all other Tax paying South Africans.

What are the consequences of financially emigrating and then wanting to return to SA after a number of years?

End of comments.

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