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Is the new exit tax constitutional?

The exit tax may very well lead to the double taxation of retirement interests.
Image: Shutterstock

The 2021 Draft Tax Bills published proposed to introduce a tax on retirement interests of those who cease their South African tax residency. It means a new section will be inserted in the Income Tax Act that will take effect from 1 March 2022. The exit tax may very well lead to the double taxation of retirement interests, and it stands to contravene the network of double tax treaties concluded by the South African Government.

Double Taxation

Countries enter into double tax agreements (DTA) to encourage economic activities, ward off fiscal evasion and, critically, to prevent double taxation. Double taxation occurs where two countries impose tax on the same person for the same subject matter. DTAs aim to prevent this by allocating taxing rights, which will determine which country has the right to tax the income in question. Where both countries have the right to tax the income, the DTA will require the country of residence to provide a tax credit for foreign taxes paid.

Read: Tax Bills propose additional exit tax on emigrating South Africans

In the context of pensions and similar amounts, the DTA would generally give the country of residence the sole taxing right. This is where the problem comes in because the proposed exit tax creates a fiction, where it treats the person to have withdrawn from the applicable fund on the day before they cease residency, creating a South African tax liability. By designing it this way, the exit tax effectively subverts the DTA, which we will get to in a moment.

The problem for the taxpayer comes in where they actually withdraw their retirement interest at a future date. When this time comes, they will probably have become resident of their new country of residence, which, per the DTA, may then tax that amount in terms of its domestic tax laws. The result is the retirement interest is taxed in both countries.

Ordinarily, the DTA will then provide relief to the taxpayer by requiring the country of residence to give a tax credit for the foreign (South African) taxes suffered. However, since the South African tax effectively contravened the provisions of the DTA, the new country of residence would not be required to give such a credit.

Does the exit tax override the DTA?

According to the Organisation for Economic Co-operation and Development (OECD), a treaty override is “the enactment of legislation which is intended to nullify unilaterally the application of international treaty obligations”.

The proposed tax on the deemed withdrawal of the South African retirement interests of expats ceasing tax residency in South Africa fits this description. This seems to be fully understood by National Treasury, which in its Explanatory Memorandum on the exit tax brazenly states that “[t]he application of a tax treaty between South Africa and the new tax resident country may in some instances result in South Africa forfeiting its taxing rights.”

In other words, the new provision appears to be designed specifically to subvert the DTA, thereby overriding the network of DTAs concluded with other countries.

The gravity of this decision cannot be understated. It is important to understand that once a DTA has been approved by both houses of Parliament and published in the Government Gazette, it becomes part of South African law; it is fully binding.

But the DTA is not the only international agreement that stands to be violated. South Africa is bound by the Vienna Convention on the Law of Treaties, which determines in Article 18 that [a] State is obliged to refrain from acts which would defeat the object and purpose of a treaty…” The purpose of a DTA is to avoid double taxation. If South Africa enacts a provision that results in double taxation, it defeats the purpose of the DTA and by extension contravenes the Vienna Convention as well.

The status of treaties in our law is complex and it is subject to differing opinions, but there are those who hold the view that treaty obligations have the same force as the Constitution. That is, they occupy the highest possible rank. If one accepts this view, overriding a DTA, as the exit tax proposes to do, would be unconstitutional.

Either way, National Treasury’s decision to enact legislation that nullifies its treaty obligations is cause for great concern.

Public comment

This is yet another measure implemented entirely to the detriment of taxpayers departing from South Africa. It is not clear if this is meant to serve as an intentional deterrent or simply a move to collect additional revenue, but it constitutes an unprecedented policy decision.

The Expat Tax Petition Group, with Tax Consulting South Africa, will be making submissions to Parliament to advocate against the introduction of this amendment.

Jean du Toit, head of Tax Technical; and Thomas Lobban, legal manager of Cross Border Taxation.

COMMENTS   31

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ANC firstly ensures with endemic corruption and total inability to govern that criminal chaos reigns. Logical result : a number of people , usually the ones with with skills and assets do not wish to live any longer in this African mayhem. Last ANC opportunity : Skin them once more on the way out.

Anything can be expected in the b a n a n a republic.

The people that left decades ago were the smart people, the ones like myself and others that tried to help the country are now entering the eye of the storm.

We will eventually pay 100% tax.

Unfortunately you are already paying 95% Tax, most of it is the Socialism Tax…

I am surprised they have not tried to start taxing the oxygen, sunlight is already taxed… I wish there was more that the South Africans overseas can do for the average joe back home.

The new revised simplified cANCer Tax Return Form:

How much do you earn?

Kindly pay it to us.

This article is 100% correct. The terms and conditions in the DTA takes preference to any tax legislation there may or may have been in SA. If the other contracting country happens to be the beneficiary of the tax to be collected, SA would have forfeited their right to it.

Once again, if this happens to a citizen, where you have been double taxed in the original country of residence, it will be court cases galore to get your money back from that country.

Once a retirement interest is taxed, does it not leave the “retirement net” and simply become “savings”. Would using up your accumulated savings ordinarily attract tax in other jurisdictions?

Taxation is supposed to represent a contract between those who pay tax and the authorities who spend such monies on societal beneficiation. That is not the case in SA. Here there is extraction by coercion and the money somehow disappears with minimal benefit to our citizens. Best avoided like the plague.

They just add Tax and more Tax without thinking about the consequences to the economy or even if Tax payer can afford it.

5 Million pay for 27 Million.

It might not be worthwhile to go to work one day.

Wrong, 5mil pay for 60mil.
The tax payers generally have families and have to pay for them as well as the families of those who receive state benefits and monies.

Each tax payer essentially pays for 12 people, tax payers therefore require special voting rights during election.

Plenty Legal and Illegal African (From Africa), Indians(from India), Bangladeshi’s, Pakistanis…. in SA with SA Id numbers …

All these individuals pay very little tax as they in the informal sector…. but subsidized by South Africans.

They send their earning back to their respective countries…

For heaven’s sake, you are stirring hysterics and fallacies

In the interest of fairness and factual journalism, do a table of Johnny and Mary.
Johnny has an RA, gets the tax deduction and reinvests the grossed up. So R10,000 pm RA plus reinvests the R3,000 let’s assume in the same profile as the RA.
Mary invested R7,000 in an ETF with same profile as an RA.

Thirty years later Johnny has a fund value, which thanks be to tax-free growth in the RA, has grown to R21m and this will now be taxable income as it pays out.

Mary’s ETF is worth R7.5m but it is fully taxed and I have assumed her growth is the after tax rate as the RA.

So if Johnny decides to become a Maltese, on what planet of fairness and tax equity does anybody think amount should get to fuffle off with the R14m tax benefit?????

It is totally fair and just that Treasury levy a R14m taxable gain (and as normal income not as capital gain) in exactly the same way that Johnny is deemed to sell his other assets on fluffing off to Malta. If there is a concession to be made it is that the tax rate on the R14m can be Johnny’s average rate last five years instead of obviously hitting max due to the size of the gain.

It is not an exit tax, it is a recoupment of prior tax deductions exactly like wear and tear on sale of an asset. There is no difference.

Your sums are wrong. You double-counted Johnny’s R3K tax deduction to give him R13K invested per month compared to Mary’s R7K. We would all like that kind of RA.

And you don’t really address what the article is about. How is Johnny double-taxed in both places?

No, Johnny paid 10k, and end of year paid the 3k tax deduction into a non RA ETF.

Forgot to address all of your question:

1. A great many destinations would NOT tax the RA under tax haven or source rules.

2. Besides that, an RA is a lifecycle affair that basically says you can deduct now but will pay later. The taxpayer is basically breaching a longterm agreement and it is therefore100% correct that past deductions are recouped.

3. The DTA issue might arise on retirement. The New Maltese or Mauritian may be years from retirement. The emigrant is also not already tax resident when this implements – the regulation applies last day. This intervention is not interrupting a tax cashflow that is already implemented.

4. Upon tax residency change all assets are realized and taxed. The RA is a major assets that must be stripped of its SA tax liability before falling under the jurisdiction of the new tax country. Same as other assets.

When they raised VAT from 13 to 14 and then 15% did someone come knock on your door for the difference owed? They can’t apply that tax from gain before the law was passed. They will but it would be unfair. The money was invested under a set of conditions. They can’t change that now. The 3 year RA emigration lock in period is BS also. It’s like playing with 7 year olds that changes the rules because they keep losing. Johnny should have left long ago.

The voice of reason!
I agree RA’s are built to provide you with a tax advantage for retiring in SA, not a tax efficient emigration tool.

I find myself coming to MW comments less often nowadays, there was a time where this was quite the intellectual space, but the Mybroadband / News24 crowd discovered it somewhere along the way and its slowly turning into a dumpster fire.

Thank you for that well-informed opinion. That is why the comment section is more informative than the article sometimes.

Why is Treasury focusing on how to tax emigrants now? Because many mid career people in are emigrating due hostile economic and political conditions. Treasury continues to tinker every year to extract more and more from the same tiny tax base. Meanwhile, BEE fat cats continue to score massive inflated public sector contracts while delivering very little value to citizens in return. Many HWNI’s will not stay resident in SA under the current terms, and Treasury knows it. The proposition put forward to HWNI’s simply no longer makes any sense. They have to pay insane level of taxation while receive zilch in return, put up with collapsing everything, sky high crime rates, deal with the threat of expropriation, rapid increases in cost of living, discrimination in educational opportunities & workplace, the list goes on and on. Simply put SA is a deeply hostile place to live and do business. Tax rates would need to be 1/3 less than they are now to compensate for the raw deal tax payers receive to see a turnaround in the economy.

It is indeed a reversal of prior tax relief given, but it doesn’t necessarily make it fair. Johnny will still be paying tax on his retirement funds, but not necessarily to SA. The OECD position is that the country of residence is best placed to assess the taxpayer’s ability to pay tax where he is subject to tax on his global income. This is a very common provision in treaties, although these do differ on taxing rights, and whether these are exclusive or shared.

It is a fact of life that people are globally mobile these days and should be able to move their retirement funds with them without penalty, as they would in most cases be paying tax on them eventually.

Eg. Someone living in SA and receiving income from a UK workplace pension is taxable only in SA and the UK loses that taxing right.

In general it should be swings and roundabouts as you lose some tax on people leaving, and you gain some on people arriving. SARS clearly only sees a one-way flow of funds though.

People should be free to move themselves, their capital and their retirement funds to a country they choose to live in without this ‘we’re missing our cut’ view of SARS.

Tax is not about fair. Is it fair that I pay 15% withholding tax to the Americans on dividends in my retirement investments in Apple? The underlying asset is American but I am not tax resident in the US and a dividend would be tax free in SA.

I would lay odds that the squealers were intending to transfer the fund to a trust or tax haven in any event and not receive it as taxable pension in a high tax rate country…

SA is doing what it should – protect tax base.

I re-read the article.

If there is not such a regulation, there ought to be regulations that make deliberately presenting half the facts and not representing at all the other facts, in the interest of one’s own narrow client and therefore own financial gain, professional misconduct.

These authors are not fools. They are choosing to present this as South Africa breaching DTA obligations. They do not mention the impacts on SA taxpayers of their clients fluffing off to places that will NOT be taxing their RA funds at all.

There was a loophole that allowed people to fuffle off and make ⅔ of their RA fund tax-free. The government is rightly saying NO. After the fund recoups the tax deductions and pays tax on its compound growth to date, that fund can go anywhere in the world – happy travels, remember to wear sunblock.

This constant nit picking and closing of every other loophole, is introduces huge uncertainty for tax payers. I was advised not to make any further contributions to my RA many years ago on the basis that the SA government would eventually introduce prescribed assets and/or impose all sorts of further conditions on RA money. Based on what I’ve seen thus far, I am quite confident that this was the correct advice. On Friday, we received news that the government was considering forcing people to pay 12% of their earning into a government controlled retirement fund. This is the exactly the kind of move that you can expect from a socialist/communist government. Essentially, money in an SA RA is subject to ever changing conditions. The money doesn’t truly belong to the person saving for retirement. An SA RA is a structure devised to give the SA government control over people’s savings.

That social welfare thing supposes we pay 12% on our first 280k (and nothing else), so it is a R34k additional tax per person from which government is going to try and pay everybody R12k per year grant money.

Basically, say goodbye to the primary and secondary and medical rebates unless you earn less than the rebates

Got and followed that advice many years ago as well. Very little in RA’s locally and now on retirement took the max cash, despite tax hit and externalized that as well. Still consider the political risk to far outweigh any tax benefits or exchange rate fluxtuations. Staying here because only grandkids are here, but can leave any day.

…it is rather “DESPERATION” on the ANC’s side.

Just a different form of “exit control/punishment”.

(The long-term consequence of socialist past & current econ policy decisions to favour the voting masses, but to the detriment of the middle/upper end of society responsible for driving economic prosperity, growth & innovation)

If there was no such a thing in SA as compulsory Pension/Provident/RA Funds, and everyone only did their own ‘descretionery’ investments….most investments would’ve left SA. “Thank You” to all our ins/advisors for enabling such savings schemes, where we are now subject to “encagement”…

kommin sense se vir my 18% van n salaris is nie voldoende om van te leef nie:

tax 45%
vat 15%
kerk 10%
nssf 12%
——-
totaal 82%
======

kerk 10%, try jy jou plek in die hemel te koop. Gaan nie werk nie hoor.

Well, it worked for the Guptas. For a criminal, Dubai is the closest to heaven you will ever get.

“tax 45%”

Let me pull out my tiniest violin for someone earning at least R1 656 601+ pa.

Also tax rates are progressive, so even if you earn more than R1.65M the entire amount is not taxed at 45%

The government is creating just another incentive not to save for retirement. Well done!

End of comments.

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